The Saudi Arabia government is suspending the cost of living allowance and raising the value added tax threefold, as part of measures aimed to shore up state finances, which have been battered by low oil prices and the coronavirus.

Cost of living allowance will be suspended as of June first, and the value added tax will be increased to 15% from 5% as of July first, the state news agency reported on Monday.

Slumping oil prices

The worlds largest oil exporter is suffering from slumping prices, while at the same time measures to fight the new coronavirus are likely to curb the pace and scale of economic reforms launched by Crown Price Mohammed bin Salman.

The austerity measures introduced on Monday comes as spending outstripped income, pushing the kingdom into a $9 billion budget deficit in the first quarter.

“These measures are painful but necessary to maintain financial end economic stability over medium to long term...and overcome the unprecedented coronavirus crisis with the least damage possible,” Finance Minister Mohammed al-Jadaan said in the statement.

He said non-oil revenues were affected by the suspension and decline in economic activity, while spending had risen due to unplanned strains on the healthcare sector and the initiatives taken to support the economy.

“All these challenges have cut state revenues, pressured public finances to a level that is hard to deal with going forward without affecting the overall economy on the medium to long term, what requires more spending cuts and measures to support non-oil revenues stability,” he added.