An austerity drive that underpins the Vision 2030 economic diversification program unveiled by Deputy Crown Prince Mohammed bin Salman in April 2016 was partially reversed last month, when a royal decree rescinded cuts to bonuses and benefits for public-sector workers that went into effect in September 2016. The government dismissed criticism that the move marked a retreat from reform, with officials noting that oil prices had increased by more than $20 per barrel since the Vision 2030 plan was being drafted in January 2016, and that the easing of fiscal stresses justified the reversal of cuts that had reinforced the slowdown of the economy by sharply reducing the disposable income of civil servants.

That rationale assumes that the cuts were implemented as a means of dealing with an immediate budget crisis. However, as the name of the program implies, Vision 2030 is designed to transform the economy, with the aim of eliminating the risk of fresh fiscal crises down the road. Moreover, signs of discontent were plainly visible in social media, where there was discussion of organizing protests to take place on the anniversary of the presentation of the reform plan. Thus, the timing of the reversal suggests that it was motivated by political considerations, rather than economic good sense.

That is not to say that the government might entirely abandon the fiscal restructuring agenda. A new 5% VAT was approved earlier this year, and will come into force in 2018, when all of the member states of the GCC have agreed to simultaneously introduce the tax. Officials also intend to introduce additional fees and levies, and are planning to make further cuts to subsidies for fuel and utilities. The deputy crown prince has also affirmed that the government is prepared to push ahead with plans to sell a stake of up to 5% in Saudi Aramco through an IPO scheduled for next year. Toward that end, the government has slash the tax rate on Aramco’s earnings from 85% to 50%, with the aim of boosting the company’s valuation.

The deputy crown prince’s massive responsibilities (he is also the minister of defense) arguably put him in a position to make the case that he is better prepared to assume the throne than his cousin, Crown Prince Mohammed bin Nayef, a fact that has raised concerns about the potential for a destabilizing power struggle when King Salman dies. A recent government reshuffling that accompanied the announcement of the reversal of austerity measures suggest that the monarch is taking steps to solidify his son’s position. A case in point is the appointment of Khaled bin Salman, the king’s son and the deputy crown prince’s brother, as the kingdom’s ambassador to the US, a move that could ensure that Mohammed bin Salman will have a friendly figure pleading his case in Washington if he should become embroiled in a power struggle at home.

OPEC’s attempt to boost global oil prices by restricting output has had only limited impact, with prices continuing to hover around $50 per barrel, too low to offset the effects of the sizeable decreases in output agreed to by the largest producers. As such, it is uncertain whether production quotas will be renewed at the expiration of the six-month agreement, and with US President Trump calling for the release of up to one-half of US reserves onto the market, sustaining prices even at the current level could be difficult.

The reversal of the public-sector cuts may soften the impact of the broader austerity program on economic activity, but retrenchment by households is likely to continue, with another hike in fuel prices in the offing. The scope for government-spending to pick up the slack will be limited, and the economy is forecast to contract slightly in real terms this year.