The balance between fiscal consolidation and non-oil growth: The case of the UAE

This research paper attempts to address the impact of oil price shocks on fiscal consolidation by taking into account numerous channels through which macroeconomic drivers can affect economic growth for the UAE economy. A small-scale macroeconomic model comprising of six econometric equations has been estimated using the OLS method over the period 1980–2015. The results show that the oil price fluctuation has a significant impact on banks' liquidity, domestic credit and foreign direct investment, but a negligible effect on non-oil GDP growth, assuming that the government keeps the same level of spending, i.e., no fiscal consolidation pro-cyclical stance with the decline in oil price. However, the budget deficit and the need for financing would grow significantly. Moreover, using different scenarios for the pace of fiscal consolidation going forward, the model suggests that government expenditure is quite effective in raising aggregate demand and supporting non-oil real growth, in line with the UAE's vision 2021.