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The Gulf Arab States have a dilemma. One reason that they have been able to avoid upheaval over the last tumultuous year in the Middle East is because they have made their already generous public subsidies even more generous. But within the short-term fix is a set of longer-term problems that could profoundly affect regional stability.

In the most basic sense, wealthy Arab governments increased their spending last year in order to improve internal security. Saudi Arabia, for example, announced plans to spend an additional $130 billion, representing approximately 30 percent of GDP. Much of the money is targeted at housing, salaries, and unemployment benefits-all essentially public subsidies. Qatar, with probably fewer than 250,000 citizens, passed an $8 billion pay...