Kuwait records second largest surplus in its history, despite a huge increase in spending
In its latest economic brief on public finance, National Bank of Kuwait reports that Kuwait closed the year on another massive budget surplus driven by high oil prices. Although down on last year’s number, the 2006/07 surplus, at KD 5.2 billion before payments into the Reserve Fund for Future Generations (RFFG), was still the second highest in Kuwait’s history. The KD 1.7 billion fall in the surplus from 2005/06 was a result of two extraordinary items of spending: the KD 1.9 billion increase in the payment to the PIFSS (largely from a one-time payment to cover arrears in pension provision for the Kuwaiti workforce) and the KD 203 million Amiri grant that occurred during the fiscal year. Without those items, the surplus would have reached a new record of KD 7.3 billion. The 2006/07 surplus was equivalent to 18% of Kuwait’s 2006 GDP.
NBK states that, including the extraordinary items, total spending leapt by KD 3.4 billion, or 50%, on 2005/06. This more than offset an increase in budget revenues of KD 1.8 billion, or 13%, which was boosted by a 12% increase in oil revenues. The underlying picture, however, suggests that government fiscal policy is becoming more expansionary. Even excluding the one-off items, spending increased by 20%, well above the average of 12% seen in the previous 3 years. Spending growth would have been faster still, were it not for a 7% under-spend across government departments – particularly in capital expenditures due to delays in project implementation. If spending had come in on budget, it would have risen by 62% on the year, or 32% excluding the extraordinary items.
The overall surplus excludes investment income, which is not officially reported by the government and treated as an off-budget item. According to balance-of-payments statistics, however, the government’s investment income from abroad - primarily accruing from state assets managed by the Kuwait Investment Authority - was estimated at KD 2.72 billion in 2006. Although there are other off-budget revenues and expenditures, such as income on domestic assets and public debt servicing, investment income from abroad represents the largest such item.
The NBK report cited that the increase in government revenues to KD 15.5 billion from KD 13.7 billion in 2005/06 represented another massive windfall for the government. Oil revenues of KD 14.5 billion came in at nearly twice that budgeted for. The government’s highly conservative oil price forecast was the main reason for the variance, with the price of Kuwait Export Crude (KEC) averaging $57.6 a barrel against the $36 assumed in the budget. The higher-than-forecast oil price by itself yielded the government an additional KD 6 billion in revenues. But production also came in higher than the budget assumption of 2.247 million barrels per day (mbd), with OPEC data suggesting that Kuwait produced more than 2.5 mbd during the year.
According to NBK, non-oil revenues posted a hefty 29% increase to reach KD 998 million. Although encouraging, non-oil revenues still only account for a tiny proportion – just 6% - of Kuwait’s overall budget revenues. Kuwait currently levies no taxes on personal income. Moreover, around half of the increase in non-oil revenues came from a KD 112 million payment by the UN Compensation Commission (UNCC). Excluding that, growth in non-oil revenues would have been 14.7%.
Apart from UNCC payments, service charges (including utilities charges and transportation fees) saw the largest increase amongst sources of non-oil revenue, rising by KD 37.7 million largely due to a rise in healthcare insurance charges. At KD 449 million in 2006/07, service charges remain the largest constituent of non-oil revenues accounting for nearly half of the total.
Growth in corporate income and profit tax revenues accelerated during FY06/07 to 40%, with receipts from locally listed companies expanding by 48%, complemented by growth in tax revenues from foreign corporations of 30%. Despite being a good year for corporate profits, however, corporate taxes are still worth less than one percent of oil revenues. Customs duties increased by KD 14.5 million, reaching KD 190 million and constituting nearly one-fifth of total non-oil revenues. The 8% growth in customs duties is a slight improvement over last year.
Total expenditures were KD 10.3 billion in FY06/07, 50% higher than the previous year. Even this, however, was 7% below budget, mainly because of a 22% shortfall in spending on capital projects (partly the result of delays in project implementation) which offset an overshoot of 160% on transfers to public institutions. Still, aside from the PIFSS payment and the Amiri Grant, capital expenditure remains the largest growing expenditure category, expanding by 32% in 2006/07.
The NBK report adds that more than half of government spending in 2006/07 fell under the Miscellaneous and Transfers category – which captures grants, and spending on public institutions such as the National Assembly, Kuwait University and KISR, as well as transfers abroad and spending on health services overseas. Spending in this category rose dramatically in 2006/07, by 84%, driven by the one off payments to the PIFSS and the Amiri grant. Excluding these special items, category spending would have increased by 16%.
Aside from transfers, there were other important increases in spending during the year. A KD 259 million, or 37%, increase in spending on fuel helped push total expenditures on goods and services to KD 1.4 billion, up from KD 1.1 billion the previous year.
Spending on wages and salaries under Chapter 1 increased 15.3% to KD 2.2 billion. The largest increases were at the ministries of Education, Public Health, Interior and Electricity and Water with increments of KD 124 million (24%), KD 38 million (15%), KD 26 million (6%), and KD 23 million (28%), respectively. Military wages and salaries – which appear separately under Chapter 5 (‘Transfers & Miscellaneous’) - dropped by 2.6% to KD 709 million - the first drop since 1996/97. Excluding the one-time payment to the PIFSS, overall employment-related expenditures (which include civilian and military salaries, spending on the National Labor Support program and regular transfers to the PIFSS) rose by 8% to KD 3.7 billion.
The bulk of the 32% growth in spending on development projects, maintenance, and land purchases (‘capital spending’) during 2006/07 came from a near doubling of spending on land purchases to KD 361 million. A significant increase of 27% was also seen in spending by the Ministry of Electricity and Water (MEEW), even though this included a 37% under-spend from budgeted figures. Spending by the Ministry of Public Works fell in absolute terms, and came in 21% below budget.