National Bank of Kuwait: Government spending growth accelerates
In its latest economic brief on public finance, National Bank of Kuwait reports that the closing accounts for Kuwait’s budget for fiscal year 2004/05 (FY04/05) reveal that spending growth accelerated to 14%. According to NBK, this was the most rapid increase in over twenty years, excluding the extraordinary spending in 1991/92 following the liberation of Kuwait from the Iraqi occupation, and higher than the previous year’s record of 12%. The rise in expenditures was accompanied by a surge in government revenues, which reached their highest level in three decades on the back of record high oil prices.
The recently released figures by the Ministry of Finance for the fiscal year ending March 31, 2005 show that the government realized a budget surplus for a sixth consecutive year amounting to 16% of 2004 GDP. The surplus stood at KD 2.65 billion before the mandatory allocation of 10% of revenues to the Reserve Fund for Future Generations (RFFG), 87% higher than the previous year’s. The net surplus after RFFG was 1.75 KD billion.
NBK notes that the State budget does not include investment income, which provides a sizeable inflow to the government. However, balance of payments statistics show total investment income from abroad of the general government sector was KD 1.65 billion in 2004. The size of investment income from domestic assets is not published.
Budget revenues rose by 29% to reach KD 8.96 billion. The bulk of the increase came from oil revenues that represented 91% of total revenues, slightly up from the previous year. NBK’s economic brief mentions that a 31% increase in the average price of crude oil in for the period was the main factor lifting oil revenues to an all-time high of KD 8.17 billion, though they were also supported by a 5% increase in production.
Non-oil revenues remained almost unchanged from the previous year rising by less than 1% to reach KD 792 million. However, excluding the payments received from the UN Compensations Committee (UNCC) for losses due to the Iraqi invasion, which dropped by KD 90 million to a mere KD 13.5 million, non-oil revenues saw an effective growth of 14% though this remains slower than last year’s 17%. Growth was driven largely by a rise in income tax revenues, land sales, and customs fees.
Revenues from customs fees, constituting 21% of total non-oil revenues, rose by 14% to KD 166 million. This increase followed an exceptional 46% increase the previous fiscal year on the back of resumed trade with Iraq and the general improvement in economic activity following the liberation of Iraq, NBK adds.
Service charges, accounting for half of non-oil revenues, saw a slower growth of 3% compared with the previous year’s 11%. Main sources of growth were revenues from law enforcement & justice, followed by electricity charges and income from the rental of housing and public facilities. However, lower telecommunications charges and healthcare fees largely tempered the growth in service revenues.
NBK’s report also mentions that the robust growth in business activity helped raise income tax revenues by 76% to an all-time high of KD 53.4 million. Taxes paid by publicly traded companies more than doubled for a second year to reach KD 26.6 million. Levies on foreign companies rose by 57% following a 17% decline the previous year. Overall, tax revenues still contribute less than 7% of total non-oil revenues, and less than 1% of total budget revenues.
Total expenditures were KD 6.32 billion in FY04/05, with growth accelerating to 14% compared to the previous year’s 12%, and higher than the 9% rate projected in the official budget. The percentage of the budget actually spent rose to 96%, the highest spending rate in recent years.
Spending on wages and salaries (chapter I) increased by 7.2% to KD 1.75 billion. The largest increases came from the Ministry of Interior with a 12% or KD 44 million increase, followed by the Ministry of Education with a KD 26 million increase.
NBK notes that chapter I does not include military wages and salaries. The latter are included in miscellaneous expenditures and transfers (chapter 5), which also includes other employment-related expenditures. Taken together, civilian and military wages, and other employment-related expenditures rose by 6.7% and, at KD 3.05 billion, represented 48% of total budget expenditures. While the military wage bill rose by 9% to KD 690 million, transfers to the Public Institute for Social Security (PIFSS) rose to KD 567 million by a mere 1.5%. Meanwhile, spending under the National Labor Support Law rose by 34% to KD 42 million after an exceptional decline the previous year.
Excluding employment-related items, chapter 5 spending (transfers and miscellaneous expenditures) rose at a rapid pace of 21% to reach KD 1.7 billion. This was mainly due to the KD 195 million Amiri grant paid to all Kuwaiti nationals. Growth also stemmed from a KD 69 million increase in transfers to public institutions other than PIFSS. Major beneficiaries from this increase were the Public Authority for Applied Education and Learning followed by the Public Authority for Agriculture and Fishing and Kuwait Municipality. Also propelling the growth were transfers abroad, which more than doubled to reach KD 131 million and a resurgence in spending on military procurement, which rose by KD 26 million.
Spending on development projects, maintenance and land purchases (chapter 4) saw rapid though slowing growth of 19% to reach KD 678 million or 10.7% of total spending. The bulk of this growth came from spending on land purchases, which more than doubled and rose by KD 99 million or 91% of the growth in chapter 4. Spending at the Ministry of Public Works increased by KD 14 million, a much lower pace than in previous years. Both the Ministry of Communications and the Ministry of Energy – Electricity & Water saw chapter 4 spending go down by 20% and 2%, respectively, after high growth rates the previous year. Total chapter 4 spending reached 82% of its budget allocation, the highest spending rate in 5 years, according to NBK.
Spending on goods and services (chapter 2), which accounted for a quarter of the rise in total expenditures in FY04/05, increased by 30% on the back of rising fuel costs incurred by the Ministry of Energy for power generation, as mentioned in NBK’s economic brief. Spending peaked at KD 870 million with the cost of fuel representing 64% of the total.