Capital spending in FY2008/09 saw less growth than other budget chapters…and is set to shrink in FY2009/10… budget likely to remain in surplus in FY 2009/10In its latest economic brief on public finance, National Bank of Kuwait reports that, according to the closing accounts of the government budget recently published by the Ministry of Finance for the 2008/09 fiscal year (FY08/09), Kuwait budget surplus stood at KD 2.7 billion, down from KD 6.6 billion in FY07/08. Extraordinary transfers to the Public Institution for Social Security (PIFSS) which amounted to KD 5.5 billion along with the high cost of fuel incurred by the Ministry of Electricity and Water (MEW) were the drivers behind an 88% rise in total spending. Excluding the special PIFSS transfer, the FY08/09 surplus would have been KD 8.3 billion. Private sector activity received strong stimulus from the 22% increase in government demand impacting expenditures and of course oil revenues were helped by very firm oil prices in 2008.Government revenues stood at KD 21 billion, up 10% from the previous fiscal year, but 66% above the government’s own budget projection. Oil revenues rose only 11.2% on the back of slightly higher oil prices. The price of Kuwait Export Crude (KEC) averaged $78.5 per barrel over the period compared to $75 the previous year and a conservative budget assumption of $50. Similarly, oil revenues were negatively affected by cuts in OPEC crude production during the past fiscal year. In contrast, NBK notes that non-oil revenues witnessed a small drop of 0.6% to reach KD 1.3 billion, though came in 26% above the budget projection. Although these receipts are only a small share of overall budget revenues, they show some interesting patterns. Income tax revenues rose 12%, signaling stronger business activity and subsequent higher corporate profitability. Fees related to “Land Sales” were down by KD 10.4 million (84%), obviously reflecting the slump in real estate activity. Total spending stood at KD 18.2 billion, and was 88% above the previous year primarily due to the KD 5.5 billion exceptional transfer to PIFSS and the KD 2.4 billion cost of fuel incurred by MEW for power generation. Excluding these distorting items, growth in spending would have reached 7.1%, down from 16.8% in the previous fiscal year. NBK says that at 96% of the initial budget, actual spending in FY08/09 compares well to an average of 91% over the previous three years. Spending on Chapter 3, “Vehicles and Equipment” and Chapter 4, “Projects, Maintenance and Land Purchases” was noticeably below budget at 68% and 82% respectively, yet both remain well above their levels in the previous year. Meanwhile, growth in demand-impacting expenditures, those expenditures more crucial to economic growth, was its strongest in years, at 22%. Chapter-by-chapter spendingSpending on chapter 1, “Wages and Salaries”, rose 22.7% in FY08/09 to reach KD 3.0 billion (95% of the budget figure) and accounting for nearly a quarter of total government spending. This increase is mainly due to the cost of living allowance for public sector employees that was introduced in April 08, the increase in public employment along with increases to wages and salaries. The highest increases in wage spending were registered at the Ministry of Education and the Ministry of Interior, which reported KD 144 million and KD 134 million increases in spending, respectively.Spending on chapter 2, “Goods and Services” soared by 70%, closing the year at a bit more than 97% of budget. Excluding the cost of fuel used in power generation by MEW, expenditures would show a 28.3% growth rate, compared to 11.7% in the year before. Chapter 5, “Transfers and Miscellaneous expenditures” saw a major growth of 158%, due to the extraordinary transfers to PIFSS. At KD 10.7 billion, spending on this chapter accounted for almost 60% of total government spending. General subsidies provided to refined products and liquefied gas at the Ministry of Oil recorded considerable growth rate, rising by KD 296 million (350%). Compensation paid under the National Labor Support Law also rose 87% to KD 194 million. Meanwhile, government assistance to other countries rose to KD 535 million, 47% above last year. Chapter 4, “Projects, Maintenance and Land Purchases” expenses closed FY8/09 at KD 1.4 billion rising 13% from last FY07/08 mainly due to spending on (MEW)’s big power and water projects. At 82% of budget, spending on this chapter apparently still faces administrative delays and other bottlenecks. Spending on this chapter has always been a major contributor to non-oil sector growth. The 2009/2010 government budgetThe budget for the current fiscal year 2009/2010 (FY09/10) which started last April projects a KD 4.0 billion deficit, including a 36% drop in both revenues and expenditures from previous budget figures. Oil revenues are expected to shrink by 41% on the back of lower oil prices, while non-oil revenues are projected to rise by 12%. Even after excluding exceptional transfers to PIFSS in the 2008/09 budget, government spending would show a 10.2% decline. NBK believes the government’s assumed price for KEC in FY09/10 budget ($35 a barrel) is extremely conservative. The price of KEC has averaged $58.5 a barrel during the first quarter of the current fiscal year, and could easily average above $60 for the whole year. Assuming different oil price scenarios, and taking into account that actual spending is likely to fall 5-10% below budget, NBK projects Kuwait’s budget balance to come somewhere between zero and KD 6.2 billion surplus, before allocations of 10% of budget revenues to the Reserve Fund for Future Generations (RFFG).NBK estimates that demand impacting expenditures (which excludes items that do not provide stimulus to the economy, such as transfers, military procurement, fuel costs and subsidies etc) are projected to increase by 5.4%, down from 8.3% in the previous year. This will be the result of lower spending on development projects and the slower growth in other spending items.Spending on wages and salaries (chapter 1) is projected to increase by 8.3% to reach KD3.5 billion, compared to 22.2% growth projected in last year budget. The Ministry of education will see the largest increase in its wages bill (+KD 180 million), followed by the Ministry of Interior (+KD104 million) and the Ministry of Public Health (+101 million). Allocations for the remaining chapters are projected to drop considerably. Allocations for goods and services (chapter 2) and capital projects (chapter 4) were reduced by 24% each. (the latter to KD 1.3 billion). The former is due to the drop in the cost of fuel used in power generation. Excluding this, spending on this chapter will jump by 19%.The government has allocated KD 4.7 billion for miscellaneous and transfers spending (chapter 5) in the FY09/10 budget, down 57% from previous year. Excluding exceptional transfers to PIFSS in FY08/09, the drop in actual spending on this chapter will be limited KD688 million, or 12.8%. Within this chapter, NBK noted that assistance to other countries is projected to drop by KD268 million, as well as the general subsidies to refined products and liquid gas by KD 184 million.