Kuwait’s 68% budget increase factors in an exceptional transfer to social security, rising fuel costs for power generation and other current expenditures… though capital spending is cutIn its latest economic brief on public finance, National Bank of Kuwait reports that following its approval by the National Assembly, the Ministry of Finance has recently released the budget for fiscal year 2008/09 (FY08/09) which started last April. The budget reflects a steep increase in spending that is projected to reach record KD 19 billion, up 68% from last year. The increase arises primarily from a KD 5.5 billion exceptional allocation to the Public Institute for Social Security (PIFSS) to cover an actuarial deficit, rising fuel costs used in power generation, and other current expenditures. In contrast, the capital budget was cut from last year’s record level which factored in emergency projects to tackle a power generation capacity shortage. While the PIFSS transfer and fuel costs won’t have an expansionary impact on domestic demand, the notable increase in budget allocations for other items is expected to provide a stimulus to the economy. NBK estimates that demand impacting expenditures (which exclude items that do not provide a stimulus to the economy such as all PIFSS transfers, transfers abroad, spending on military procurement, fuel costs and subsidies, and housing loan forgiveness) are projected to increase by 8.3%, down from an average 22% annual increase over the previous three years. This is good news on the inflation front as expansionary fiscal policy has been a major contributor to domestic inflation. On the revenue side, the budget projects an increase in both oil and non-oil revenues. However, despite the 52% increase in revenue projections, the government budget still shows a deficit of KD 7.6 billion. Bear in mind that for FY07/08 the MoF projected a deficit of KD 3 billion, only to end with a surplus of KD 9.3 billion. These, now habitual, discrepancies between initial budget plans and actual yearend numbers , are in large part due to the very conservative assumptions used for oil prices in those budgets ($36 per barrel in 07/08, $50 barrel now for 08/09).According to the NBK report, oil revenues are projected to reach KD 11.7 billion, up 56% from last year’s budget. The increase reflects an escalation in the assumed oil price and output, as well as production costs. In addition to the 39% increase in the assumed oil price, the budget projects a 0.3 million barrel per day (mbd) rise in oil production from last year to 2.5 mbd, and a rise in production costs from KD 1.155 per barrel in FY07/08 to KD 1.302 this current fiscal year. Revenue projections also take into account the negative impact on oil receipts from the revaluation of the KD against the US dollar by assuming a 3.6% appreciation in the KD exchange rate in the current fiscal year from its previous year’s level. Given that the price of Kuwaiti crude has averaged $113 per barrel during the first three months of the fiscal year, and our forecast that it will average between $108 and $128 over the whole fiscal year, the budget is more likely to realize a surplus in the range of KD 9.7–15.8 billion before the allocation of 10% of revenues to the Reserve Fund for Future Generations (RFFG).Non-oil revenues are also projected to rise by a notable KD 156 million (18%) to exceed the KD 1 billion mark for the first time on record (though actual revenues last fiscal year amounted to KD 1.3 billion). The highest contribution will come from custom taxes and fees that are expected to rise by KD 31 million in the light of strong economic activity and imports. Meanwhile, the healthy performance of the business sector is expected to add an additional KD 26 million to the proceeds from income and profit taxes. The largest contributor to non-oil revenues, namely service charges are projected to continue their vigorous growth and to rise by KD 64 million, especially from fees on healthcare, and water & electricity services. On the expenditure side, wages and salaries of public sector employees other than those for military personnel at the Ministry of Defense (chapter 1), the total bill is expected to rise by KD 584 million (22%) to reach KD 3.2 billion. This increase reflects mainly a KD 356 million increase in allocations to cover the rise in the cost of living allowance to public sector employees that was introduced last April, as well as a KD 76 million for newly employed Kuwaitis. According to NBK, all ministries are expected to see a boost in their wage bill, with the largest increases at the Ministries of Interior (KD 49.8 million), Education (KD 44 million), and the National Guard (KD 24.3 million). This chapter’s allocation covers an estimated 205,500 government employees. Those are 73% nationals and exclude military personnel. Wages and salaries at the Ministry of Defense, which appear in chapter 5, are projected to decline 3.1% to KD 930 million following last year’s exceptional growth of 35%. If all employment related expenditures under Chapter 1 and 5 are added together, other than the exceptional transfer to PIFSS, their share of total spending and contribution to the rise in spending would amount to 40% and 39%, respectively. Rapid growth in spending on goods and services (chapter 2) is expected to continue with the jump in prices and consumption of oil. Spending on this chapter is set to increase by KD 1.2 billion (68%) following 28% growth last year. The cost of fuel used in power generation accounts for 89% of the projected increase in this chapter. Excluding the exceptional transfers to PIFSS, this chapter is expected to receive 23% of total budget expenditures, compared to a four year average of 15%. NBK reports that capital expenditures and land purchases (chapter 4) are projected to see their first decline in 9 years. Spending is projected to fall by 19% or KD 394 million to reach KD 1.66 billion. The brunt of the cuts will be in allocations to new or existing development projects (down KD 428 million to KD 1 billion) and land purchases (dropped by KD 89 million to KD 179 million). The Ministry of Electricity & Water saw the deepest cut of KD 396 million in its capital budget after being lifted last fiscal year by the cost of emergency power projects undertaken to tackle power outages that had plagues Kuwait over last summer. Transfers and miscellaneous expenditures (chapter 5) are expected to surge by 137% from last year’s budget to KD 10.8 billion, accounting for 57% of total budget allocations. In addition to the exceptional allocation to PIFSS, chapter 5 will see a notable increase of KD 285 million in transfers to cover medical treatment abroad, and KD 62 million to the Public Authority for Applied Education. General subsidies are also projected to rise by KD 230 million to alleviate the negative impact of rising consumer prices on the standard of living of nationals. Meanwhile, military spending on armaments was cut roughly in half to a mere KD 73 million, while aid to other countries was also cut by KD 129 million.