Demand-impacting spending up 15% in new budget

Demand-impacting spending up 15% in new budget
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Published August 5th, 2010 - 11:58 GMT

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NBK’s latest Public Finance Brief stated: The Ministry of Finance has recently released the budget for fiscal year 2010/11 (FY10/11) which started last April. The budget shows a remarkable increase in total spending, which is projected to rise 33% from last year to KD 16.2 billion. Total spending still falls short of the record KD 19 billion in the FY08/09 budget, however. But unlike two years ago the increase this year is to a larger extent due to rise in demand impacting expenditures. These exclude transfers and items that do not provide stimulus to the economy (such as all Public Institute for Social Security transfers, transfers abroad, spending on military procurement, fuel costs and subsidies, and housing loan forgiveness).  This year, demand impacting spending should rise 15% and will make up almost 35% of new spending. 
Demand-impacting expenditures by type, (budget, not actual)
On the revenue side, oil revenues are projected to reach KD 8.6 billion, up 24.4% from last year mainly on the back of recovering oil prices internationally. An oil price of USD43 is assumed, compared to USD35 in last year’s budget.
Non-oil revenues on the other hand are projected to total KD 1.1 billion, down 4% from last year’s budget figure. Most of the drop is projected to come from income related tax which is estimated to decrease by 35%. As the business sector continues to suffer from a subdued economic environment, corporations are expected to see another year of weak bottom line figures. Income and profit taxes are to drop to KD 71 million (down KD 38 million).
Non-oil revenues – 2010/11 budget
Million KD, unless otherwise noted
On the expenditure side, wages and salaries of civilian public sector employees (chapter 1) are expected to grow by 3% to reach KD 3.6 billion. The ministry of electricity and water and the ministry of public health are projected to see the largest boost in their wage bills rising 16% and 11% respectively. The National Guard and the ministry of interior will see the only two major declines in their wage bills, down 4% and 1% respectively.
Salaries of military personnel which appear in chapter 5 will grow by 12% to KD 119 million. Therefore, according to the budget, total government salaries should increase by 5%.
Goods and services (chapter 2) are expected to see considerable growth of 25%, though mainly on the back of higher oil prices and increased consumption. The cost of fuel used in power generation should account for 88% of the projected increase in this area.
Capital expenditures and land purchases (chapter 4) are projected to see a record increase of KD 833 million to KD 2.1 billion, up 66% from a year earlier. The increase in spending on this chapter will contribute a good 21% to the increase in total spending comparing well to only 6% in the previous year. 96% of the increase in spending on this chapter is allocated to development projects. The Ministry of Electricity & Water (MEW) is expected to receive 49% of the total spending on this chapter while the Ministry of Public Works gets 26%. (Note that oil projects, part of the 5-year plan, are NOT on budget and will provide further stimulus to the economy).
Where the rise in spending will go, budget of FY2010/11
Transfers and miscellaneous expenditures (chapter 5) are expected to rise by 57% from last year’s budget to KD 7.3 billion, accounting for 45% of total budget allocations and 65% of the increase in spending. 93% of the increase on this chapter comes transfers. Transfers are projected to rise mainly thanks to the exceptional transfer to PIFSS (we estimate that this will be worth KD 1.1 billion), and general subsidies which are projected to rise by KD 751 million as support to refined products and liquefied natural gas amid the surge in energy prices.
The NBK report concluded: The budget projects a deficit of KD 6.4 billion before allocations to the Reserve Fund for Future Generations. Despite the government’s projection of a deficit, we think a budget surplus for FY2010/11 is more likely – perhaps as large as 6 billion. The difference stems mainly from our projections for oil prices, which are much higher than the government’s very conservative assumption of USD 43.


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