Public Finance Brief

The Ministry of Finance has recently approved a record budget of KD 19.4 billion for fiscal year 2011/12 (FY11/12) which started last April. The approved budget reveals an increase of 20% in spending from last year. The full budget details were not released yet, but the summary numbers reveal that the spending categories deemed more significant to growth are also up a good 20%.

In FY 2011/12, revenues are projected up 38% mostly on the back of the higher oil price assumption. Oil revenues saw an increase of 43%. The assumed price of oil in the budget is $60 pb compared to $43 pb in FY 2010/11.

Non-oil revenues show a more subdued increase of 3%. The weak business environment still weighs on company earnings and income tax revenues are budgeted to drop 26%. On the other hand, service charges reveal an increase of 4% mostly in water and electricity and transportation services. However, most of the increase seems to come from miscellaneous revenues (KD 206 million), likely led by UNCC payments.

Spending on chapter 1, wages and salaries, is projected to grow a record 24%, totaling KD 4.4 billion. The government had approved a series of salary hikes that added to the normal annual salary increases. The ministries of interior and education, as large employers, received the biggest increases in absolute terms.Total expenditures are up 20% (KD 3.2 billion). KD 1 billion, or 31%, of the total increase in spending was allocated to total wages and salaries (chapter 1 plus military wages). Growth in capital expenditures makes up 10% of the total increase in spending. The remaining 59% went to other spending categories, namely transfers and other miscellaneous expenditures.

Chapter 2, goods and services, is projected to grow 3%, amounting to KD 3 billion. The Ministry of Electricity and Water show a slight drop in expenses, despite a higher assumed price for oil. Oil expenses for the MEW usually take up more than two-thirds of chapter 2 spending.

Spending on chapter 3, vehicles and equipment, saw a jump of 71% (KD 160 million), but remains the smallest chapter with a total of KD 385 million.

Chapter 4, projects maintenance and land purchases, is anticipated to grow a good 16%, totaling KD 2.4 billion. This comes after a remarkable 66% hike in the previous year’s budget. Spending on this chapter in FY 10/11 was higher than previous years indicating a better commitment on the government’s behalf to its development plan. If spending on projects picks up momentum, actual on-budget capital spending should exceed KD 2 billion in the current fiscal year.

Chapter 5, transfers and miscellaneous expenses, is budgeted to total KD 9 billion, up 25% on the year. Full details on this chapter are not yet available. Large increases are allocated to the Ministry of Finance public account, and to the Ministry of Defense. The additional allocation of KD 157 million for the Ministry of Defense can be largely attributed to the approved increases in military wages. While the Finance Ministry increase is likely to fund transfers to social security PIFSS.

The government projects a budget deficit of KD 6 billion for FY11/12. However, this is based on a very conservative oil price assumption compared to current oil prices, $60 versus prices currently over $100. And with actual spending typically coming slightly lower than budgeted, we project a surplus for FY11/12 to come close to KD 9-10 billion. This would be Kuwait’s 13^th consecutive budget surplus.