Kuwait FY24/25 draft budget sees lower spending, but huge deficit

Spending cut part of a broader reform package needs

KUWAIT: The government’s draft budget for the fiscal year starting April (FY24/25) projects another large deficit, of KD 5.9 billion. The deficit is smaller than the one projected for FY23/24 thanks mostly to a drop in expenditures linked to the absence of one-off items. This more than offsets a projected drop in revenues resulting from lower expected oil production, while potential new revenue-enhancing measures do not appear to be included.

We expect the fiscal position to come in better than budgeted next year due to a combination of traditional below-target spending outturns and above-target oil prices. Still, this could be the ninth deficit in the past ten years, underlining the continued challenge in securing long-term fiscal sustainability. Absent fresh debt issuance or other measures, the squeeze on the government’s liquid reserves will continue to grow.

Expenditures in FY2024/25 are budgeted at KD 24.6 billion, a drop of 6.6 percent on the previous year’s budget. Spending on all major items was reduced: subsidies (-22 percent b/b to KD 4.7 billion); salaries (-0.8 percent to KD 14.8 billion); capex (-7.7 percent to KD 2.3 billion); and other expenses (-4.7 percent to KD 2.7 billion). As noted above, a large part of the expenditure cut is due to the absence of one-off outlays from the previous year’s budget, namely around KD 1 billion in arrears from unsettled subsidies related to the operation of refineries, water and power plants, while an additional KD 0.5 billion in mostly non-recurring accumulated leave allowance has also been spared. Stripping these items out, budgeted spending is down a more modest 1 percent from the previous year. Still, this seems to represent some degree of spending restraint in view of the large projected deficit, given that pre-COVID spending was growing at an average rate of around 6 percent per year.

In terms of the broader structure of spending, two points in the budget are worth highlighting: the continued dominance of wages and subsidies and the ongoing decline in capex. First, the share of wages and subsidies has steadily risen over the last few years and has now reached an elevated 79.4 percent of all estimated spending, with wages alone accounting for 60.4 percent, which is its highest share in recent years. While subsidy payments can be volatile due to changing energy prices, the rigidity of subsidy programs and overall wage spending means that significant savings are more likely to come from more discretionary items, i.e. the “allowances” and “bonuses” categories of employee compensation, which instead have witnessed a notable increase over recent years, or on capital expenditures.

Secondly, the targeted cut in capex is the third decline in a row, following cuts of 15-16 percent per year in FY22/23 and FY23/24. Moreover, actual capital spending has come in around 70-80 percent of the budget targets over the last few years, bringing government capex as a share of GDP down to a low of 3.7 percent in FY22/23. This is below regional peers and will need to be lifted if the government is to realize its project-intensive work-plan. We do note, though, that the government is putting greater stock in tapping the private sector, including through PPPs, and potentially off-balance sheet style investments through the proposed Ciyada fund, to help meet its expansive development plan.

On the other side, revenues are projected to decline to KD 18.7 billion (-4.1 percent y/y) including oil receipts of KD 16.2 billion (-5.4 percent b/b), with the authorities taking a customarily conservative view on oil prices (averaging $70/ bbl) and estimating lower b/b oil production (to 2.55 mb/d from 2.68 mb/d) in line with Kuwait’s OPEC+ production cut obligations. That said, reaching the average production level forecast in the budget would only look likely if current output cuts of 135 kb/d through Q1 2024 (January 2024 production was at 2.4 mb/d) are quickly reversed, which, based on current estimates of oil market demand-supply balances, may be optimistic. Meanwhile, non-oil revenues are projected to increase to KD 2.4 billion (+5.7 percent), representing 13 percent of total revenues. While details have not yet been released, these include revenue from corporate taxes, customs duties, property rents, water and electric fees, income from hospitals, and other government fees and penalties. Growth in non-oil receipts penciled in for FY24/25 is close to its historic average, implying no introduction of fresh revenue measures in this budget.

Limited impact on growth

In terms of the budget’s impact on the economy, our initial take is that it looks broadly growth-neutral, with spending cut but from a very high base and with the key salaries segment (which would be influential in driving consumer spending) down least of all. Meanwhile, the projected trimming in capital spending is the smallest in three years – and could also be interpreted as a more realistic target given the degree of underspending in previous years. Finally, we note that the draft budget is subject to revision, and spending has in the past often been pushed upwards before final approval.

Clearly, however, the underlying spending restraint in the draft budget reflects the need to address persistent fiscal deficits and the government’s warning in its recent four-year work agenda update that the funding gap could, if unaddressed, spiral to KD 45-60 billion in aggregate over the next five years given the ballooning wage and subsidy bill and the overdependence on oil receipts. While control of spending is more straightforward and quicker in the near-term than introducing new revenue streams, the work plan also references moves to reprice fees for government services and property leases, reform subsidies and introduce corporate and excise taxes. Near-term liquidity pressures at the General Reserve Fund have eased due to the large fiscal surplus recorded in FY22/23 (due to exceptionally high oil prices) and transfers from the oil sector, but the government is also keen to avoid difficulties resurfacing through passage of the draft law on ‘liquidity management tools’, which would facilitate debt issuance.