Policy Discussions

A. Ensuring Long-Term Fiscal Sustainability

The mission underscores the urgency of adjustment to put the fiscal position on a sounder path. The looming depletion of liquid GRF assets is a symptom of the fiscal position being too weak to meet savings obligations with respect to the FGF. The mission estimates that larger transfers than currently set aside in the FGF would be needed to ensure equally high living standards for future generations. Even under an estimation approach that allows the current generation to run a somewhat higher deficit (i.e., consume a higher share of oil wealth), the nonoil balance in FY2025/26 would fall about 16 percentage points of nonoil GDP short of the level needed to ensure adequate savings for future generations. The mission therefore calls for a well-paced fiscal adjustment over the medium term to close this intergenerational savings’ gap and reduce financing needs.

The mission proposes an adjustment path that would close the intergenerational savings’ gap in 10 years. Under such scenario, total spending would decline to about 75 percent of non-oil GDP (from 100 percent now) – a level broadly consistent with that experienced during 2000-10. The proposed adjustment would weigh on growth, but the effect would dissipate over time as higher investment and structural reforms to unlock the private sector’s potential bear dividends.

Curtailing the public wage bill over time. To achieve this, the availability and attractiveness of public sector jobs should be reduced by more closely aligning public sector wages with those in the private sector and containing future wage growth. Harmonizing the public wage grid structure, fostering merit-based compensation, and reducing the very high public-private wage premia would generate sizeable savings. It would also incentivize nationals to seek opportunities and create jobs in the private sector, thereby boosting competitiveness and productivity.

Phasing out generalized subsidies and reforming transfers. At almost 7½ percent of GDP, fuel, electricity, and water subsidies and transfers are large. In addition to being costly to the budget, subsidies encourage excessive consumption and investment and disproportionately benefit the rich. Utility prices should be raised to cost recovery levels and various transfers rationalized through consolidation and strict eligibility enforcement. Doing so would result in savings and more efficient use of resources. Targeted cash transfers should be introduced in parallel to offset the adverse impact of reforms on lower-income households.

Increasing growth-enhancing public investment and improving its efficiency will be essential for closing infrastructure gaps with GCC peers and raising the long-term growth potential. This would also help counteract the drag on growth from fiscal consolidation. Higher capital spending should be accompanied by reforms focused on improving project selection, planning, and implementation.

Introducing a 5-percent value added tax (VAT) would broaden the tax base, yield stable revenue, help upgrade tax administration capacity, and contribute to a deeper understanding of the input-output structure of the economy. This would also bring Kuwait in line with Bahrain, Saudi Arabia, and the United Arab Emirates which have recently implemented the tax as part of the GCC-wide agreement.

Broadening the coverage of the profit tax and introducing excises on luxury goods. In addition to generating revenue, extending the business profit tax coverage to domestic companies would level the playing field and encourage FDI. Excises on luxury goods or, alternatively, a personal income tax on high earners would contribute to a more socially-balanced adjustment mix, helping increase its acceptance among the middle class.

The government needs to build consensus for fiscal adjustment. To gain broad support, the proposed fiscal measures should be part of a comprehensive reform package that fosters private sector growth and jobs, reduces waste and improves the quality of public services, and strengthens government accountability and transparency. Experience in other countries shows the need for pro-active and transparent communication to explain the rationale for adjustment, proposed measures, their expected costs and benefits, including distributional impact.

B. Putting Robust Policy Frameworks in Place