Kuwait's budget shows how political populism is keeping the country at the mercy of oil prices

Until structural reforms are implemented to boost the private sector, the state’s spending burden will spiral higher

Another dizzying surge in state spending, not least on a rising number of government employees, raises doubts on the sustainability of the country’s finances just as other oil economies are changing
Andrei Cojocaru
Another dizzying surge in state spending, not least on a rising number of government employees, raises doubts on the sustainability of the country’s finances just as other oil economies are changing

Kuwait's budget shows how political populism is keeping the country at the mercy of oil prices

Kuwaiti newspapers recently published the state's draft budget for the fiscal year 2023/2024, which starts on the first of April and ends on 31 March of the following year.

It is the largest in the country’s history, with total expenditures estimated at 26.3 billion dinars ($86.22 billion) for the upcoming fiscal year, 11.7% higher than the current fiscal year’s expenditures ending on March 31.

A prominent feature of the new budget is that current expenditures make up 91% of total expenditures.

Longer-term capital expenditure, reaching 2.4 billion dinars ($7.9 billion), makes up the remaining 9%.

The bulk of spending in the fiscal year covered by the budget is for salaries and wages, at 14.9 billion dinars ($48.85 billion) or 57%, up from 13.1 billion dinars ($42.95 billion), an increase of 13% in the current fiscal year.

This confirms continuous employment in government departments and public institutions. The number of government employees’ appointments this in the new fiscal year was estimated at 21,815.

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Kuwait City Kuwait Amazing Kuwait Towers.

Undoubtedly, the increase in the number of employees in the public sector confirms the dilemma that the state faces in providing jobs for the flow of national workers entering the labour market, and the narrow employment opportunities in the private sector.

Economic reform and the diversification of Kuwait's sources of income have stalled due to the worsening political situation and the dominance of populism in national politics. 

Historical data shows that the state's general budget amounted to 5.5 billion dinars ($18 billion) in the fiscal year 2003-2004.

Measured from there, the latest measures represent a jump of 376%, or an 18.8% annual growth in expenditure.

There is no doubt that this rise in spending rates raises concern about sustainability and how to meet growing obligations in the coming years when oil revenues are uncertain and significant shifts in energy economies are likely.

As well as public sector wages, government subsidies make up a significant proportion of the upcoming spending plans.

Subsidies were estimated at 5.9 billion dinars ($19.34 billion), up from 4.4 billion dinars ($14.43 billion) in the current fiscal year, a 34.4% increase.

Among them electricity, fuel, and water subsidies increased by 1.15 billion dinars ($3.77 billion). Also, the cost of construction and consumer materials increased by 75 million dinars ($245.9 million), student allowances by about 140 million dinars ($459 million), and rent allowances by 68.5 million dinars ($224.58 million).

The increases come as a government response to populist demands by national assembly members, which have become louder after last September's vote.       

Getty Images
Kuwaiti parliament members attend a session of the National Assembly at its headquarters in Kuwait City on January 10, 2023.

Populist thought dominates politicians

The Kuwaiti government's oil revenue estimates are based on the assumptions that 2.6 million barrels per day will be produced at and an average sale price of $70. This brings the total estimate of oil revenues for the fiscal year to 17.1 billion dinars ($56 billion).

Meanwhile, non-oil revenues estimates were set at 2.28 billion dinars ($7.74 billion), representing 11.7% of total projected revenues, amounting to 19.45 billion dinars ($63.77 billion).   

Kuwait is still hostage to oil economies and unable to diversify its sources of income at a time when other Gulf countries are making great efforts to develop and enhance their economies.  

Oil revenues are unquestionably subject to market fluctuations. They could rise with the increase of oil prices, as we have seen in the current fiscal year. But they could also fall, tracking unknown economic or geopolitical factors.

A file picture taken on November 21, 2014 shows Kuwait's largest oil refinery at the Al-Ahmadi complex, about 40 kilometres (25 miles) south of the capital Kuwait City.

This leaves Kuwait as hostage to oil and unable to diversify its sources of income at a time when other Gulf countries are making great efforts to develop diverse economic capabilities as is the case in Saudi Arabia and the UAE.

Economic reform, which could lead to the diversification of the sources of income, has been stalled in Kuwait, as populist thought has risen to dominate a worsening political situation. 

State control of economy's leading players delays reform

The issue of economic diversification is not new. It has been raised in Kuwait since the early sixties. An even earlier World Bank mission had recommended rationalising spending and boosting the role of the private sector.

But there was little or no progress, complicated by an increase in oil revenues after the mid-seventies, following the first oil shock.

Since then, the hegemony of the government and the public sector has only been consolidated. Today, the state has complete control over key economic institutions, including full ownership of the oil sector.

The private sector has been unable to enhance its role in the economy by entering new industries such as housing. Currently, the government has a policy of providing housing for every Kuwaiti family, an ineffective approach that sometimes leads to waiting lists lasting over 20 years.

Financing has also become complicated by the draining of the state owned Credit Bank and delays with established infrastructure projects.

The private sector also plays no role in the electricity and water sectors, which the government controls, and population growth and inflation means it must pay more to run them, lifting public expenditure.

The government has tried to implement the value-added tax adopted by Gulf countries, but the opposition of the members of the National Assembly was too strong.   

Increasing non-oil revenues is no simple matter, with citizens accustomed to modest charges for electricity, water, communications, and health services based on a subsidy philosophy.

As for taxes, private sector joint-stock companies must pay a labour tax of 2.5% on net profits and 1% zakat. Industrial companies, farm owners, and beneficiaries of tourist chalets also pay some fees under the usufruct law, which brings in revenue from the users of public property via Ground Leases.     

The government tried to implement value-added taxes adopted by Gulf countries, but opposition from members of the National Assembly was too strong.

Getty Images
Kuwaiti MPs arrive to attend a parliamentary session at the National Assembly in Kuwait City on January 25, 2023.

The government expressed an intention to raise these usufruct fees, but not we have to wait until the end of the next fiscal year has ended to see the outcomes. No matter how high they may eventually go, they could never lead to a substantial increase in non-oil revenues.

The way to do that is to use the private sector through increasing its contribution to the gross domestic product, opening up fresh sources of tax revenue from various economic sectors, as is the case in developed capitalist economies.    

Budget deficits will balloon without structural reform

Until such structural reform is implemented, Kuwait's state budget will remain dependent on oil prices.

So, in light of the revenue estimates, the current budget will lead to a deficit that may reach 6.8 billion dinars ($22.29 billion). After calculating private parties' profits, the government estimated the deficit at 5 billion dinars ($16.39 billion), but that is an inaccurate figure.

There are plans to present a draft public debt law to finance the deficit. Legislative and executive authorities have failed to agree on the law for the past three years.

Non-recurring obligations were one of the justifications for the increase in expenditures in the 2023-2024 budget.

This included more than one billion dinars ($3.28 billion) for the oil and electricity ministries for ongoing projects and approximately 481 million dinars ($1.57 billion) for government employees covered by a system offering payment for untaken holiday time from work. The latter shows the dominance of rent-seeking policies over the country's political class. 

Reviewing fiscal policies has become one of the most pressing issues that Kuwait should look at if it does not wish to increase spending in the coming years, when oil revenues are difficult to predict and could become inadequate to meet the state's obligations.  

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