After brief surplus, Kuwait's national budget back in the negative

Salaries and subsidies account for 80% of national budget

Once again, the was a lack of reform or rationalisation. Salaries and subsidies continue to account for around 80% of planned expenditure.

Salaries alone amount to $48.4bn, or 14.9bn dinars, a rise of 13.3% year-on-year. Subsidies reached $19bn, up 34.2%, and continue to cover fuel petrol and related products, electricity, construction materials, rent allowances for housing applicants, and stipends for sponsored students and even basic foodstuffs.

Populist political support for high spending and opposition to structural fiscal reform or the development of modernised public employment systems makes any overhaul difficult. Nonetheless, there was some progress on capital expenditure plans, which were down 15.2% to $8bn, or 2.5bn dinars.

Not all the increased spending plans will permanently recur. One-off increases, or extra-ordinary allocations, included around one billion dinars for the Ministry of Electricity and Water. An allocation of $1.6bn to buy back the unused vacation days of public sector employees is similar to the frontline allowances paid in other countries to staff dealing with Covid-19.  

While those plans reward some deserving staff ­– including doctors, nurses and the police – they have also included other government employees indirectly affected by the pandemic. They are also another example of the government giving in to populist pressure in the National Assembly, rather than standing up for more prudent spending.

Other measures have similar origins.

Last month, the National Assembly adopted amendments to the "Afya" health insurance programme that will allow pensioners to receive treatment at private hospitals and clinics. The amendments included housewives who had never worked in government. The cost of the new Afya is higher than the current expenditures in the budget.

Bloated public sector

The most significant elements of the budget cover salaries and wages. They are rising steadily on an annual basis as the public sector grows, expanding to absorb surplus labour. The budget estimated the number of new jobs at 21,815, costing $1.9bn.

It comes as the Kuwaiti private sector continues to generate only limited employment. There remains a lack of reform and privatisation which is needed to liberate the economy from the dominance of the state.

Employment in public administration seems only to serve as a means of providing income for newcomers joining the jobs market. It is, in effect, increasing the hidden rate of unemployment, undermining national productivity.

The number of new jobs in government varies between 20,000 and 25,000 per year, or about 5% of the total Kuwaiti workforce in the public sector, estimated at over 400,000 employees.

New fiscal and economic policies are needed to deal with an influx of Kuwaitis into the formal labour market. Government apparatus needs to be streamlined for greater efficiency, with technological advances applied to the operation of the public sector.

Budget for development

Kuwait once saw its budget as a means to set up sustainable development.

When the late Jassim Al-Kharafi was Minister of Finance in the second half of the 1980s, there was a move in this direction. However, the efforts came to a halt after the unconstitutional dissolution of the National Assembly in July 1986.

Nonetheless, there is a precedent for deploying the budget to boost development.

Positive relations between the public and private sectors and the transfer of ownership of various institutions and facilities into the private sector would help. Facilities such as water distillation, power generation, fixed-line telecommunications, and transportation are ripe for privatisation.

Such a move would need a review of utility tariffs to reflect the real cost of providing these services and the phasing out of subsidies.  

Tax reform is needed. Laws should be enacted to generate revenue for the treasury in exchange for private company profits. The cost of transportation fuel should also be reviewed. Kuwait should impose a value-added tax (VAT) on goods and services approved by the Gulf Cooperation Council (GCC) based on commodities and services previously defined by GCC committees.

Capital expenditures could include public-private partnerships in many projects, including housing, transportation, critical infrastructure, and other development programmes.

Spending stays unsustainable

Kuwait's latest budget shows its financial philosophy remains illogical and unsustainable, not least due to its heavy reliance on oil revenue. The need for change will only become more acute as the world increasingly moves toward alternative energy sources.

That process may take time. But major oil exporting nations need to be ready and caution on spending alongside a move toward other sources of revenue is vital. There are also demographic considerations. Kuwait has rising life expectancy rates and a growing number of youth and young children, which is an added burden on the government.

The country must answer a fundamental question: Are its politicians ready, willing and able to summon the courage to face this reality and set aside destructive and economically costly populist policies?

For now, Kuwait can afford it but that will not always be the case. Now is the time to lay the foundations for the sustainable economy and public finances the country will one day depend upon.

It will only get harder to do so later.