(MENAFN - Arab Times) The Amir recently approved by decree the much-delayed budget law for FY 2012/13, which had been held up by the absence of a sitting parliament. The budget shows a 9% increase in planned spending to KD21.2 billion, which should in principle be supportive of an economy struggling to gain momentum. However, actual spending traditionally undershoots its target and because of this year's delay, it is subject to even greater uncertainty than usual. Either way, another large budget surplus looks likely.
* All of the increase in planned expenditures comes from current spending (including wages, subsidies and transfers, amongst other things), which is budgeted to rise 12% to KD18.6 billion. Of this increase, more than half comes from spending on power generation. Traditionally, budget targets in this area reflect the government's oil price assumption, which dictate the theoretical cost of purchasing fuel. This year, however, the increase in the budget oil price from 60 per barrel (pb) to 65 pb seems too small to have generated such a large effect. The bulk of the increase could instead stem from increased power output in light of recent capacity additions.
* The rest of the increase in current spending comes largely from (civilian) wages and salaries, which are seen rising 16%. Around half of this increase comes from the Ministry of Education. The planned increase in total wages and salaries, although significant, is lower than the 24% increase the previous year. Nevertheless, it should still provide support for growth in consumer spending, which has been the backbone of the non-oil economy in recent years. In total, wages and salaries account for 24% of overall budget spending, up slightly from previous years. (Chart 2.)
* Disappointingly, capital spending is budgeted to decline by 6% this year, to KD 2.6 billion. (Chart 3.) This comes at a time when higher government investment is much needed both to support the economy and to kick-start lackluster infrastructure spending in the government's development plan, which is now in its third year. A combination of bureaucracy, technical challenges and political constraints has already slowed project execution to a crawl.
* While a concern, the budget figures on capital spending need not be quite as bad as the headline figures suggest. Firstly, given the budget's late approval, lower investment spending targets may reflect the limited time remaining this year rather than a lack of ambition. Secondly, the drop in capital spending stems entirely from a fall in investment in the power sector, which may reflect the end of a recent project cycle; excluding this, capital spending is projected to rise 10%. Finally, because of an especially weak execution rate last year, actual investment spending could still rise this year, despite the lower budget allocation. Note also that some public capital spending takes place off-budget.
* Overall, total spending looks set to provide modest support for the economy for the remainder of this year. Actual spending in FY2011/12 stood at KD 17.0 billion, 88% of its targeted budgeted level. A rise in the execution rate to a more historically typical 94% would see total spending rise by 17% y/y. However, the budget's delayed approval and the absence (so far) of some of the budgetary detail " notably on the large 'Miscellaneous and transfers' segment, which includes some important transfer payments " increase the uncertainties surrounding any projections.
* Elsewhere, total budget revenues are projected to rise 4% to KD 13.9 billion. Oil revenues account for nearly all of this increase. Despite nudging up its oil price assumption, the government's revenue projection remains extremely conservative and " as in previous years " budget revenues are likely to end up much higher than expected. Indeed, the price of Kuwait Export Crude has averaged 106 pb in the first 7 months of this fiscal year. Although no official data has yet been published, we estimate that the government may have reached its total year revenue target in September.
* Non-oil revenues are projected to rise by 2% to KD 1.2 billion. However, they account for a very small share of total projected revenues, at 8%. Both (corporate) income tax charges and revenues from land sales are expected to rise strongly. Miscellaneous payments (which include UNCC payments as a legacy from the Iraq war) are expected to fall, but have substantially overshot budget projections anyway in recent years. Judging by previous experience, non-oil revenues will come in somewhat higher than expected.
* Based upon the government's projected spending numbers and revenue assumptions, we estimate that the oil price needed to balance the official budget is 97 pb, up from 86 last year. The number falls sharply if " as we expect " oil production turns out to be higher or government spending comes in lower than projected.
* In reality therefore, the overall fiscal position is expected to remain extremely strong. Using the conservative official oil price assumption, the government projects a deficit of KD 7.3 billion for FY12/13 " a record high. But with oil revenues likely to be stronger " and spending levels weaker " than projected, we think another large surplus is more likely, the fourteenth in a row. If oil prices stay at recent levels, a surplus of KD 10 billion looks plausible. This would equate to around 20% of GDP, compared to a surplus of 30% of GDP recorded last year.
* Finally, it is worth noting that allocations to the Reserve Fund for Future Generations (RFFG) have increased to 25% of total revenues, from 10% in previous years. This appears to be partly an accounting change " directing funds to the RFFG that would otherwise be held by the General Reserve. Total allocations to the RFFG are budgeted to rise to KD 3.5 billion. Under our higher revenue estimates, however, they could be as large as KD 7 billion.
