Kuwait recently approved its draft budget for fiscal year 2025/2026, forecasting a larger deficit of KD 6.3 billion, or approximately 13 percent of GDP, compared to KD 5.6 billion in the FY24/25 budget. Despite some efforts to restrain spending, the government still faces significant challenges in curbing expenditures and balancing its public finances. The new budget signals a move toward more sustainable fiscal policies, though structural reforms remain necessary.
Expenditure Overview
The government has projected total expenditures for FY2025/26 at KD 24.5 billion, marking a modest decrease of 0.1 percent from the previous year. This slight reduction in spending indicates a level of restraint as Kuwait seeks to align with the previously set spending ceiling. However, budgeted spending levels remain elevated, near historical highs. The government’s allocation for employee compensation will see a 1.6 percent increase, while subsidies, other expenses, and capital expenditure (capex) are set to decline by 2.2 percent, 3.7 percent, and 1.7 percent, respectively.
Despite this decline in spending on certain items, issues such as high spending on wages and subsidies – which make up nearly 80 percent of all expenditures – persist. Meanwhile, capex continues to shrink, accounting for only 9.1 percent of total spending. This ongoing trend of reduced capex raises concerns, especially as the country aims to meet Vision 2035 infrastructure goals. The limited capex allocation may be due to liquidity constraints, which have hindered larger infrastructure projects in recent years.
Revenue Projections and Fiscal Measures
On the revenue side, Kuwait anticipates a decline in oil revenues, forecasting KD 15.3 billion from oil income, down by 5.7 percent from the previous year. This reduction is driven by a lower oil price assumption of $68 per barrel, compared to $70 in the previous budget, as well as a slight decrease in oil production (2.50 mb/d from 2.55 mb/d). However, the government expects a significant increase in non-oil revenues, projecting a 9 percent year-on-year rise to reach KD 2.9 billion, a record high.
This increase reflects a series of new revenue measures, including a corporate income tax for large multinational companies (15 percent minimum top-up tax) that is expected to raise KD 250 million in tax income. Additionally, a new traffic law imposing higher penalties for violations is set to take effect in April, and a law allowing ministries to adjust service fees could lead to higher government revenues from administrative, judicial, health, and property lease fees.
New Debt Law and Future Generations Fund
In a move to strengthen fiscal liquidity, a new public debt law is on the horizon. If approved, it would enable the government to return to the bond market for the first time since the expiration of the previous debt law in 2017. Reports suggest the law could permit borrowing of up to KD 20-30 billion over 50 years, which is feasible given Kuwait’s low public debt (around KD 1.4 billion) and relatively low debt servicing costs. The new law could be followed by legislation to regulate withdrawals from Kuwait’s Future Generations Fund, which recently surpassed $1 trillion in assets. These measures would help provide more fiscal flexibility for deficit financing and higher capital spending in future budgets, addressing liquidity pressures in the state treasury.
Outlook and Reform Potential
While the budget indicates some fiscal restraint and new revenue sources, it is clear that deeper structural reforms are needed to address Kuwait’s long-standing fiscal challenges. The limited increase in employee compensation and modest reductions in other areas suggest that this budget may not lead to significant economic expansion or private consumption growth. The slight decline in capex allocation signals a cautious approach to investment, although actual capital spending may still rise given historical underspending.
Looking ahead, the government is actively pursuing a range of legislative reforms that could have significant fiscal and economic implications. These include the potential restructuring and merging of government entities, the privatization law, the public-private partnership law, and the housing financing law. The service repricing law, in particular, could have profound effects on the budget by allowing for the gradual removal of energy and water subsidies, aligning Kuwait with other GCC countries like Saudi Arabia and the UAE, which have successfully implemented similar reforms.
In conclusion, while the FY25/26 budget reflects some cautious steps toward fiscal sustainability, Kuwait will need to undertake more substantial reforms to ensure long-term financial stability and economic growth.
