Kuwait’s Public Wage Bill Limits Infrastructure Investment, NBK Reports
Kuwait’s government is allocating nearly 80% of its budget to public sector wages and social aid, significantly limiting funds available for essential infrastructure projects, according to a recent report by the National Bank of Kuwait (NBK). This fiscal strategy presents structural challenges, especially as the nation aims to advance its Vision 2035 development plan.
Budget Allocation Imbalance
In the proposed 2025-2026 budget, set to commence on April 1, Kuwait plans to reduce capital expenditure by approximately 1.7%. Conversely, spending on public sector salaries and social assistance is projected to increase by 9.1% compared to the current fiscal year. This trend of declining capital investment has persisted over the past four years, despite the pressing need for infrastructure development to meet the goals outlined in Vision 2035.
Projected Deficit and Revenue Adjustments
The draft budget estimates total spending at 24.5 billion dinars ($80.8 billion), slightly less than the current fiscal year’s expenditure. However, the anticipated deficit stands at 6.3 billion dinars, an increase from this year’s projected shortfall of 5.6 billion dinars. This rise in deficit is primarily due to expected decreases in oil revenue, with projections based on an average oil price of $68 per barrel, down from $70 in the current year.
In contrast, non-oil revenue is forecasted to grow by about 9% in the next fiscal year, reaching a record high of approximately 2.9 billion dinars. This increase is largely attributed to a planned 15% corporate tax on multinational companies, which Finance Minister Noura Al-Fassam anticipates will generate an additional 250 million dinars.
Comparative Regional Context
A World Bank report highlights that Kuwait’s public sector wage bill is the highest among Gulf Cooperation Council (GCC) countries, with government employee salaries comprising about 60% of total public spending. This substantial allocation towards wages and social benefits reflects a longstanding social contract, wherein the government employs over 80% of Kuwaiti citizens and provides generous subsidies for fuel, electricity, and water. While this approach ensures a high standard of living and one of the world’s highest per capita incomes, it also results in modest private sector development and job creation.
IMF’s Perspective on Economic Risks
The International Monetary Fund (IMF) has acknowledged Kuwait’s post-pandemic economic recovery but warns of “substantial” risks to the country’s outlook. In its latest assessment, the IMF projects that real gross domestic product (GDP) growth will slow to 0.1% in 2023, primarily due to oil production cuts. The IMF recommends that Kuwait undertake comprehensive fiscal consolidation, focusing on increasing non-oil revenue and addressing current spending rigidities. Suggested measures include introducing excise taxes, implementing value-added tax (VAT), and expanding corporate income taxation to encompass domestic companies.
Challenges and Recommendations
Kuwait’s heavy reliance on oil revenue renders its economy vulnerable to global oil market fluctuations. The significant portion of the budget dedicated to public sector wages and social aid constrains the government’s ability to invest in critical infrastructure projects necessary for economic diversification and sustainable growth.
To address these challenges, experts suggest that Kuwait consider the following measures:
- Diversify Revenue Streams: Implementing taxes such as VAT and excise duties can reduce dependence on oil income and provide a more stable revenue base.
- Reevaluate Public Sector Employment Policies: Encouraging private sector growth and reducing the guarantee of public sector employment for citizens can alleviate the wage bill burden.
- Prioritize Capital Expenditure: Allocating more funds to infrastructure projects can stimulate economic growth and attract private investment.
- Enhance Efficiency in Social Aid Programs: Reforming subsidy programs to target those most in need can reduce unnecessary expenditures.
Balancing social welfare commitments with the necessity for infrastructure development is crucial for Kuwait’s long-term economic health. Strategic fiscal reforms and prudent budgetary allocations can help the nation achieve its Vision 2035 objectives and ensure sustainable prosperity for future generations.
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