Gulf oil producers overshot budgeted spending by nearly 12 per cent in 2010 and are expected to exceed their budgets again this year, tempted by strong oil prices, according to a well-known regional economist.
The six Gulf Cooperation Council (GCC) countries, which control over 40 per cent of the world’s proven oil wealth, had projected 2010 spending at around $269 billion but actual expenditure rose to $301 billion through the year, Mohammed Al Asumi said in an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research (ECSSR).
He noted that GCC budgets over the past years show that there is a strong relationship between oil revenues and expenditure on one hand and the economic development and improvement of standard of living on the other.
He said the surge in public spending last year was most pronounced in Saudi Arabia, Kuwait and Qatar as expenditure in the UAE was primarily in local budgets while public spending in the federal budget remained unchanged.
“As per available data, the GCC countries’ budget for this year is estimated at $302 billion with a minimal increase over the real spending last year,” he said.
“However the data provided for the first half of this year indicates a 15 percent rise in public spending to approximately $347 billion.”
Asumi, a Bahraini, said most GCC members have remained very conservative about oil prices while preparing their annual budgets.
Kuwait, for example, assumed a price of $45 a barrel this year while other GCC countries, though they take into account higher prices, they did not exceed $80 for the first half of this yea despite the surge in crude prices.
“Oil prices are expected to remain high during the second half of the year……high oil prices have encouraged GCC countries to announce a set of measures to expand public spending plans, “ Asumi said.
He noted that in the first quarter of this year, Saudi Arabia announced several plans which have led to a sharp rise in spending that reached $100 billion.
These plans focused on improving services and bolstering the welfare of the Saudi citizens in addition to implementing various programs related to the country’s infrastructure, housing, public and educational facilities.
Public spending is also expected to increase in other GCC countries which have announced new plans to enhance their economies and raise their citizens’ standard of living, Asumi said.
“The rise in oil prices has also contributed to alleviating the GCC budget deficits which exceeded $55 billion in 2010. The GCC budgets are expected to show a similar surplus this year despite the anticipated increase public spending.”
According to Asumi, the structure of public spending indicates that salaries and payrolls constituted the largest share in the budget over the past few decades. These were followed by infrastructure and public services projects, which have been extensively developed to reach international standards.
“Despite the role played by oil in supporting spending plans, the strong link between spending and crude revenue constitutes a weak point in financing of budgets. It makes these budgets vulnerable to fluctuations,” Asumi said.
“This necessitates financial restructuring and plans to gradually reduce dependence on oil revenues and to dedicate them for creating alternative sources for financing the GCC countries’ budgets. Financing of the UAE federal budget is a model of such a transformation.”
Moreover, introduction of a unified Gulf tax system compatible with existing economic and social situation has now become inevitable, Asumi said.
“This will serve as a milestone in the GCC economic landscape, which still depends on subsidized prices that burden the budgets with huge sums of spending on items that do not generate income for society’s needs. Some subsidized services in the GCC are considered nothing but waste of resources by consumers due to their cheap prices.”