Saudi Arabia: Planning a Cutback?
Saudi Arabia’s budget plan, announced December 26, is counter to trend in one important way – it is the first time in the last decade the Kingdom plans to spend less in the coming year than in the previous year. If it is implemented, and RGE thinks it will be difficult for economic officials to hold the line on spending given domestic and global pressures, it would exacerbate the slowdown in Saudi Arabia’s growth next year (from the official estimate of 6.8% included in the budget documents). Likely, as with the last seven consecutive years, spending will outstrip the budget, even if it does come under last year’s record total.
The 2012 budget targets spending of 690 Saudi riyals or US$184 billion, splitting the difference between 2011’s spending surge to US$214 billion and the more modest increases planned at the end of 2010. This year’s spending was amplified by stimulus measures, including a new minimum wage, social housing and government-brokered credit introduced in February and March 2011 in the wake of the Arab Spring. Although some of 2011 spending was on one-off measures, including salary bonuses, we expect much to be permanent and to continue the steep pattern of spending increases that began in 2003. Moreover, since the government was slow to implement some of the construction projects earmarked for 2011, including social housing, we expect these measures to keep spending higher than targeted in 2012, and slightly more expansionary. Moreover, political pressures suggest that military spending (not identified in the budget, but thought to absorb 15% of spending) will continue to climb.
Figure 1: Gap Between Planned and Actual Spending
Source: Saudi Ministry of Economy, RGE (for 2012 spending)
Given this immediate precedent, why the public attempt at conservation and austerity? The budget plan could be intended to send two messages:
- To imply that the Saudi Arabian budget could balance at a still-manageable oil price to maintain room to maneuver for oil policy and reduce its need to draw on its sizeable savings. We estimate that 2011 spending required an oil price over US$85/barrel (Saudi crude), leaving a sizeable surplus and helping bring in official foreign assets of well above US$500 billion. The rapid increase in spending has reduced Saudi Arabia’s policy space, and could lead to deficits (perhaps not in 2012 but in years to come).
- Give the government room to maneuver for further measures later in the year (at the ruler’s discretion), should it be politically necessary. Should oil prices remain in the US$90-100 comfort zone, the government would have more space to boost spending.
Moreover, it may be trying to send a domestic message that budgets will not automatically increase annually. The planned composition of spending is no surprise, however. Education, health and related social infrastructure attract the bulk of spending plans.
Beyond domestic spending, the Saudi officials have also pledged funds to several Arab countries, including Bahrain, Jordan, Morocco and Egypt. Few of these pledges have yet been fulfilled, with Egyptian officials particularly vocal in criticizing the slow delivery of funds. 2012 will be another tough balancing act.
Figure 2: Composition of Spending
Source: Saudi Arabia Ministry of Economy, RGE calculations for other spending
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