In the years since the Iraqi occupation, Kuwait has recorded budget deficits as well as lower investment income. The budget deficits reflected the high spending associated with liberation, reconstruction, and rehabilitation, as well as a surge in transfers (both domestic and, in the earlier years, transfers abroad in connection with Desert Storm operations).1 Investment income fell as a result of the drawdown of official foreign assets. The deficit has, however, been on a declining trend, reaching a low of 11.7 percent of GDP in 1994/95, and expected to have been significantly lower in 1995/96.2 Despite this favorable trend in the fiscal balance, the structure of the budget has remained weak, with heavy dependence on oil revenues and large outlays related to the costs and subsidies associated with the cradle-to-grave social welfare system.
The authorities clearly recognize the need to address the structural weaknesses, as evidenced by the objectives set out in the Five-Year Plan, approved by the Supreme Planning Council, the Cabinet of Ministers, and the National Assembly. The plan aims to eliminate the deficit by 1999/2000 and to introduce measures that will lead to a sustainable fiscal position in the future, including a restoration of the accumulation of official assets. Kuwait’s budget preparation process is described in Box 3.1.
The Budgetary Process in Kuwait
• Kuwait’s fiscal year runs from July 1 through June 30.
• The Finance Ministry prepares a draft budget in consultation with other ministries and departments.
• Once approved by the Council of Ministers, the draft budget is forwarded to the National Assembly, where it is debated. Modifications can be made during this process by agreement between the government and the Economic and Financial Committee of the National Assembly. The Assembly must pass the budget before it can become law; until the budget for the new fiscal year has been approved, the main elements of the previous year’s budget remain in force.
• Kuwait’s budget covers accounts of the central government, the state general budget, and the “attached budgets” of the National Assembly, Kuwait City, and a number of public enterprises. The attached budgets are, in general, public enterprises that are not expected to operate on a commercial or profit-making basis. The government accounts include, in addition, a group of “independent budgets.” These are essentially closing accounts that reflect subsidies and transfers required to cover whatever losses arise in a group of 11 public enterprises that are operated on a commercial basis. Independent budget entities that are not loss making do not appear in the government accounts.
Building on the general analysis of Section II, this section considers developments in Kuwait’s fiscal position in the period since 1980/81, and discusses the structural weaknesses that need to be addressed to place Kuwait on a sustainable fiscal path. It examines Kuwait’s fiscal situation from a historical perspective, reviews developments in the two latest budget periods (1994/95-1995/96), analyzes the structure of the budget, and discusses the implications for the government’s intentions for reform.
Historical Perspective
Traditionally, Kuwait has recorded fiscal surpluses and has followed a much-respected policy of building up official assets so that future generations might benefit from the proceeds of the nonrenewable oil reserves extracted in the current period. The policy of reserve accumulation was formalized in 1976, when the government passed a law requiring that 10 percent of all budget revenues be transferred to the Reserve Fund for Future Generations (RFFG).
In the 1970s, during the period of the sharp increase in oil export receipts, fiscal policy in Kuwait was characterized by high spending on the infrastructure needed to create a modern state, the development of an extensive welfare system, and the buildup of reserves. During this period and until the mid-1980s Kuwait consistently recorded budget surpluses, averaging about 25 percent of GDP (Figure 3.1). In response to the lower oil prices of the mid-1980s, the authorities began to pursue more conservative fiscal policies, restraining budgetary expenditures, especially the high development spending of earlier years. As a result, Kuwait was able to continue increasing its holdings of official assets despite weaker oil prices.
Overall Fiscal Balance
(In percent of GOP)
Sources: Kuwaiti authorities; and IMF staff estimates.Overall Fiscal Balance
(In percent of GOP)
Sources: Kuwaiti authorities; and IMF staff estimates.Overall Fiscal Balance
(In percent of GOP)
Sources: Kuwaiti authorities; and IMF staff estimates.The Iraqi invasion in August 1990 interrupted normal budgetary activities. The invasion and subsequent occupation of Kuwait caused serious destruction of physical assets, and of administrative and social services, as well as the dislocation of a large part of the population. After liberation in February 1991, the government embarked on a massive rehabilitation and reconstruction effort to restore these services and rebuild productive capacity and infrastructure, involving a considerable commitment of financial resources. The budgetary accounts for the fiscal years 1990/91 and 1991/92 reflect the consequences of this effort and other extraordinary expenditures related to the occupation.
Oil exports were interrupted during the occupation and the following year because of the destruction of oil production capacity. As a result, total revenue fell by 66 percent in 1990/91, while expenditures rose by 126 percent. More than 80 percent of total outlays during 1990/91 was accounted for by the large official transfers abroad for payments to foreign governments for Desert Shield and Desert Storm operations. The wage bill and other outlays on goods and services were significantly lower than in previous years, owing to the seven-month Iraqi occupation. A deficit of about 120 percent of GDP was recorded; it was financed by drawing on official foreign assets.
In 1991/92, total expenditures declined, primarily as a result of much smaller transfer payments to foreign governments for Desert Shield and Desert Storm operations (KD 2 billion, compared with more than KD 4 billion a year earlier). This fall was more than compensated for by the large increase in the government wage bill (due in part to a 25 percent salary increase granted to Kuwaiti employees beginning in March 1992),3 sharply higher purchases of goods and services for reconstruction, and a rapid expansion of domestic subsidies and transfers. As in 1990/91, transfers to individual Kuwaitis were large. In addition, charges for electricity and water were temporarily suspended, and payments related to employment termination of non-Kuwaiti nationals rose. Total budgetary revenue barely increased: while oil income and tax and nontax revenue rose slightly, investment income declined owing to the continued drawdown of official foreign assets.
The overall deficit for 1992/93, while falling sharply from the level of the previous two years, remained high at 22 percent of GDP. Total expenditure declined markedly, as payments for Desert Shield and Desert Storm were completed. However, spending on subsidies and transfers increased, owing to the cancellation of consumer loans outstanding at the time of the Iraqi invasion, and interest payments associated with the debt-settlement bonds under the Debt Collection Program (DCP) of KD 300 million. Expenditure restraint focused almost exclusively on capital expenditure, which amounted to the equivalent of 5-6 percent of GDP. Revenues increased sharply, as oil revenues recovered to their precrisis levels, offsetting the further fall in investment income.
No new policy measures were incorporated in the 1993/94 budget, but the deficit nevertheless declined further to 18 percent of GDP because of higher oil revenues, which rose by 11 percent. The benefit from higher oil revenues was partly offset by a further sharp decline of investment income. Total expenditures declined slightly from a year earlier, owing largely to a fall in subsidies and transfers. This decline was due to the one-time nature of the costs of the consumer loan cancellations in the previous year and a sharp fall in end-of-employment benefits and took place despite higher spending related to a housing loan cancellation program. Spending on wages and salaries remained roughly un-changed, and, on goods and services, actually declined as reconstruction activities ended. On the other hand, interest payments increased on account of the bonds issued by the government under the DCP established to resolve the problem of nonperforming loans arising from the Souk Al-Manakh crisis and the Iraqi occupation.4
Fiscal Developments in 1994/95-1995/96
The outcome for 1994/95 was better than budgeted (a deficit of 11.7 percent of GDP, compared with 18 percent of GDP in 1993/94), reflecting a combination of factors—most importantly, the significant increase in oil revenues arising from higher oil prices (averaging close to $15.5 a barrel, compared with the conservative budget assumption of $13 a barrel). Non-oil revenues were below budget estimates as planned increases in customs duties and some fees and charges were delayed.
Growth in spending was constrained in some categories, most notably wages and salaries, reflecting strict control by the Ministry of Finance and some difficulty in hiring qualified Kuwaitis to fill positions vacated by non-Kuwaiti nationals. However, spending on subsidies and transfers was 25 percent higher than budgeted, because of ad hoc transfers for social welfare payments, the failure to raise certain fees and charges of public enterprises, larger transfers to public services to compensate for higher energy prices, and an increase in transfers to the social security institute, reflecting payments that had been delayed from the previous fiscal year (included in the suspense accounts).
The outcome for 1995/96 is estimated to have been significantly better than budgeted, again owing to a sharp increase in oil prices. Non-oil revenues are estimated lower than budgeted, reflecting continued delays in implementing increases in customs duties increase and fees and charges.
With regard to expenditures, a further contraction in the wage and salary bill has taken place, owing to strict controls on hiring procedures, slow progress in recruiting to fill positions vacated by expatriates, and efforts to prevent any increase in benefits. Spending on goods and services has also been constrained over the year. However, outlays for subsidies and transfers are estimated to have again exceeded budgeted amounts.
Structural Aspects of the Budget
As a result of the intensive reconstruction efforts, oil output and national income had largely recovered to precrisis levels by 1993, as discussed in Section II. Nevertheless, the repercussions of the regional crisis have continued to have an important impact on fiscal performance and on the structure of the budget—due primarily to the decline in investment income from the government’s reduced holdings of official foreign assets and a structural upward shift in government spending.
As recognized by the Kuwaiti authorities, these structural weaknesses call for a reform of the revenue base and a rationalization of expenditures over the medium term, achievement of which will require a reexamination of the role of government in the economy. In order to shed some light on the extent of the challenge facing the authorities, the specific revenue and expenditure patterns contributing to the weakening of the fiscal structure need to be reviewed.
Revenues
Kuwait’s revenue structure is characterized by high dependence on oil revenues, and—in the years since the invasion—by the reduced importance of the stabilizer role played by investment income owing to the drawdown of official reserves (Figure 3.2). In 1994/95-1995/96, oil revenues accounted for some 75 percent of total revenues (compared with 67 percent of total revenues in the years prior to the invasion), rendering Kuwait’s revenue base extremely vulnerable to developments in the volatile international oil market.
Developments in Fiscal Revenue
(In percent of GDP)
Sources: Kuwaiti authorities; and IMF staff estimates.Developments in Fiscal Revenue
(In percent of GDP)
Sources: Kuwaiti authorities; and IMF staff estimates.Developments in Fiscal Revenue
(In percent of GDP)
Sources: Kuwaiti authorities; and IMF staff estimates.Historically, oil revenues (excluding the period of the invasion and subsequent reconstruction) have fluctuated markedly. Oil revenues peaked at about KD 6 billion in 1979/80, and were in the range of KD 2.5 billion prior to the latest increase in international prices. Compared with other GCC countries and selected oil producing countries, Kuwait is among the most dependent on oil receipts (Table 3.1). For the future, this source of revenue will depend on developments in international oil prices— including the effect of the development of new sources of oil internationally—as well as on developments within OPEC and, in that context, in Kuwait’s quota allocation.
Composition of Revenues for Kuwait and Comparator Countries
(In percent of total revenues)
Composition of Revenues for Kuwait and Comparator Countries
(In percent of total revenues)
| Oil-Related Revenue | Domestic Goods and Services | Import Duties | Other | |||||
|---|---|---|---|---|---|---|---|---|
| 1993 | 1994 | 1993 | 1994 | 1993 | 1994 | 1993 | 1994 | |
| Kuwait | 67 | 75 | — | — | 2 | 2 | 31 | 23 |
| Other GCC countries | ||||||||
| Saudi Arabia | 75 | 51 | — | — | 6 | 6 | 19 | 43 |
| Qatar | 59 | 65 | — | — | 2 | 2 | 39 | 33 |
| United Arab Emirates | 81 | 77 | — | — | 1 | 2 | 19 | 21 |
| Bahrain | 64 | 60 | 4 | 4 | 9 | 11 | 23 | 25 |
| Oman | 78 | 78 | 1 | 1 | 3 | 3 | 18 | 18 |
| Comparator countries | ||||||||
| Indonesia | 33 | … | 26 | … | 5 | … | 36 | … |
| Venezuela | 38 | 30 | 11 | 21 | 10 | 7 | 41 | 42 |
| Iran, I.R. of | 67 | 55 | 2 | 7 | 4 | 10 | 27 | 28 |
| Syrian Arab Rep. | 37 | 26 | 4 | 4 | 12 | 11 | 47 | 59 |
Composition of Revenues for Kuwait and Comparator Countries
(In percent of total revenues)
| Oil-Related Revenue | Domestic Goods and Services | Import Duties | Other | |||||
|---|---|---|---|---|---|---|---|---|
| 1993 | 1994 | 1993 | 1994 | 1993 | 1994 | 1993 | 1994 | |
| Kuwait | 67 | 75 | — | — | 2 | 2 | 31 | 23 |
| Other GCC countries | ||||||||
| Saudi Arabia | 75 | 51 | — | — | 6 | 6 | 19 | 43 |
| Qatar | 59 | 65 | — | — | 2 | 2 | 39 | 33 |
| United Arab Emirates | 81 | 77 | — | — | 1 | 2 | 19 | 21 |
| Bahrain | 64 | 60 | 4 | 4 | 9 | 11 | 23 | 25 |
| Oman | 78 | 78 | 1 | 1 | 3 | 3 | 18 | 18 |
| Comparator countries | ||||||||
| Indonesia | 33 | … | 26 | … | 5 | … | 36 | … |
| Venezuela | 38 | 30 | 11 | 21 | 10 | 7 | 41 | 42 |
| Iran, I.R. of | 67 | 55 | 2 | 7 | 4 | 10 | 27 | 28 |
| Syrian Arab Rep. | 37 | 26 | 4 | 4 | 12 | 11 | 47 | 59 |
A major consequence of the 1990-91 regional crisis was the substantial reduction of Kuwait’s official foreign assets. With the continuation of budget deficits in subsequent years, reserves have been further reduced. With this loss of reserves, investment income has declined significantly—from about 27 percent of GDP in 1989/90 to less than 8 percent of GDP in 1994/95.
The counterpart to the heavy dependence on oil revenues is the small contribution of tax revenue to total revenues. In recent years, tax revenues have accounted for only about 2 percent of total revenues and less than 1 percent of GDP. Customs duties are the main component of Kuwait’s tax system, with taxes on income earned by foreign companies and taxes on selected property transfers generating some additional tax revenue. Even so, within the GCC (as well as compared with other oil producing countries), Kuwait’s customs duties make among the smallest contribution to total revenues. While Kuwait’s membership in the GCC has constrained to some extent the expansion of the revenue base through customs tariff increases, it is clear that there is scope for earning higher revenues from this source. Other factors explaining the poor performance of tax revenue are the narrow coverage of the tax net, weak administrative capacity, and the lack of automation and high costs of collection.
Kuwait’s revenue base is also characterized by a very low level of nontax revenues, reflecting the notional nature of fees and charges for public services. Many public services are provided free of charge (for example, health and education) and others, at a minimal charge. In addition to contributing little on the revenue side, the agencies providing these services also represent a burden on the expenditure side of the budget through the transfers allocated to them to cover their operating costs, as noted below.
Expenditure
The rise in total expenditure over the past 15 years is accounted for entirely by an increase in current spending; capital spending declined over the same period (Figure 3.3). Current expenditure more than doubled as a percent of GDP between 1980/81 and 1994/95 from 23 percent to 51, percent, while capital spending stayed roughly constant at about 7 percent of GDP over the same period. Particularly noteworthy is the upward structural shift in spending after the end of the war, primarily owing to the higher outlays on the government wage bill.
Components of Fiscal Expenditure
Sources: Kuwaiti authorities; and IMF staff estimates.Components of Fiscal Expenditure
Sources: Kuwaiti authorities; and IMF staff estimates.Components of Fiscal Expenditure
Sources: Kuwaiti authorities; and IMF staff estimates.The level of current spending in Kuwait is high, especially when compared with other countries in the region, as well as representative countries from out-side the region. Current government spending in Kuwait—at 50 percent of GDP in 1993/94—is significantly higher than in all other GCC countries, which ranges from 11 percent of GDP in the United Arab Emirates to 38 percent of GDP in Qatar (Table 3.2).5 Kuwait’s high level of current spending is also no-table when compared with other oil producing countries included in Table 3.2, which recorded current expenditure/GDP ratios averaging close to 14 percent. Furthermore, it is higher than the levels registered in most OECD countries, although it compares to the level characteristic of a high-spending OECD country such as Sweden.
Components of Government Expenditure, 1994
(In percent of GDP)
Components of Government Expenditure, 1994
(In percent of GDP)
| Countries | Current Expenditure | Wages and Salaries | Subsidies and Transfers |
|---|---|---|---|
| Kuwait | 50.3 | 14.5 | 16.9 |
| Other GCC countries | |||
| Oman | 37.1 | 10.2 | 2.7 |
| United Arab Emirates | 11.2 | 4.2 | 1.0 |
| Bahrain | 27.6 | 15.8 | 4.0 |
| Saudi Arabia | 32.7 | 19.4 | 1.0 |
| Qatar | 38.1 | 14.7 | — |
| Selected OECD countries | |||
| Australia | 27.8 | 49.4 | 19.4 |
| France | 44.5 | 4.8 | 9.3 |
| New Zealand | 35.7 | … | 13.5 |
| Sweden | 49.5 | 3.0 | 25.6 |
| United States | 22.2 | 2.2 | 5.9 |
| Oil producing countries | |||
| Indonesia | 8.5 | 2.7 | 2.6 |
| Mexico | 14.8 | 4.5 | 5.4 |
| Nigeria | 13.5 | 2.5 | … |
| Venezuela | 16.3 | 4.2 | 5.3 |
| Iran, I.R. of | 16.2 | 9.0 | 2.5 |
Components of Government Expenditure, 1994
(In percent of GDP)
| Countries | Current Expenditure | Wages and Salaries | Subsidies and Transfers |
|---|---|---|---|
| Kuwait | 50.3 | 14.5 | 16.9 |
| Other GCC countries | |||
| Oman | 37.1 | 10.2 | 2.7 |
| United Arab Emirates | 11.2 | 4.2 | 1.0 |
| Bahrain | 27.6 | 15.8 | 4.0 |
| Saudi Arabia | 32.7 | 19.4 | 1.0 |
| Qatar | 38.1 | 14.7 | — |
| Selected OECD countries | |||
| Australia | 27.8 | 49.4 | 19.4 |
| France | 44.5 | 4.8 | 9.3 |
| New Zealand | 35.7 | … | 13.5 |
| Sweden | 49.5 | 3.0 | 25.6 |
| United States | 22.2 | 2.2 | 5.9 |
| Oil producing countries | |||
| Indonesia | 8.5 | 2.7 | 2.6 |
| Mexico | 14.8 | 4.5 | 5.4 |
| Nigeria | 13.5 | 2.5 | … |
| Venezuela | 16.3 | 4.2 | 5.3 |
| Iran, I.R. of | 16.2 | 9.0 | 2.5 |
Outlays on wages and salaries over time have been the largest component of total current spending. Furthermore, expenditure on wages and salaries has demonstrated an increasing trend, rising from 6.6 percent of GDP in 1980/81 to an average of 15 percent of GDP in the three latest fiscal years. This pattern reflects a number of factors: the re-placement of non-Kuwaiti nationals with higher-paid Kuwaitis;6 an increase in government employees more generally, as part of the employment policy, which guarantees all Kuwaiti university graduates a job in the government sector; and generous salary increases, particularly after liberation (when a salary increase of 25 percent was awarded to all Kuwaiti employees). Spending on wages and salaries is generally high in the GCC countries, averaging 13 percent. Other oil producing countries spend significantly less on wages and salaries, ranging from 3 percent to 11 percent of GDP. The selected OECD countries presented in Table 3.2 also allocate a much smaller amount to wages and salaries than is the case in Kuwait.
A wide array of budgetary subsidies and transfers, both direct and indirect, is provided by the government to Kuwaiti nationals (Box 3.2). Subsidies and transfers accounted for just over 6 percent of GDP in 1980/81, increasing gradually in the years up to the invasion to about 8.5 percent of GDP. In the immediate postwar years, they rose sharply to more than 20 percent of GDP, reflecting extraordinary transfers, including payments to Kuwaitis living abroad, payments related to employment termination, and the transfers associated with the government’s forgiveness of all consumer and housing loans of Kuwaiti nationals outstanding at the time of the invasion. Outlays on subsidies and transfers have since moderated, although they nevertheless remain high—averaging 11 percent of GDP in the past three years (1993/94-1995/96)—particularly when compared with other countries. In terms of GDP, Kuwait spends more than twice as much on subsidies and transfers as Oman and Saudi Arabia (4 percent of GDP), and an even higher magnitude over other GCC countries. Likewise, the levels recorded in other oil producing countries are also significantly lower.
Budgetary Subsidies and Transfers
Budgetary subsidies and transfers were equivalent to more than 11 percent of GDP in 1994/95, with social security transfers representing almost half of this amount. The extensive system of subsidies and transfers is detailed below.
Subsidies
•Food. Subsidies on certain basic food items (rice, sugar, cooking oil, tomato sauce, milk powder, and infant formula) are provided to families of Kuwaiti citizens on the basis of ration cards. Some subsidized food is also distributed to low-income non-Kuwaiti nationals.
•Housing. Married Kuwaiti citizens meeting certain criteria are eligible to purchase plots and homes from the National Housing Authority at prices well below cost. The waiting list for such housing is currently 12 years. Citizens on the waiting list are eligible to rent smaller homes owned by the Public Housing Authority at below-market rents. The government subsidizes construction materials by Kuwaitis building homes on property purchased from the National Housing Authority.
•Utilities. Electricity is provided to consumers at 10 percent of the cost per unit. Water is provided to different categories of users at different costs, although there is a subsidy element in the prices charged. Total water and electricity subsidies amounted to more than 1 percent of GDP in 1994/95.
•Petroleum products. The Kuwait Petroleum Corporation sells petroleum products to the domestic market at prices well below the international market price—at about 40 percent of the average world price.
Transfers
•Social security system. Budgetary support is provided to ensure the actuarial soundness of the system, which includes a pension scheme for all Kuwaiti citizens in the active labor force—both in the private and public sectors.
•Housing. Part of the bank debt assumed by the government consisted of mortgage loans that were in de-fault. Transfers also include interest payments on behalf of individuals due for home and property loans contracted since liberation, as well as qualifying renters.
•Education and health. Education and medical care are provided virtually free of charge. These transfers include payments to private schools to cover half of the costs for each student, as well as payments to Kuwaiti citizens to cover medical treatment abroad.
•Other transfers. These include transfers to clubs and sports activities, local newspapers and magazines, the one-time marriage grant of KD 3,000 for Kuwaiti citizens, and social assistance for low-income households.
The dominant components of subsidies and transfers have been the transfers to the Social Security Institute; transfers to individuals (covering, among other items, cancellations of housing and consumer loans, end-of-contract payments to non-Kuwaitis, and gifts and study bonuses); and subsidies for electricity, water, and petroleum products.
Current spending on goods and services has also increased, from close to 7 percent in 1980/81 to 16 percent in 1994/95, reflecting in part higher outlays on military procurement and other security-related equipment and services, particularly since the 1991 crisis.
Implications for Reform
Various structural features of the economy account for the high level of spending in Kuwait. Foremost among these are the cradle-to-grave social welfare system and the large role of government in the economy. The high population growth rate in Kuwait and other demographic factors also have implications for the achievement of the budget objectives over the near and medium term. On the income side, the budget is heavily dependent on volatile revenues from petroleum exports, which are subject to a variety of exogenous factors. The drawdown of official assets to finance the deficits of the postwar years has increased the volatility of revenues, by reducing sharply investment income.
Policies to mobilize greater domestic revenues are needed. As the authorities are aware, attention needs to be focused on broadening the tax net and increasing the contribution of tax revenues. Measures discussed in the context of the plan and more generally include the following:
• The extension of the company tax to domestic companies, a restructuring of the corporate tax to in-corporate a flat tax rate of 35 percent (rather than the progressive tax rate currently in effect), and an improvement in collection procedures with respect to taxes on both domestic and foreign companies. Given the size of the private sector in Kuwait, the initial effect of measures in this area will inevitably be small. However, the success of associated reform efforts aimed at improving the investment climate for private sector development, including progress in implementing the privatization program, will lead to an expansion of the nongovernmental sector, which in turn will increase the tax base (in terms of the number and profitability of private companies— both domestic and foreign) and the revenues generated from this source.
• An increase in the import duty from the current average level of 4 percent and a removal of exemptions. Kuwait’s room for maneuver on this front is limited to some extent by its membership in the GCC. Under a 1992 agreement, the six GCC states agreed to work toward establishing a common external tariff by 1996. While a consensus has not yet been reached, an increase in Kuwait’s average import tariff to a broad-based 8 percent would appear consistent with the understandings reached among the group thus far. Such action would generate additional revenues in a relatively short time horizon, but it would need to be supported by efforts to modernize the Customs Department, including through the computerization of procedures.
• An increase in nontax revenues by raising fees and charges on publicly provided services—such as health and education—as well as by introducing higher tariffs for public utilities—telecommunications, electricity, and water. In addition to generating additional revenues, such measures would help to promote a more efficient use of resources and enhance the competitiveness of the economy. Further-more, given the intention to privatize government entities providing these services, the increase in fees and charges would go some way toward improving their financial performance, thereby enhancing their attractiveness for potential buyers.
• Introduction of a government sales tax (GST) and, possibly, a personal income tax. Over the medium term, a GST could represent an increasingly attractive option for raising revenue from consumption activities. Given the lead time required to formulate and introduce a GST and personal income tax, the authorities would need to begin building a consensus on the desirability of introducing such taxes.
Revenue-raising measures will be important in reducing the vulnerability of the fiscal position to developments in the oil market. But given the relatively limited scope for broadening the revenue base in the near term, the bulk of fiscal effort will need to come initially from expenditure reduction. Accordingly, the authorities have begun to reexamine the following spending categories for ways to reduce overall expenditure, although specific measures remain to be specified:
• Wages and salaries. As noted above, the wage and salary bill represents the largest spending category in the budget. Included in this category are social allowances paid to all Kuwaitis working in the public sector; nationals working in the private sector are not eligible for these benefits. About one-third of total outlays on wages and salaries is accounted for by these social allowances. Looking forward, the cost of government employment would increase in the absence of measures, given the young population profile of the country (40 percent of nationals are below the age of 14). The authorities are aware of the need to contain outlays on wages and salaries and have begun to implement stricter controls over hiring practices in the ministries. Rapid progress in implementing the next phase of the privatization program, involving the sale of many public enterprises, will also help bring down the public sector wage bill.
• Subsidies and transfers. Given the extensive array of subsidies and transfers and their heavy burden on the budget, consideration is being given to reducing them. Measures to increase fees and charges on publicly provided services would also have the beneficial effect of reducing the need for sizable transfers to these enterprises.
• Goods and services. A proportion of this category of spending is directed toward the purchase of military equipment and services. The security needs of the country and the appropriate level of spending is a matter of national sovereignty. However, a careful review of all options for reducing these expenditures would be important for generating additional budgetary savings.
Conclusions
Kuwait has been faced with fiscal deficits since the Iraqi occupation. The emergence of these deficits has brought to the forefront the problems associated with the structure of the budget. The structural problems were exacerbated by the effects of the crisis, primarily through the upward adjustment of current expenditure—such as higher spending on wages and salaries, subsidies and transfers, and defense and security—and the drawdown of official reserves to finance the deficits, which in turn has reduced investment income and increased the dependency on oil revenues. Although the recent increase in oil prices has further reduced the fiscal imbalance, there is a need for action to address the budget structure.
The authorities recognize the importance of fiscal reform, as evidenced by a key objective encompassed in the Five-Year Plan—to eliminate in a sustainable fashion the budget deficit by 1999/2000. The critical element in achieving this goal will be the political will and commitment of the government to implement the measures necessary to reduce the dependency on oil revenues by broadening the tax and nontax base, and to restrict current spending, most directly by reducing the role of government in the economy.
The discussion above demonstrates the links between progress in addressing structural problems in all areas of the economy and the success of fiscal reform. Success in the privatization program will not only enhance the prospects for broadening Kuwait’s revenue base, but also offer opportunities for reducing outlays on wages and salaries, transfers, and subsidies. Financial reforms, measures to deregulate the economy, and labor market reforms will improve confidence and enhance the investment climate, thereby creating additional opportunities for Kuwaiti nationals to be employed in the private sector. This in turn would have an impact on the fiscal position through higher tax revenues and the creation of additional employment opportunities for Kuwaitis currently employed in the public sector. In addition, continued commitment to addressing the nonperforming loan problem will ensure that the government is not faced in the future with large outlays related to the integrity of the financial system.
However, not all the expenditures dedicated to this effort passed through the budget. Some reconstruction was financed by official agencies from their own resources. For example, much of the rehabilitation of the oil sector was financed by the Kuwait Petroleum Company (KPC) from its own reserves; this work is estimated to have cost about KD 2 billion. These outlays are being reimbursed to KPC over a number of years by allowing the KPC to retain a larger than normal share of oil receipts.
The fiscal position in 1996/97 will be improved markedly by the high international oil price
The estimates for wages and salaries also include the government’s 10 percent employer pension contribution to the Public Authority for Social Security. An additional 10 percent, paid by the government for all private and government employees and the self-employed, is classified as transfers to individuals. The 1991/92 overall deficit was 97 percent of GDP (which by then had recovered to about three quarters of 1989 GDP). It was financed by drawing on official foreign assets and foreign borrowing. A syndicated foreign commercial bank loan of $5.5 billion was fully utilized along with export credits of $0.35 billion.
See Section VI, which describes the DCP in more detail.
The data presented refers to the fiscal year ended in 1994—the latest year for which a consistent set of reliable data is available on the basis of the methodology set out in International Monetary Fund, Government Finance Statistics.
Salary scales for expatriates are lower than for nationals, and expatriates do not receive the roughly 25—35 percent in additional allowances (for spouses, children, type of work, and bonuses) that supplement wage earnings of nationals.
