Kuwait looks to reduce subsidies

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The government in Kuwait is weighing-up measures to rein in spending on subsidies and welfare programmes, responding to concerns that the national budget could slip into deficit by the end of the decade.

Subsidies account for around 20% of government spending, with payments amounting to roughly $16bn a year. Fuel and utilities are sold at below-market rates, while many Kuwaitis are provided with additional subsidies for housing and food, as well as free health care and education. The state is also by far the largest source of employment in the country, with public servants given attractive wage and benefits packages, which combined with subsidies, represent the bulk of budgetary outlays.

The IMF and other international agencies have said Kuwait’s budget could fall into deficit by 2018 unless the country is able to turn around the upward trend in spending. The government itself has forecast an end to fiscal surpluses by 2021.

Government reviews expenditures

In mid-January, newly appointed Finance Minister Anas Al Saleh said the government was continuing a review of its subsidies programme, acknowledging that there was a need to reduce spending on support, at least to some degree.

“There should be a decrease in general but they will not be eliminated,” he told reporters on January 14.

Though saying reductions were necessary, the minister stressed that subsidies would not be phased out completely, and that any review would only serve to recommend measures to ensure those in need received state support.

Among the changes being considered is an increase in charges for utilities, passing on more of the cost to consumers, Al Saleh said.

“The thought is there and it has to be step by step, and to make sure that there are not sudden actions – it has to be well-planned,” he said.

That planning started last November, when the government announced it was establishing a committee to review the subsidies system. This followed a warning from Prime Minister Sheikh Jaber Al Mubarak Al Sabah that existing welfare payment and price support schemes were in need of an overhaul.

“The current welfare state that Kuwaitis are used to is unsustainable,” he said in late October. “It is necessary for Kuwaiti society to transform from a consumer of the nation’s resources to a producer.”

The need to boost revenue or reduce spending was underscored by data released by the Finance Ministry on February 9 that showed the budget surplus had shrunk by 11% in the first nine months of the Kuwaiti fiscal year, which begins in April. The surplus for the three quarters ending December was a still healthy $50.7bn, but down from the $57bn for the same period in 2012. The dip was a result both of lower income, with state revenue falling from $86bn to $84.8bn, and higher spending, which rose 18% year-on-year to $34.1bn.

According to the 2014/15 draft budget, approved by the cabinet at the end of January but yet to be voted on by parliament, expenditures are set to rise by 3.2% in the next financial year. While an increase, this represents a modest uptick compared to the double-digit annual growth in spending that was typical of the past decade.

Re-focused spending

If the state is able to redirect some of the funds it saves towards growth-generating investments in the economy, as it has said it intends, this would offset some of the impact of its cost cutting measures. However, the government has in the past been slow to implement its economic stimulus and capital works programmes, at times resulting in under-budget spending and delays in project development.

The biggest challenge in curbing welfare and social support spending may come from the parliament. In January legislators proposed a motion to provide subsidies of $100,000 for materials for families building their own homes, on top of inexpensive loans and other support for which they are already eligible.

While Kuwait’s fiscal reserves are massive, with its sovereign wealth fund estimated to hold assets worth more than $400bn, these funds will be needed to establish a future less dependent on oil. Given the wide gap between those who accept the need to reduce subsidies and those who do not, the first task the government may face in any move to scale back social spending is to build consensus.

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