Impact of budget 2015 on GDP growth

On Dec. 25, Saudi Arabia unveiled the annual budget amid great anticipation, at home and abroad. Despite low oil prices, the budget continued the expansionary path it has maintained since the global financial crisis. To maintain expansion, the new budget projects a deficit of about $39 billion. If oil prices stay low, that means deficit spending, either through borrowing or drawing from its massive reserves.
Looking at the published figures, we see that the government revenue is expected to drop by 32 percent from last year’s actual level, while spending would decline by about 22 percent from last year’s actual level. Both of these facts, if left untreated, would have a significant impact on GDP growth.
I will deal in today’s column with those effects on government finances and the Saudi economy as a whole. The projected levels of spending and revenue, although high, are much lower than actual figures over the past two years and as such could lead to a considerable reduction in GDP growth.
With lowered expectations for oil revenue in the next year, the budget projected revenues for 2015 at SR715 billion ($191 billion), a drop of about 32 percent from the actual revenue of 2014, which would naturally affect GDP growth.
Similarly, expenditure for 2015 is projected at SR860 billion ($229 billion). While this level of expenditure is in line with last year’s projected spending of SR855 ($228 billion), it represents a significant drop of about 22 percent from the actual spending of 2014. The budget document projects a deficit of SR145, but the actual deficit will depend on oil prices next year and actual levels of revenue and expenditure.
Government spending in 2015 is projected to go mainly to education, health, transport and other infrastructure development, which together will receive about 60 percent of total budget, in addition to considerable funds allocated (but not spent) in previous years. Unspent funds exceed in magnitude new funding in most sectors.
Education and technical training are slated to receive about $58 billion, which is over 25 percent of the total budget. King Abdullah’s Project for Education Reform will receive about $21 billion. Another $6 billion will go to King Abdullah’s Project for External Study, whereby some 200,000 students receive their education in foreign universities. Education budget includes also building three new universities in Jeddah, Bishah, and Hafr Al-Batin.
The budget allocates $43 billion (about 19 percent) to improvements in health care delivery and social services, including the building of some 27 new health facilities. New social services would include building sports clubs and facilities for those with special needs, as well as spending on poverty reduction. Water and fisheries projects take up about $15 billion in new funds and $37 billion of old funds allocated in previous budgets but were not spent. They include building new solar-powered desalination plants, as well development of fisheries and wastewater management.
Transportation and other infrastructure will receive $16 billion in new funds, together with $31 billion in funds allocated (but not spent) in previous budgets. About $9 billion are allocated to add around 2,000 kilometers to the Kingdom’s road network. Five major roads will also be started or upgraded at a cost of over $6 billion. They include Jeddah-Jazan coastal highway, Yanbu-Jubail expressway linking Saudi Arabia’s eastern and western coasts, Tabuk-Madinah expressway and others.
Delays in the implementation of transportation projects have been the subject of public scrutiny and King Abdullah has repeatedly pointed out this problem and urged ministers to speed up implementation. The recent Cabinet reshuffle included the appointment of a transportation expert as minister. His appointment is expected to speed up the implementation of new and old projects, including several railroad, metro and highway projects, as well as upgrades for major airports.
This is good news and there is more of it in the new budget. Let us see how it is going to impact the economy.
Let us assume that things go according to plan, i.e., that spending would be at the $229 billion and revenue at $191 billion levels. Then, as government spending shrinks by 22 percent from current actual levels, GDP could also shrink. As government spending constitutes on average about 35 percent of the Kingdom’s GDP, the shrinkage in GDP resulting from reduction of government spending could amount to 7 or 8 percent in nominal terms. This considerable drop could be mitigated by taking steps to immunize GDP growth from those effects, at least partially.
First, as noted earlier, there are massive funds that were allocated (but not spent) in previous years, largely to fund development projects and programs. Speeding up their implementation could add considerably to GDP and contribute to positive economic growth.
Second, although the oil sector shrank by 7 percent in 2014, the private sector did the opposite, growing by over 9 percent. As such, private sector growth in 2015 could contribute significantly to mitigating the drop in oil GDP. Additional incentives to the private sector to produce more could be repaid in greater non-oil GDP growth.
Third, government spending could be rationalized through reduction in its energy bill, either through the price mechanism or strict application of energy saving measures. As fuel is supplied to local energy producers at a fraction of international prices, there is no incentive for energy producers to be more efficient. Either by raising the cost of fuel to energy producers or incentivizing them to use more efficient production, great savings could be made, which then could be used to reduce the deficit or increase expenditure on more productive sectors.
Strict implementation of the recent measures adopted by the Saudi Center for Energy Efficiency (SCEE) should also help in reducing waste, without resorting to the price mechanism. The less energy waste, the lesser fuel is supplied at low prices. The fuel thus saved could be exported at higher prices, adding to government revenue and lowering deficits.