The Saudi Ministry of Finance released its 2024 Pre-Budget Statement and 2023 Mid-Year Economic and Fiscal Performance Report in late September. Both reports are part of the ministry’s efforts to improve fiscal transparency in the kingdom. They provide a timely update on economic and fiscal developments in Saudi Arabia and an early glimpse of the government’s fiscal thinking ahead of the 2024 budget, which is usually published in December.

Perhaps most notable is the government’s projection that it will run a fiscal deficit (expenditure will exceed revenue) of 2% of gross domestic product (82 billion riyals, or around $22 billion) in 2023 after projecting a small surplus of 0.4% of GDP at the time the 2023 budget was released in December 2022. This means that the budget surplus recorded in 2022 – Saudi Arabia’s first since 2013 – is looking like a one-off.

Revenue and expenditure are both projected to exceed the expectations set in the 2023 budget. Revenue is being boosted by the robust performance of the domestic economy, which is providing higher tax revenue, and by additional “performance-linked” dividends from Saudi Aramco, most of which goes to the government.

A significant upshift in spending, however, will more than offset higher revenue. At the time of the 2023 budget’s release, Saudi Arabia planned to spend 1.1 trillion riyals (around $293 billion) in 2023, but it is now expecting to spend 1.26 trillion riyals (around $336 billion), an overrun of 13%. The main areas where spending is set to exceed the budget are capital spending projects; health and social care, which is receiving additional funding for the Citizens’ Account program and other social programs; and the ill-defined “general items” category, which is a budgetary black box.

Looking forward, the government also expects the budget to be in a deficit from 2024-26 rather than a surplus as previously projected. This is largely because of higher spending. Whether these small deficits materialize will depend on developments in the global oil market – lower oil revenue would bring larger deficits and higher oil revenue would likely push the budget back to a surplus – and if spending can be managed closer to budget than the past two years. The path outlined for 2024-26 has spending growing on average by only 2.6% per year, which looks optimistic given the experience of the past two years.

Surging Spending Raises Fiscal Risks, Reduces the Credibility of Fiscal Reforms

The projected overspending in 2023 comes on top of even greater overspending of 22% over the budget in 2022. All in all, central government spending is set to be over 21% higher in 2023 than in 2021. This ratcheting up of spending at a time of high oil prices is not unusual in Saudi Arabia, but it makes the budget more vulnerable to downturns in the oil market. If, for example, a weakening in global economic growth undermines oil demand in 2024, oil revenue will be adversely affected, resulting in a significantly larger deficit than projected unless spending is cut back.

Now, these risks do need to be put in perspective. Saudi Arabia has a strong fiscal position, with low public debt, significant borrowing capacity, and substantial financial assets spread across the public sector. However, the fiscal deficits that have been run for most of the past 10 years have reduced the government’s deposits at the central bank, a key source of insurance against fiscal risks. History, most recently in 2014 and 2020, shows that a major drop in oil prices will result in a large and rapid deterioration in the fiscal balance, which would need to be financed by domestic or international borrowing.

The effectiveness of Saudi Arabia’s recent reforms to strengthen fiscal management is also put into doubt by spending developments in 2022 and 2023. Better control of government spending, delinking spending from oil price movements, and strengthening the budget process are key pillars of the fiscal reforms implemented under Vision 2030 through the Fiscal Sustainability Program and its predecessor, the Fiscal Balance Program. A change in behavior seemed apparent in 2021, when spending was well controlled despite the strong recovery in oil prices as the world emerged from the coronavirus-induced economic slowdown. In 2022 and 2023, however, strong oil revenue translated into a significant increase in government spending, which is not consistent with the desire to delink spending from movements in oil revenue.

The upshift in expenditure by the central government and the continued expansion of spending by the Public Investment Fund means that the direct economic footprint of the Saudi public sector is growing again. It is hard to get a clear picture of PIF spending in the domestic economy, but it has stated a target of spending a minimum of 150 billion riyals ($40 billion) a year. Assuming this target is achieved, spending by the central government and PIF combined would be around 56% of non-oil GDP in 2023. This is well below the levels of spending (as a share of non-oil GDP) in 2011-14 but still represents a very sizeable intervention in the economy.

Saudi Finance Minister Mohammed Al-Jadaan had previously suggested that the PIF and the National Development Fund could receive the proceeds from fiscal surpluses generated by the central government. If there is nothing to transfer from the budget, however, the PIF’s operations will be more reliant on asset transfers from elsewhere in the public sector, its own borrowing, running down its liquid assets, and recycling its existing capital. Given the early repayment this year of the promissory notes issued to the PIF by Aramco to finance the acquisition of Saudi Basic Industries Corporation, the availability of financing will not be an issue in the near term, but the PIF’s ambitious plans will need continued high levels of financing for many years.

More Robust Spending Controls Needed

Saudi Arabia’s fiscal position is the envy of many countries that are dealing with high debt burdens and rising global interest rates. Recent developments, however, do raise concerns that the government is slipping back to the procyclical fiscal policy of the past where spending expands rapidly at times of high oil prices. The failure to break the link between oil revenue and government spending means that fiscal risks, while still limited, are rising, and the spending plans of both the government and PIF are vulnerable to a downswing in oil prices. Using the current period of high oil prices to pay down debt and rebuild deposits would have given the government stronger fiscal buffers to protect its spending plans in the event of a global economic downturn. The International Monetary Fund has suggested the introduction of a fiscal rule that more strictly limits the annual growth in government spending to better control its procyclicality. While such a rule would have its own implementation challenges, the broader message is that more needs to be done to control government spending.