2014 budget is vulnerable to unpredictability

The tightness of the 2014 fiscal budget is vulnerable to unpredictability with the government projecting less than five per cent growth that could more likely lead to a black hole in the public finances.

The slim growth is dominated by the health and education ministries with the rest of the sectors facing budgetary stagnation. The government allocated OMR2.6 billion for the academic development, twice as much as the allocation in the 2013 budget. The health sector gets a whopping OMR1.3 billion, about 185 per cent more than what it was last year.

This is a budget that has gone into a drastic cut in growth in a panicky decision to control spending. Last year, the growth in expenditure was nearly 30 per cent over the 2012 budget.

What is interesting to note is that the deficit is not getting any better despite the restraint in spending. It is projected at OMR1.8 billion, a hundred million rials more than in 2013.

The question is what should we expect in the future budgets in terms of development when we are forecasting an almost stagnated growth this year?

To secure future economic expansion, the fiscal sustainability will need new radical approaches to policy making. The unpredictability may well come in the form of employment and infrastructure projects.

This year's budget has allocated OMR5 billion to salaries in government's organizations, about 37 per cent of the total state's expenditure. According to the ministry of manpower, about 200 Omanis are leaving the private sector a week looking for government's jobs on top of 24,000 job seekers expected this year.

With the government very keen to provide jobs for all Omanis, it is likely the fiscal allocation for employment would be stretched out of the OMR5 billion limit. In the past, development projects always demanded more funds than budgeted for. 

The OMR3.2 billion investments for the projects, in consideration to the unpredictability of the transportation sector, sewage, oil and gas, may almost certainly need a top up of funds to push the deficit well past the projected figure of OMR1.8 billion.

On top of all that, the government would need to find OMR900 million to finance the standardisation of salaries planned for this year, which has not been budgeted for.

This vulnerability could be further exposed to the volatility of the international oil prices. Oman has been pushing the oil price, whose budget is based on, from $45 per barrel a decade ago to $85 this year.

The international oil price at the moment is about $110 per barrel and one may argue the government has a $25 per barrel cushion on its budget. However, with the global economic outlook still shaky, the oil prices look more likely to drop this year than stabilise.

With Iran agreeing to suspend its nuclear programme, the US-led sanction will soon be lifted to allow Tehran to export its oil to full potential. Adding to further pressure on oil prices, China's factory activities have slowed in late 2013 due to a drop in international orders.

The flooding of the Iranian oil in the global market with China buying less crude due to its factory production decline, the oil prices will take a severe hit in 2014.

Therefore, the government may need to revamp its public finances and resort to borrowing more than the planned OMR400 million it has planned for this year. It also goes back to the generous welfare system.

Pressures to deficit

The subsidy budget has gone up by 38.5 per cent to OMR1.8 billion this year from OMR1.3 billion in 2013, piling up further pressures to the deficit. Again, fuel, electricity and water dominating this almost charitable fund.

Oil production this year is projected to be at an average of 945,000 barrels per day, just 15,000 barrels more than in 2013.  The oil income will make up 83 per cent of total revenues while 50 per cent of the non-oil revenue will be raised from taxes, which is expected to be nearly a billion rials.

In conclusion, there is already a fiscal black hole of OMR900 million from standardisation of salaries, which would add up to the deficit to make a budgetary arrear of OMR2.7 billion for 2014. 

The question is what would it take to convince the financial planners to consider income and remittance taxes as a new source of revenue while at the same cutting on crippling subsidies?


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