Background study
Budgeting is a key element for every government in the process of executing various economic policies. Government budgeting is undertaken by both the local and state governments. According to Tigue, effective budgeting results into an improvement in the chances of the government attaining effective decisions making, planning for its financial resources in a way that promote economic growth, and their implementation(Para. 1). Government budget is defined as a legal document which is formulated by the legislature and the executive arms of the government. Government budgeting entails allocation of revenues and other borrowed funds with the aim of achieving predetermined social economic goals of a given country. It also involves effective management of various government expenditures. This results into creation of the desired economic impact in the production of goods and services thus enhancing the country’s fiscal position. Various governments adopt different processes in their budgeting processes in an effort to stimulate their country’s economic growth. Over the past few decades, there has been an increment in the number of economic integration witnessed amongst various countries based on various characteristics. Some of these characteristics include geographical location. Examples of such integration include Gulf countries and Middle East-North Africa (MENA) countries. The Gulf countries consist of Saudi Arabia, United Arabs Emirates and Kuwait while MENA countries include Egypt, Tunisia and Morocco. This paper entails a report on government budgeting for MENA and Gulf countries.
Aim
The report involves a comparison of government budgeting between the Gulf and MENA countries.
Scope
The report covers a comparison of the major sources of government revenue for MENA and Gulf countries. It identifies oil and natural gas as the major source of government revenue for both Gulf and MENA countries. However some of MENA countries such as Egypt, Morocco and Tunisia depend on foreign remittances and tourism as a major source of revenue. Suez Canal is also identified as a major source of revenue for the Egyptian government. The report also identifies the major government expenditure for these countries and the process of budgeting undertake by these government. Government budgeting pays close reference to discretionary programs, entitlement programs, budget resolution and authority. Finely, the report considers a conclusion and a number of recommendations.
Sources of governments’ revenue
The Gulf countries are closely related in a number of ways such as their financial dependence. These countries are characterized by vast deposit of oil which makes oil to be the major source of revenue for economic development of these economies. In addition, these countries have vast reserves of natural gas. The largest percentage of Gulf countries income results from exportation of oil. Increase in the level of revenue for these countries has resulted into a growth of these governments. For instance, among the Gulf countries, Kuwait is one of the countries which are characterized by enormous economic growth. Its growth is mainly associated with its large deposits of crude oil. Discovery of crude oil in Kuwait changed the country’s economic activity making oil to be the major source of revenue. Petroleum industry in Kuwait accounts for approximately 90% of the country’s total exports. Increase in petroleum exports has over the years supported Kuwait’s annual Gross Domestic Product (GDP) to an average of $ 43.7 billion.
This has culminated into Kuwait’s annual growth rate of 5%. In addition, Kuwait has experienced an increase in its government budget to KD 8.2 billion which is relatively above its projection of KD 8.1 billion (‘Kuwait economic brief’ 6).
On the other hand, United Arab Emirates (UAE) is also one of the countries that are undergoing a rampant economic growth. Over the past few years, UAE has ceased from depending on natural resources as its major source of revenue. However, exportation of natural gas and petroleum oil still forms the largest source of revenue for the country. In 2008, UAE experienced an increase in its level of earnings from exportation of oil with a margin of 34% compared to 2007. This increase in the level of revenue is associated with the increase in oil prices.
In Saudi Arabia, the oil industry is a key sector in the country’s economic performance. According to ‘Gulf Countries: country overview’, it is expected that the country will experience an improvement in its economic performance resulting from an increment in the country’s level of oil output (3). Natural gas and oil form the largest source of government revenue for the country. Over the past few years, the country has witnessed an increase in the production of natural gas. This is associated with the discovery of more oil fields as illustrated in the table below.
Table 1: Natural gas statistics
Egypt’s three major source of revenue which supports its economic growth. These include remittances by Egyptians working in foreign countries and revenue from Suez Canal. The Suez Canal is a significant source of revenue for Egypt. The current economic recession has had a negative impact on these sources of revenue. In 2009, there was a drop in revenue from Suez Canal by a margin of 13% from $419. 8 million to $ 365.5 million. According to May, the drop in revenue is associated with the increase in oil price (Para. 5). On the other hand, there was an increment in the level of revenue from tourism during the 2008-2009 fiscal years from $ 2.6 million to $3.3 million. According to ‘Oil and gas in Egypt’, Egypt is also a net exporter of gas and oil. Exports of natural gas and oil form a significant source of revenue for the country. However, Egypt’s gas and oil exports are relatively low compared to other countries. For instance, in 2007, Egypt oil exports accounted for only 0.87% of the total world exports. On the other hand, the country’s gas exports accounted for approximately 1.57% of the total world gas exports (Para. 1). The table below illustrates the percentage contribution of three economic sectors to government revenue for the past three years.
Table 2
Exportation of natural gas and oil forms a significant source of revenue for Tunisia. Over the past few years, there has been a reduction in contribution of gas and oil export to the country’s GDP from 25% to 10%. The reduction was worsened by the occurrence of financial crisis,
However, the country has experienced rampant growth in the tourism industry. Diana asserts that this is due to its rich tourism industry (Para. 4). Growth in tourism industry plays a significant in replacing the reduction in revenue level from the drop in oil revenue.
Morocco’s major sources of income include mining, tourism and foreign remittances. Mining of phosphates contributes significantly to the country’s GDP (‘Country profile: Morocco’ 2).
The table below shows the percentage comparison of the contribution of foreign remittances to government revenue amongst MENA countries.
Table 3
During the financial crisis which began in 2007, there was an increase the price of natural gas and oil. This affected the volume of revenue from exportation of the product in both MENA and GCC countries. The table below depicts the change in price in these countries.
Table 4: GCC and MENA Natural Gas and Oil Prices
The table below illustrates the contribution of oil and gas exports to GCC governments’ budget. It also illustrates the changes in government spending for the past three year.
Table 5
Government expenditure
Government spending is also referred to as public spending and is categorized into three groups. These include government purchase of various goods and services that are intended for current consumption. This spending is referred to as government consumption. Other government spending is intended to create value in the future such spending on infrastructure and research and are commonly referred to as government investment. In addition, government spending is also composed of various forms of payments that are paid out to citizens such as the social security funds and are called transfer payments.
Homeland security spending forms a significant and permanent proportion of government consumption among Gulf countries. According to International Monetary Fund (IMF), GCC countries spend approximately 13% of their GDP on military. This shows that these countries are increasingly being committed to their homeland security. Increase in homeland security spending by GCC countries has resulted into a crowding out effect in relation to expenditure on other issues such as education, infrastructure and health care. In addition, increased government consumption on homeland security has resulted into a reduction in government’s level of subsidies while taxes increase (‘GCC spending on homeland security rises’ 1).
The Gulf countries governments are also being committed on increasing their spending on infrastructure. This is due to the fact there is a high probability of the region witnessing rampant growth. For instance, Kuwait government is becoming more committed to improve its infrastructure as an economic stimulus strategy. This will culminate into more investors being attracted into the country. Government expenditure among Gulf countries is also associated with increased investment in education. According to a report by World Bank, approximately 5% of these countries GDP are dedicated to reformation of the education system. For instance, UAE allocated approximately 25% of the country’s federal budget on education (‘Major economic indicators’ Para. 7).
Health care also forms a significant proportion of government spending in the Gulf countries. For instance, an approximate cost of US$14 billion per year is being incurred in the construction of hospitals and other health facilities in the Gulf countries (‘GCC spending on new hospitals and health facilities’ Para. 4).
Similar to the Gulf countries, homeland security forms a significant proportion of government expenditure amongst the MENA countries. In addition, education and healthcare also forms a significant proportion of government consumption in MENA countries. For instance, Egypt increased the number of universities to 18 during the year 2006-2007. In Morocco, there was a reduction in government consumption on education during 2006-2007 to 3.8% from 4.2% of the country’s GDP. Despite the occurrence of the financial crisis, both GCC and MENA countries have managed to maintain a high level of government spending (International Monetary Fund Para. 6).
The table below illustrates the trend in major government spending amongst the GCC and MENA countries.
Table 6
The table below illustrates government spending in MENA countries.
Table 7
Process of budgeting for these countries
In their budgeting process, both MENA and GCC countries undertake the same procedure in determination of their national budgeting. These include preparation, authorization, execution and accountability. A number of programs are involved in the budgeting process. These include discretionary programs, entitlement programs, and budget resolution and budget authority.
In GCC and MENA countries, budget preparation is delegated to the Ministry of Finance. Previous revenue and expenditure are used in developing the budget for the next fiscal year. The various ministries and departments submit their estimates in relation to revenue and expenditure. A draft budget is prepared and submitted to the State Executive Council.
Budget resolution refers to the annual decision that is made by the parliament to set a certain level of government revenue and spending. Budget resolution provides a framework through which the parliament agrees to limit money bills. According to Heniff, budget resolution represents an agreement between the senate and the parliament of these governments on the budget plan to be adopted for a given fiscal year. In addition, budget resolution has the capacity to instruct various committees to amend current laws so as to save money. This means that the budget resolution can undertake legislative actions (Heniff 1).For instance, during the 2009/2010 fiscal year, Kuwait parliament approved the state budget which was passed prior to dissolution of the legislature in March (El Gamal Para. 1).
The budgeting process of these governments also entails determination of budget authority. Budget authority refers to responsibilities that are conferred by the parliament empowering various government agencies to utilize state funds. The parliament has the authority to specify the criteria to be used in utilizing these funds. For instance, it may spell out that a certain agency must utilize the funds allocated within a given time farm such as one year or any time as they feel appropriate. There are a number of forms in relation to budget authority. These include the authority to contract, borrow, appropriate and obligate. The amount available for budget authority may either be indefinite or definite, specific or unspecified. In addition, budget authority may either be current or permanent. Budget authority enhances government’s effort in ensuring that there is accountability in the utilization of funds allocated through the budget (‘Ensuring truth in budgeting with a parliamentary budget authority’ Para. 3).
Discretionary programs in government budgeting involves government expenditure that must be renewed by the parliament each year. There are various components that the parliaments of MENA and Gulf countries consider in their discretionary program. These include homeland security, education and health care. Discretionary programs accounts for approximately one third of the total government’s budget.
Government budgeting in these countries is also composed of entitlement programs. Entitlement program entails government expenditure in relation to transfer payments such as Medicare, veteran and disability benefits, social security and Medicaid. The amount of fund allocated to entitlement programs are determined by the number of individuals who are eligible. The entitlement programs are not subject to annual appropriation.
Conclusion
Government budgeting is a key element in the process of attaining a countries economic growth. This is due to the fact that it enables effective identification of the major sources of revenue for the government and hence their allocation. Exportation of natural gas and oil forms a major source of revenue for both gulf countries and MENA countries. Apart from natural gas and oil, these governments also depend on other sources revenue for their budget. Tourism and foreign remittance form a significant source of revenue for MENA countries. In relation to government expenditure, homeland security, healthcare and infrastructure forms a significant proportion of government budget for both Gulf countries and MENA countries. There are a number of considerations that governments of MENA and Gulf countries undertake in their budgeting process. These include discretionary program, entitlement program, budget resolution and authority. Consideration of these elements in the budgeting process enables their budgeting process to be more comprehensive. This is due to the fact that they ensure that there is effective allocation of funds. In addition, they also instill the element of accountability in the process of budgeting.
Recommendations
- In their pursuit to attain economic growth, the governments of both Gulf and MENA countries should consider diversifying their source of revenue. Diversifying the sources of government revenue will limit the probability of their economic growth being adversely affected due to a decline in the source of revenue.
- These governments should also ensure that their budgeting process is comprehensive for there to be economic growth. In their budgeting process, these governments should allocate sufficient amount of funds to key sectors that propagate the country’s economic growth.
- The governments should also put in place effective monitoring and control mechanism. This will help in ensuring that there is no misappropriation of government funds upon their allocation to the various ministries.
Works cited
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