The Government budget under debate at the Federal National Council (FNC) contains a feature not seen in six years: a small deficit.
While the Federal Government tabled a Dh41 billion (US$11.16bn) spending plan early last month, it only yesterday revealed it was projecting revenues at Dh38bn for next year. That clashes with the balanced-budget philosophy that has prevailed between 2008 and this year. The Government ran surpluses between 2005 and 2007 and last ran a deficit in 2004.
Younis al Khouri, the UAE Finance Ministry under secretary and director general, said on the sidelines of an FNC gathering yesterday it was "a very minor deficit". The shortfall was "not a concern as of yet and definitely we'll be looking for alternatives throughout the year", he said.
"What we've seen in the past few years is they've always balanced the Federal budget, so it's something slightly surprising and I don't know why that is," said Giyas Gokkent, the chief economist at the National Bank of Abu Dhabi.
Officials have yet to fully explain the logic behind the deficit. But observers say it could be symptomatic of government departments' resistance to cuts as leaders try to rationalise Federal spending. The Dh41bn of spending in the Federal budget for next year is 6 per cent lower than this year's Dh43.6bn.
That fiscal prudence comes as the emirates' governments look to do some trimming of their own after running up deficits to finance big development plans. In January, Dubai projected a Dh6bn deficit for this year, with spending at Dh35.4bn versus Dh29.4bn of revenues. Abu Dhabi is forecasting an Dh84.9bn deficit this year, according to a bond prospectus released in August, with Dh207bn of spending and Dh122.6bn of revenues. However, oil prices have stayed well above the $60 per barrel level Abu Dhabi assumed in its deficit projection, however, suggesting the actual figure for the year will be lower.
Whatever oil prices do, though, lower fiscal surpluses and even deficits are expected to be a theme for some time in a region accustomed to large surpluses. The reason is many GCC governments are using oil revenues to build whole new cities and develop the private sector to create non-government jobs for a wave of millions of young people preparing to enter the workforce.
"Higher spending in the GCC countries has raised substantially the break-even oil prices that balance budgets," the Institute of International Finance said in a report last month. "… even with a modest decline in the pace of government spending growth the break-even price of oil for Saudi Arabia is projected to rise to $108 per barrel by 2020, well above the projected constant oil prices in real terms."
If the Federal Government does run a deficit next year - something that will depend largely on whether revenues come out above or below expectations - it will need to fill the resulting financing gap. And that could mean its first sale of bonds to international investors. Individual emirates have raised billions of dollars through global bond markets, but the Federal Government has never done so.
Obaid Humaid al Tayer, the Minister of State for Financial Affairs, said in May that a federal bond was a possibility but only after the Government enacted a public debt law, a revised draft version of which is due to be discussed next week, and set up a debt management office - which is in the process of being created. "We will consider the matter of issuing bonds after that," he told Dow Jones.
While the projected federal deficit next year marks a shift in budget policy from the prior three years, Mr Gokkent said it was important to keep in mind that Federal Government spending remained much smaller than that of individual emirates. Historically, federal spending has constituted about 15 to 20 per cent of overall government spending in the UAE, he said.
Next year's Federal Government budget is part of a Dh122bn spending plan for 2011 to 2013 that was announced last month.