Kuwait mulls new taxes to lower its growing budget deficit

The widening budget deficit in Kuwait coincides with a pivotal moment in the wealthy Gulf country's financial reform trajectory.

Spending on government salaries and commodity subsidies accounts for a large share of oil revenues, putting pressure on the government to realign priorities amid oil price volatility. This dynamic opens the door to new taxes and adjustments to public services, such as education and health care, to ensure the sustainability of the economic model.

The draft budget for the 2025–2026 fiscal year forecasts an 11.9% increase in the deficit to 6.31 billion Kuwaiti dinars (about $20.5 billion), driven by an expected decline in oil revenues despite attempts to reduce current spending.

This reflects a structural challenge that makes fuel subsidies and salaries more vulnerable to adjustment amid mounting financial pressure, according to a Bloomberg report published on 2 February.

These projections come as Kuwait pursues efforts to diversify its revenue sources. However, heavy dependence on oil means any price decline reduces the fiscal space available to maintain subsidy levels without resorting to borrowing or withdrawals from sovereign funds, according to the same report.

In the context of government salaries, which account for a large share of expenditure, political pressure is an obstacle to radical reforms.

However, the rising deficit is pushing toward reducing public-sector hiring and adjusting allowances, alongside proposals to link wages to performance to curb the growth of the wage bill, which threatens financial stability, according to an assessment published by the International Monetary Fund on 18 December 2025.

The same assessment suggests the likelihood of new taxes.

Kuwait has approved a 15% corporate profits tax on multinational companies with annual revenues exceeding €750 million, expecting to collect hundreds of millions of dollars annually. Possible plans also include a 5% value-added tax and excise taxes on harmful goods, marking a first step toward expanding the tax base and reducing dependence on oil.

These measures align with the Organisation for Economic Co-operation and Development (OECD) standards and aim to strengthen financial sustainability amid oil market volatility, despite political challenges to implementation.

This was noted in an assessment published by Global Finance Magazine last month, on 25 January, which analyses emerging economies and financial reforms.

Economist Hossam Ayash told Al-Araby Al-Jadeed, the Arabic-language sister publication of The New Arab, that Kuwait’s budget suffers from a “structural deficit” approaching $32 billion, equivalent to about 10 billion dinars.

This makes it the country's second-largest deficit after one that exceeded the same threshold in 2021. He attributed the widening deficit primarily to declining oil prices.

Oil revenues account for about 79% of the Kuwaiti government's total income.

These revenues fell by 16.3%, while expenditures rose by 6.2% during the same period, a divergence Ayash described as evidence of an imbalance between expenditure reviews and declining revenues.

Current expenditure items, particularly salaries and subsidies, account for the largest share of government spending at around 76%, or nearly 20 billion dinars.

This includes about 16 billion dinars for salaries alone and 4 billion dinars for subsidies. Productive capital expenditure does not exceed 3 billion dinars, confirming that the budget is more oriented towards consumption than towards production stimulus.

According to Ayash, the structural problem lies in the budget's reliance on an oil break-even price of about $90 or $91 per barrel to achieve balance.

The assumed price in the budget ranges between $60 and $70, a reality that ensures continued deficits unless subsidies are controlled and the large wage bill is reviewed.

The economist warned against maintaining this pattern, given expectations that oil prices will not return to previous high levels.

Exiting this impasse requires a comprehensive reassessment of the public sector and tighter wage controls.

It also requires activating capital spending to ensure investment returns and seriously considering new taxes, such as sales and income taxes, as part of a gradual fiscal reform. Borrowing through a public debt law is also required, a step Ayash considers necessary for Kuwait to align with other Gulf states in managing debt and fiscal policy.

However, spending priorities in Kuwait are clearly imbalanced, as expenditure on salaries and wages significantly exceeds spending on education and health care.

This places Kuwait behind regional competitors that are investing heavily in modern technologies and artificial intelligence. Ayash therefore recommended redirecting resources towards improving vital services rather than dissipating wealth through unproductive current spending.

Traditional reliance on oil faces existential challenges as the world shifts towards renewable energy and electric vehicle technologies.

This shift reduces market sensitivity to geopolitical events and makes oil demand less responsive to shocks. According to Ayash, this structural transformation requires Kuwait to shift its economic equations away from rentier dependence, raise public-sector productivity, and reduce the size of the government workforce.

Article translated from Arabic by Afrah Almatwari. To read the original, click here.