2025 budget deficit reflects planned investment spending: Analysts

The Ministry of Finance announced that Saudi Arabia’s actual 2025 budget recorded revenues of SAR 1.11 trillion against expenditures of SAR 1.38 trillion, resulting in a deficit of SAR 276.6 billion—higher than the projected SAR 245 billion deficit.

In remarks to Argaam, analysts said the wider deficit in Q4 was expected, driven by increased payments to the private sector and accelerated capital project execution. They stressed that the development is not alarming.

They added that the deficit reflects planned, growth-oriented investment—supported by non-oil sector expansion, rising non-oil revenues, and ample sovereign reserves—rather than structural weakness. Ongoing development projects, they noted, remain a key engine of economic growth while preserving fiscal sustainability.

Drivers Behind the Higher Actual Deficit

Economic analyst and researcher Ali Al-Hazmi said the rise in the Q4 2025 deficit was natural, given higher state payments to private contractors and greater capital spending during the quarter. These factors, he noted, pushed the quarterly deficit to SAR 95 billion, emphasizing that the situation is not a major concern.

Meanwhile, academic and economic writer Dr. Bandar Al-Juaid said several key factors drove the actual deficit to exceed the approved level by SAR 94.8 billion, most notably:

- Countercyclical fiscal policy: Continued spending on development projects and sustained investment momentum despite oil revenue volatility.

- Oil price and revenue fluctuations: The relative reliance on oil exposes revenues to price swings, with any deviation directly impacting the fiscal balance.

- Accelerated project execution: Strategic project implementation and continued social spending of around SAR 99 billion through year-end, alongside expanded stimulus programs.

- Higher debt servicing costs.

On whether the deficit is temporary or structural, Al-Juaid said it is more accurately viewed as a planned investment deficit rather than a structural one. He pointed to 4.9% annual growth in the non-oil sector, non-oil revenues reaching SAR 505 billion, improving labor market and private sector indicators, and foreign sovereign reserves standing at SAR 1.7 trillion. Structural deficits typically emerge when non-oil revenue bases weaken—something current data does not suggest.

Al-Hazmi similarly described the deficit as cyclical, linked to global economic conditions and oil price fluctuations rather than structural imbalances. He noted the total 2025 deficit of SAR 276 billion slightly exceeded the pessimistic scenario of SAR 275 billion, but reflects global economic cycles rather than fiscal deterioration.

He added that the Kingdom holds strong reserves and is reluctant to draw on them to finance deficits, in order to preserve its credit rating. The current deficit, he reiterated, is cyclical rather than structural.

Government Plan to Reduce the Deficit in 2026

Regarding plans to narrow the deficit in 2026, Al-Hazmi said the projected SAR 165 billion deficit is also planned, with the government betting on capital projects to generate future income that would offset borrowing costs.

He indicated that authorities may focus on boosting non-oil revenues and enhancing spending efficiency through the Expenditure and Project Efficiency Authority (EXPRO), while managing debt prudently by diversifying funding sources and lowering financing costs. Privatization initiatives and public-private partnerships could also reduce fiscal burdens without compromising major projects.

Al-Juaid said the government will likely adopt an integrated approach to deficit management without affecting strategic projects, built on three main pillars:

- Enhancing spending efficiency: Rescheduling selected projects, prioritizing higher-return initiatives, and expanding PPP frameworks.

- Maximizing non-oil revenues: Broadening the tax base, improving compliance, increasing fee-based revenues, and supporting non-oil sector growth.

- Flexible debt management: Diversifying funding instruments, leveraging lower liquidity costs, and balancing borrowing with reserve utilization.

The objective, he said, is not to halt mega-projects but to manage their financing pace while maintaining fiscal sustainability.

2026 Outlook Amid Deficit Conditions

Al-Juaid expects 2026 to see accelerated growth driven by the non-oil sector, potential improvement in oil revenues if prices stabilize, a gradual decline in the deficit-to-GDP ratio over time, and stable debt levels within a safe range of 30–35%.

Supporting indicators include a Purchasing Managers’ Index (PMI) of 57.7 points, 10% private sector credit growth, 64% expansion in e-commerce, and low inflation at 2%. Key risks, however, include prolonged weak oil prices, higher global financing costs, and regional geopolitical pressures.

Al-Hazmi expects continued capital spending, particularly on Vision 2030-related projects, while maintaining a controlled deficit. He noted that the Kingdom’s sovereign debt stands at roughly 33–34%, well below many global averages of 60-70%, providing fiscal space without sacrificing growth.

He added that sustained investment projects remain a primary growth driver, with non-oil revenues helping ease the deficit. An oil price recovery toward $70 per barrel could create a positive scenario, boosting oil revenues and accelerating deficit reduction. Conversely, a prolonged oil downturn and higher financing costs could increase debt servicing pressures.

Al-Hazmi concluded that the Kingdom will not sacrifice economic growth for the sake of deficit reduction. Fiscal sustainability remains a priority, supported by relatively low debt levels compared to global benchmarks, providing room for maneuver.