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UPDATE 1-Saudis boost spending, slow austerity drive in 2018 budget

* Balanced budget target pushed back to 2023 from 2020

* Government balancing rating agencies, need for feel-good factor

* Next year's growth projections may be too optimistic

* But state funds will also spend outside budget

* Budget appears to assume oil price of $51 to $55 a barrel (Adds details, analysis, quotes)

RIYADH, Dec 19 (Reuters) - Saudi Arabia will increase government spending next year and slow an austerity drive as it struggles to lift the economy out of recession in the face of low oil prices, according to a state budget released on Tuesday.

Riyadh plans to increase spending to a record 978 billion riyals ($261 billion) in 2018, the finance ministry said. That is up from 890 billion riyals in the original 2017 budget plan and 926 billion riyals of actual spending this year.

As a result, the decline in the government's budget deficit will slow next year. The 2018 deficit is projected at 195 billion riyals, or 7.3 percent of gross domestic product, against an actual 230 billion riyals in 2017.

In a speech, King Salman formally announced that the target date for eliminating the deficit would be pushed back to 2023 from the original target of 2020. Finance ministry officials had already informed local economists of the change last month.

Much of next year's increased spending will go to infrastructure projects that would benefit private companies, government ministers told a nationally televised briefing.

"In 2018, we will keep issuing legislation that will support the private sector, and we will also privatise some sectors that are ready and interest private business," said economy minister Mohammad al-Tuwaijri.

Riyadh has imposed new taxes and slashed spending in some areas bring down its deficit since 2015, when lower oil export revenues produced a record budget gap of 367 billion riyals, or about 15 percent of GDP.

The austerity drive has restored investor confidence in the Saudi currency and financial markets but taken a toll on the economy, where private sector growth has slowed to a crawl. Data for the first half of 2017 showed the overall economy in recession, partly because of cut-backs in oil output.

That has prompted the government, under pressure to cut an unemployment rate among Saudi citizens that is officially put at 12.8 percent, to plan on loosening its purse strings next year.

The budget plan predicts the economy will grow 2.7 percent in 2018 after contracting 0.5 percent in 2017. The non-oil sector is projected to expand 3.7 percent next year.

Many private economists said those growth targets might be too optimistic, since the government plans to introduce a 5 percent value-added tax in January and raise domestic energy prices later in the year.

But Monica Malik, chief economist at Abu Dhabi Commercial Bank, said Riyadh needed to shift policy towards faster growth to support long-term reforms designed to reduce the economy's reliance on oil exports.

"They are balancing fiscal consolidation required by rating agencies and international investors - they can't have a blowout budget - with the domestic need to show progress with the economic transformation plan, and boost the feel-good factor with stronger growth," she said.

Estimating the impact of the budget is harder for 2018 because of the government's increasing use of its giant Public Investment Fund and other state funds to invest in projects that lie partly outside the budget plan, economists said.

The finance ministry said that including these funds, government spending would total 1.11 trillion riyals next year. State loans worth 32 billion riyals would be offered to fund home construction, in an effort to address a housing shortage that is a major frustration for Saudis.

Another uncertainty is how Saudi Arabia's massive crackdown on corruption, launched last month with the arrest of dozens of princes, senior officials and top businessmen, will affect revenues.

The government has said it aims to claw back some $100 billion of illicit funds through settlements and prosecutions of people detained in the crackdown.

Saudi Arabia, the world's top oil exporter, does not disclose the oil price assumptions behind its budget. But private economists calculated that the 2018 budget appeared to assume an average Brent crude price of around $51 to $55 a barrel. It is now around $63, suggesting revenues may be larger than projected next year. (Additional reporting by Aziz El Yaakoubi and Maha El Dahan, writing by Andrew Torchia, editing by William Maclean, Larry King)