Kuwait's general budget surplus is expected to reach KD 9 billion for the next fiscal year (2014/2015) with a modest increase in government spending, and overall expenditures are set to rise by 3 percent y/y in budget-on-budget terms, following a budgeted decline of 1 percent for the current fiscal year, National Bank of Kuwait (NBK) said in a report released Wednesday. The small projected rise is a further sign that fiscal policy has entered into a less expansive phase than in the past, partly reflecting sustainability issues. However, because of a likely undershoot this year, actual spending growth in FY14/15 - particularly capex - may still end up stronger than the budget figures suggest, said NBK. Total spending is targeted to reach KD 21.7 billion next year, up from KD 21.0 billion in FY13/14. The projected rise is driven entirely by current expenditures, which are set to increase 7 percent y/y to a record KD 19.6 billion. Within this, civilian wages and salaries are budgeted to rise 8 percent, while spending on goods and services (mostly the cost of purchasing fuel from government refineries) is projected to edge up slightly, reads the report. But most of the rise in current spending is attributed to the miscellaneous expenditures and transfers segment, which accounts for almost half of total spending. Within this category, some 40 percent of the rise is budgeted to come from inter-governmental transfers, mainly related to transfers to the social security fund, and subsidies for fuel products and LNG. These types of outlays have limited significance for the domestic economy. Once they are excluded, growth in the 'demand-impacting' portion of the budget is 2 percent y/y, close to the overall figure, noted NBK. Capital expenditures are budgeted to drop by a large 20 percent y/y to KD 2. 0 billion, the largest cut on record. This is also the lowest budgeted level in the past 5 years. The fall is driven by a decline in capex by the Ministry of Public Works and the Ministry of Electricity and Water, by 44 percent and 19 percent respectively, added the report. Although the precise reason is unclear, it could be partly related to the completion of a round of infrastructure projects. In any case, we think the outlook for growth in capex is better than these draft figures imply, not least because a number of delayed government projects are finally showing signs of getting off the ground, indicated NBK. While projections on spending for next year are inevitably speculative at this stage, our working assumption is that, as usual, the level of spending ultimately comes in somewhat below budget. However, a higher than usual execution rate in capital spending means that the "underspend" will be smaller than before, at 3 percent. This results in actual spending growth of around 5 percent in FY14/15, slightly above the 4 percent we project for this year, added NBK. On the income side of the budget, total government revenues are projected to increase by 11 percent to a record KD 20.1 billion. Oil revenues are expected to rise at a similar pace to KD 18.8 billion. Oil prices are assumed to average USD 75 per barrel, up from the USD 70 assumed for FY13/14, while assumptions for oil output are unchanged at an average of 2.7 million barrels per day. Meanwhile, non-oil revenues are projected to rise at steady 4 percent to KD 1.3 billion. All of these assumptions are conservative. In our view, a total revenue figure of KD 30 billion is more likely," said the report. Under the government's projections, the budget records a deficit of KD 1.6 billion in FY14/15 before transfers to the Reserve Fund for Future Generations. Based upon our more upbeat forecasts for revenues, however, the fiscal position looks much more solid. We project the budget to record another hefty surplus of around KD 9 billion or 20 percent of GDP in FY2014/15, slightly below the expected surplus for this fiscal year, continued the NBK report.