Riyadh deficit widens as spending accelerates

Saudi Arabia recorded a budget deficit of 125.7 billion riyals, or about $33.5 billion, in the first quarter of 2026 as state expenditure rose sharply and oil income softened.

Total government spending reached 386.7 billion riyals during the three months to March, outpacing revenues of 261.0 billion riyals. The fiscal gap underlines the strain facing Riyadh as it presses ahead with large-scale development programmes while managing volatility in energy receipts, the mainstay of public finances.

The first-quarter deficit was more than twice the shortfall recorded in the same period of 2025, reflecting a 20 per cent rise in expenditure against a slight decline in total revenue. Oil revenue fell 3 per cent to 144.7 billion riyals from 149.8 billion riyals a year earlier, while non-oil revenue rose 2 per cent to 116.3 billion riyals from 113.8 billion riyals.

The figures show that Saudi Arabia’s diversification drive is providing a growing revenue base, but not yet at a scale sufficient to offset the fiscal impact of weaker oil receipts and rising spending commitments. Non-oil revenue accounted for about 45 per cent of total revenue in the quarter, a significant share by historical standards, supported by taxes on goods and services, business activity, fees and other income streams linked to the expanding domestic economy.

Spending pressures were broad-based. Compensation of employees stood at 151.1 billion riyals, making it the largest expenditure item. Spending on goods and services rose to 98.1 billion riyals, while military expenditure increased 26 per cent to 64.7 billion riyals from 51.4 billion riyals a year earlier. The pattern points to a mix of operating commitments, defence allocations and investment-linked outlays tied to national programmes.

Riyadh has made clear that it is prepared to tolerate deficits while advancing Vision 2030, the economic transformation plan led by Crown Prince Mohammed bin Salman. The programme seeks to expand tourism, entertainment, logistics, manufacturing, mining, technology and financial services, while reducing the country’s long-term reliance on crude exports.

That strategy has lifted domestic demand and supported employment, but it has also kept public spending elevated. Projects in transport, urban development, housing, tourism destinations and industrial zones require sustained capital outlays. The government has also continued to fund social, health, education and infrastructure priorities, areas that carry political and economic importance as the population grows and expectations for public services rise.

The 2026 budget had already signalled a deficit, with planned spending exceeding projected revenue. The first-quarter data indicate that the fiscal path may remain challenging if oil prices, production levels or export earnings fall short of assumptions while project expenditure continues at pace.

Saudi Arabia’s fiscal position remains stronger than many emerging-market peers, helped by moderate public debt, substantial sovereign assets and access to domestic and international debt markets. The kingdom has repeatedly tapped sukuk and bond markets to finance spending and manage liquidity, while maintaining investor interest through its investment-grade credit profile and the scale of its economic reform agenda.

Even so, the fiscal numbers highlight the trade-off at the centre of Saudi economic policy. Faster diversification requires heavy upfront spending, but sustained deficits increase borrowing needs and place greater importance on the returns generated by state-backed investments. The Public Investment Fund, government entities and sectoral development agencies are central to that model, directing capital into priority industries designed to create jobs, attract private investment and widen the tax base.

Oil remains the decisive variable. Despite the expansion of non-oil activity, hydrocarbon revenue continues to dominate the treasury’s income structure. A small percentage decline in oil receipts can produce a large fiscal effect, particularly when expenditure is rising at a double-digit pace. Output policy within OPEC+ and global demand conditions will therefore remain critical to the budget outlook through the rest of 2026.