Behind the numbers of the UAE’s federal budget

Capital Letter is Frank Kane’s weekly series on Abu Dhabi’s money, power and ambition

It is accepted wisdom that Abu Dhabi controls the purse strings of the UAE. But the financial reality has always been more complicated, and this week’s federal budget announcement provides a timely reminder of just how unusual the federation’s economic arrangements really are.

The UAE government this week approved a spending programme of AED292.5 billion ($79.6 billion) for the next three years, an increase of more than 28 per cent over the previous period.

It sounds like a substantial commitment of national resources from the federal capital, especially at a time when the economic consequences of war are becoming increasingly apparent.

But there is something rather unusual about the UAE’s federal budget. Despite the impressive headline figure, it accounts for only a small fraction of the country’s total public expenditure.

According to the International Monetary Fund, the federal government accounts for just 15 per cent of the UAE’s public expenditure. The remaining 85 per cent is largely the responsibility of the seven individual emirates, which retain a degree of financial independence unusual among the world’s federations.

The reasoning goes back to 1971, when the founding rulers agreed on the terms of the new federation. The emirates surrendered important powers over foreign affairs, defence and national policy, but retained control over their natural resources, revenues and much of their spending.

It was a pragmatic arrangement that recognised the different economic circumstances of the founding members, particularly oil-rich Abu Dhabi and commercially-oriented Dubai.

More than half a century later, that original bargain remains fundamental to the way the UAE manages its finances.

It’s worth noting too that the budget announcement came from Sheikh Mohammed Bin Rashid Al Maktoum, ruler of Dubai, acting in his capacity as prime minister of the Abu Dhabi based federal government – a neat illustration of the carefully balanced relationships underpinning the UAE federation.

The UAE operates differently from the centralised and integrated regimes of other federal systems, like the US and Germany. Individual emirates control their own finances, including revenues from hydrocarbons, and contribute to the federal government under arrangements that reflect the federation’s distinctive history.

Abu Dhabi’s role is especially important. Its vast oil wealth has underpinned the country’s development since its foundation, and it remains the principal financial contributor among the emirates, providing more than 90 per cent of the combined contributions to the federal budget.

But the federal government also generates substantial revenues from taxes, fees and investment income. VAT receipts are shared between the federal government and individual emirates.

The federal budget does not include the enormous economic resources controlled by Abu Dhabi’s development institutions, like L’Imad and Mubadala, or the huge spending and investment programmes of government-related companies such as Adnoc.

These operate largely outside the federal accounts, as do comparable institutions and development programmes in Dubai.

What does the federal government actually spend its money on?

The conventional understanding is that Abu Dhabi’s oil wealth provides much of the financial underpinning for the five northern emirates, while Dubai largely finances its own development through commerce, tourism and financial services.

There is some truth in that picture, but the reality is more complicated. Federal spending, direct emirate contributions and nationally funded programmes create a web of financial relationships, while Dubai also contributes to the federal budget and the northern emirates generate revenues of their own.

The spending priorities announced this week were familiar: education, healthcare, housing, social services and the wellbeing of citizens, alongside the essential functions of national government.

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Much of this social spending is directed towards Emirati citizens, who benefit from publicly funded education – the biggest with 20 per cent of the total – healthcare, housing assistance and pension arrangements. The much larger expatriate population generally relies on private provision, employers or insurance for many of these services.

Individual emirates also spend heavily on their citizens, while federal expenditure on defence, security, infrastructure and administration benefits the entire population.

This underlines another distinctive feature of the UAE’s economic model: the difference between citizenship-based social provision and the services supporting a much larger resident population.

The new budget also demonstrates how the system is evolving. Federal taxation has created a growing national revenue base, while increasingly complex economic relationships between the emirates require closer coordination of fiscal policy.

The war has added urgency to those questions. Defence, infrastructure resilience, economic disruption and the need to maintain investor confidence are national challenges that do not respect the boundaries between emirates.

Time will tell whether the system put in place in 1971 has sufficient flexibility to adapt to those very different circumstances.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist