Saudi Arabia Between a Widening Deficit in 2026 and Declining Spending in 2027: Is Vision 2030 Entering Its Toughest Test?

"Stretch your legs according to your blanket." An old Egyptian proverb summarizes one of the simplest rules of financial management: know the limits of your capacity before deciding the scale of your spending. However, nations do not manage their budgets so simply, especially when spending is part of an economic project on the scale of Vision 2030. Here, the question is no longer just: how much does the state spend? But rather: where does it spend, and what return does it get on every riyal?

How does the Saudi budget deficit widen by about 80 billion riyals over the original estimate without Moody's seeing a credit risk in that? The new estimate for the 2026 deficit is 245 billion riyals, or 4.9% of GDP, compared to 165 billion riyals in the original budget. Moody's had affirmed the Kingdom's rating in May at Aa3 with a stable outlook. The explanation begins with the source of the increase.

The increase came on the expenditure side, as the original budget estimated spending at 1.313 trillion riyals. The current estimate is 1.435 trillion, which is about 122 billion riyals or 9% higher. Revenues rose by about 4% to 1.190 trillion riyals, narrowing part of the gap, while the remaining difference is reflected in the deficit.

Revenues held up despite harsh circumstances. The Saudi Ministry of Finance expects oil activities to contract by 21.8% this year and real GDP to contract by 3.6%, following maritime disruptions in the Strait of Hormuz. Moody's expects higher prices to offset part of the decline in volume, forecasting Brent crude to average between $90 and $110 in 2026, and highlighting the Kingdom's ability to reroute a large portion of its exports through Red Sea ports. This gives fiscal policy greater room to maneuver compared to a scenario where the widening deficit stems primarily from a collapse in revenues, even if part of the additional spending is tied to obligations that cannot be easily reduced quickly.

43 billion riyals less: What lies inside the figure? The ministry estimates 2027 spending at 1.392 trillion riyals, down by about 43 billion riyals from 2026, against revenues of 1.202 trillion, bringing the deficit down to 191 billion riyals or 3.6% of GDP.

However, this does not mean the government has announced a spending cut program. The statement itself speaks of continuing to spend on developmental priorities and projects with economic and social returns, outlining a trajectory where spending reaches 1.544 trillion riyals in 2029. The deficit rises again to 192 billion riyals in 2029, after 177 billion in 2028. Thus, we are looking at a projected spending reduction for a single year compared to the estimate for the preceding year.

Here, the question shifts from the magnitude of the cut to where it occurs. The number alone does not reveal the quality of fiscal policy. Cutting an operational expense differs from cutting investment; postponing a project differs from canceling it; and relinquishing a slow-return project differs from sacrificing an investment that enhances the economy's productive capacity. A budget funding an economic transformation on the scale of Vision 2030 should not be judged merely by the spending it eliminates, but also by the investments it maintains that can expand the productive capacity of the economy.

The past record warrants caution. The 2025 budget estimated the deficit at 101 billion riyals, before the ministry's estimate rose to 245 billion riyals, or 5.3% of GDP. An analysis by the Arab Gulf States Institute in Washington noted that the statement does not clarify how the spending cut will be achieved, adding that such a nominal reduction is rarely realized, and suggesting that the 2027 deficit is likely to exceed 3.6%.

Regarding the growth gap between the government and Moody's, the government forecasts real growth of 12.8% in 2027, while Moody's expects 8.5%. Both figures start from a low base following the 2026 contraction; thus, a large portion of the rebound is mathematical in nature, as the resumption of oil production and improved navigation could significantly boost GDP.

The real test lies in the non-oil sector. The ministry projects its growth at 3.2% in 2026, down from 1.8% in the first half, with its share of GDP rising to 57.3% during that period. This figure cannot be read in isolation from the contraction in the oil sector, as the increased share partially reflects the shrinkage of the denominator rather than an equivalent expansion of the non-oil economy. Moody's expects growth in the non-hydrocarbon private sector to return to the 4% to 5% range once the conflict ends. The two estimates do not pertain to the same conditions, but they reveal a difference in assessing this sector's ability to lead the recovery.

Non-oil revenues rose from 166 billion riyals in 2015 to 505 billion in 2025, marking a significant transformation over a single decade. However, the unresolved question remains its ability to sustain an upward trajectory when the government spending that helped build it slows down.

There are fiscal buffers that explain why a widening deficit is not enough to change the outlook, as Moody's points out that government financial assets reached about 18% of GDP by the end of 2025, and readily available deposits at the central bank exceeded 9% of GDP. It expects debt to rise from about 32% of GDP this year to nearly 40% by the end of the decade. These buffers, alongside strong credit ratings from Fitch and S&P, explain why the agency does not view the widening deficit alone as sufficient reason to alter the Kingdom's rating.

However, buffers buy time rather than offer a blank check. The ability to borrow is one thing and the need to borrow is another; the benchmark is the return on every additional riyal against its funding cost. The ministry stated that the 2027 deficit will be financed through borrowing in line with the medium-term strategy, and that a detailed borrowing plan will be announced before the end of the year. More importantly, what warrants close monitoring?

First, the details of the full budget usually released in December: the allocation of spending between current and capital expenditure, and which projects will proceed and which will be postponed. The impact of these priorities is not limited to Saudi finances; companies involved in project execution, including Egyptian firms, need this clarity prior to expanding their commitments.

Second, the borrowing plan: its division between domestic and external markets, the volume of sukuk, repayment maturities, and funding costs.

Third, export routes via the Red Sea. Moody's places geopolitical risk at the forefront of downside risks; rising prices offer little benefit if shipments are disrupted or shipping and insurance costs surge.

Fourth, non-oil private sector growth. If it approaches the 4% to 5% range, the economy may be better positioned to absorb the slowdown in government spending. However, if it remains near 2%, the slowdown could become a heavier drag on growth itself.

The 2027 budget will answer the critical question: Can Saudi Arabia spend less and grow more, after a year in which the deficit widened beyond the budget estimate by about 80 billion riyals and spending exceeded its original estimate by roughly 122 billion?