Fiscal policy in the forecast period will be dominated by the state's ambitious five-year, US$280bn investment plan. This spending will focus on developing the non-hydrocarbons sector, improving infrastructure, expanding the local skills base and supporting small- and medium-sized enterprises. According to the government, these expansionary budgets will be funded exclusively from domestic sources. The government is committed to avoiding borrowing on international markets and will be able to cover the costs by drawing on the reserves in its oil stabilisation fund, the Fonds de régulation des recettes, which are around AD4trn (US$52bn). The government had pledged to invest US$150bn in a previous five-year plan but was unable to spend all the money, some of which has now been allocated to the 2010-14 plan. The government's patchy record of completing projects on budget does not instil much confidence that this new, larger programme will be implemented fully.

We estimate that Algeria recorded a small budget deficit in 2010 of 1.9% of GDP as back-dated pay rises for public servants were balanced by higher oil and gas revenue than in 2009. The government's draft budget for 2011 envisages a budget deficit of AD3.6trn, equivalent to nearly 30% of GDP. However, the government routinely uses conservative oil price assumptions, and we do not expect Algeria to meet all its spending commitments and therefore to record much smaller deficits. We forecast that the fiscal account will record annual average deficits of around 1.9% of GDP in 2011-12 as higher oil prices will offset increases in spending, and will average 3.2% of GDP thereafter, as the government turns its spending programme towards capital expenditure. Low forecast gas prices and sluggish investment in hydrocarbons will dampen government revenue in the forecast period.