Fiscal policy will remain expansionary during the next five years, with expenditure projected to increase considerably to support the diversification programme. Mubadala, Abu Dhabi's investment fund and primary vehicle for economic diversification, issued a US$1.5bn bond and announced a fourfold increase in planned investment this year to US$16.3bn. The government will also increase social spending, mainly by increasing subsidies for basic food items. The Economist Intelligence Unit expects a 30% rise in global food prices in 2011. Much of the increase in spending will come from Abu Dhabi, as Dubai will concentrate on repaying its debt. Although Dubai World (DW), one of three major state-owned companies in Dubai, concluded restructuring talks with creditors in September, further restructurings may put pressure on the federal budget as Abu Dhabi may be required to provide additional support for other Dubai GREs.

The UAE is expected to maintain its attractive tax environment, which will enable it to keep its competitive edge and draw in foreign investment. To bridge the funding gap, the government is likely to increase charges for transport and public services in an effort to augment revenue. The UAE's fiscal position will be much weaker in the forecast period than in 2006-10. We forecast that the federal surplus will widen in 2011 as concerns over oil supply drive oil prices higher, but the surplus will contract in 2012. The federal budget is forecast to move into deficit in 2013-15, with the shortfall averaging 2.6% of GDP. As Dubai resolves its debt problems, we expect net public debt to fall from an estimated 42.5% of GDP in 2010 to 27.8% of GDP in 2015.

It should be noted that the UAE's official fiscal data understate the real strength of the public finances, as a portion of Abu Dhabi's oil earnings are not reported as current revenue, but instead paid directly into reserve accounts. The official federal budget accounts for only about one-quarter of revenue and expenditure. The bulk of spending is at emirate level, with Abu Dhabi covering certain national expenses, particularly defence. Dubai is the only other emirate to contribute to the federal budget. Expenditure does not include funds used to bolster the balance sheets of loss-making GREs. The figures also exclude the substantial income generated by the UAE's stock of publicly owned foreign assets.