Posted Ordinally on 21, 2026 by Martin Armstrong |  

Saudi Arabia recorded a budget deficit of 125.7 billion riyals, approximately $33.5 billion, in the first quarter of 2026. That is almost as large as the $44 billion deficit the government projected for the entire year. Spending increased by 20% while oil revenue declined by 3%, creating the very contradiction Vision 2030 was intended to eliminate. The kingdom is spending enormous amounts of oil revenue and borrowed money to build an economy that will supposedly no longer depend upon oil.

The government approved financing needs of 217 billion riyals, or nearly $58 billion, for 2026. This includes 165 billion riyals to cover the projected budget deficit and another 52 billion to repay maturing debt. But the Q1 deficit has already consumed most of the amount projected for the entire year. The government may recover some ground if oil revenues rise, but this exposes the vulnerability of every state-directed economic transformation. The projections assume that politicians can control spending, oil prices, regional stability, and investor confidence simultaneously. History demonstrates that they can control none of them.

The war with Iran has accelerated the problem. Saudi military spending increased by 26% during the first quarter as the kingdom attempted to protect its population, oil facilities, shipping routes, and critical infrastructure. Government expenditure on goods and services increased sharply, subsidies rose, and capital spending was brought forward. This is the hidden cost of war even for a country attempting to remain outside the conflict. Saudi Arabia does not have to invade Iran to pay for the war. It must spend billions defending itself against missiles, drones, disrupted shipping, higher insurance costs, and the possibility that the Strait of Hormuz will remain unreliable.

Saudi Arabia’s Public Investment Fund is now scaling back and shifting toward phased projects tied more closely to profitability. The original plans for The Line, a 112-mile linear city, became the international symbol of Vision 2030, but symbols do not produce cash flow. Projects are being reevaluated while the kingdom redirects attention toward logistics, artificial intelligence, clean energy, religious tourism, utilities, and infrastructure connected to events such as Expo 2030 and the 2034 World Cup.

There is nothing inherently dangerous about Saudi Arabia borrowing money. Its debt burden remains far below that of the United States, Japan, or the major European governments. The issue is the direction of the trend and the productivity of the expenditure. Debt used to construct infrastructure that increases trade, tourism, energy capacity, and private investment may strengthen the economy. Debt used to maintain political prestige, absorb operating losses, or defend projects that cannot survive without government support becomes a permanent claim upon future revenue.

Vision 2030 was launched to diversify the Saudi economy away from oil, expand tourism, build new industries, and create private-sector employment for a young population. Those objectives are entirely rational. No government can assume that a single natural resource will finance the state indefinitely, particularly when Western governments are simultaneously regulating fossil fuels, subsidizing alternatives, and using energy policy as a geopolitical weapon. The problem is not the desire to diversify. The problem is the belief that diversification can be commanded from above through unlimited spending.

The danger emerges when government borrowing begins crowding out the private economy Vision 2030 was supposed to create. Saudi banks, contractors, and investors naturally prefer projects supported by the state because political backing appears to reduce risk. Capital then flows toward whatever the government has designated a national priority instead of toward enterprises responding to genuine market demand. This produces the illusion of private-sector growth while the entire system remains dependent upon public spending. If the state reduces expenditure, the supposed private boom disappears with it.

This pattern is not unique to Saudi Arabia. Japan attempted to support growth through enormous infrastructure spending after its 1990 asset bubble collapsed, leaving behind bridges, roads, and regional projects that could not restore private demand. China used state-directed credit to build cities, railways, and property developments on an unprecedented scale, but debt accumulated when economic returns failed to match political projections. Dubai itself experienced the limits of debt-financed development during the 2009 crisis and required assistance from Abu Dhabi. Governments always believe their current project is different because they cannot imagine the economic cycle turning against them.

Saudi Arabia’s advantage is that it still possesses enormous energy reserves, financial assets, and the ability to attract international capital. Its disadvantage is that this apparent wealth encourages the belief that every project can be completed regardless of cost. Oil revenues can conceal mistakes for decades, but they cannot transform an uneconomic project into a productive one. If the kingdom must continually borrow against future oil income to finance diversification, then oil dependency has not ended. It has simply been moved from the present budget onto the future balance sheet.

The regional war makes that contradiction more dangerous. Higher oil prices may increase revenue, but attacks on shipping and infrastructure can reduce export volumes and raise security expenses. Saudi Arabia can therefore receive more per barrel while still confronting a deteriorating fiscal position. This is why analyzing oil producers solely through the price of crude is foolish. Revenue depends upon price, volume, transportation, security, and the cost of maintaining the state. War can increase the first while damaging every other component.

Vision 2030 may ultimately produce valuable infrastructure and a more diverse Saudi economy. That outcome will depend upon whether the government is willing to abandon projects that cannot generate an economic return. The decision to scale back the most extravagant parts of Neom may be the first sign that reality is beginning to overcome political ambition. Continuing every project merely to avoid admitting error would transform Vision 2030 from an economic reform into a sovereign debt machine.

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