The 2008 budget, published on 21 November, includes a 70 per cent increase in salaries for federal government employees. The move is expected to lead to further salary increases in the rest of the economy, which will contribute to the growing problem of inflation.

According to the Economy & Planning Ministry, inflation was 9.3 per cent in 2006.

“Federal wages have lagged behind those at an emirate level so a correction was due,” says Simon Williams, economist at HSBC in the Gulf. “But the scale of the rise is unprecedented and will add to the pressure on the rest of the public and private sectors to agree to substantial salary increases.”

Earlier this month, contractors working in the construction sector increased workers’ wages by 20 per cent to compensate for rising living costs and the falling value of the UAE dirham (MEED 16:11:07).

The budget is the largest ever by the federal government and includes spending of AED34.9bn ($9.5bn), an increase of 24 per cent on 2006.

Federal government revenues generate 40-50 per cent of the budget. The rest comes from the seven emirates, with Abu Dhabi contributing the most. “Revenues are strong and that is allowing the government to fund the planned growth in social services and infrastructure investment,” says Williams.

Education received the largest allocation, at AED9.7bn. AED8.6bn will be spent on infrastructure projects and AED1.4bn on restructuring the federal government.