Saudi Defence Surge Tests the Kingdom's Fiscal Buffer

The security shock

Saudi Arabia's military expenditure reached SAR64.7 billion in the first quarter of 2026, up from SAR51.4 billion a year earlier. The SAR13.3 billion increase represented growth of 25.9%, far exceeding the 1.4% real increase that SIPRI estimated for Saudi military expenditure across all of 2025.

The timing strongly connects the acceleration to the regional war. Saudi authorities reported Iranian missile attacks against the kingdom after Riyadh had said its airspace and territory would not be used for military action against Iran. Subsequent official statements described attacks on civilian objects, economic interests and energy infrastructure across the Gulf.

Yet the budget supplies no breakdown of the increase. It cannot establish how much covered interceptions, readiness, repairs, replenishment or accelerated procurement. First-half military spending subsequently reached SAR124.6 billion, about 52% of the SAR240 billion annual allocation—elevated, but not yet evidence of a full-year overrun.

The budget verifies the defence surge; it does not disclose how the money was used.

The fiscal mechanism

The military increase formed part of a much broader fiscal expansion. First-quarter expenditure rose 20% to SAR386.7 billion, while revenue declined to SAR261 billion. Oil receipts fell 3%, non-oil revenue gained 2%, and the resulting SAR125.7 billion deficit was more than twice the shortfall recorded a year earlier.

The second quarter was less severe: revenue recovered to SAR338.8 billion and the deficit narrowed to SAR34.3 billion. Even so, the first-half deficit of about SAR160 billion consumed roughly 97% of the original full-year plan. The IMF judged that full-year spending was likely to exceed the pre-war budget, although some first-quarter outlays were non-recurring.

Financing capacity reduces near-term danger. The debt-management authority had secured about 90% of expected funding before the escalation and said additional needs could be met through private channels and domestic markets. The harder question is allocation: the war landed as the Public Investment Fund was already shifting from rapid expansion towards capital efficiency and value realisation.

By mid-year, the deficit had nearly exhausted the amount budgeted for all of 2026.

Resilience and strategic choice

Saudi Arabia was less exposed than Gulf producers wholly dependent on Hormuz because it could redirect some crude through the East-West pipeline to Yanbu on the Red Sea. The IMF concluded that this limited the fall in deliveries and that higher oil prices more than offset lower export volumes, creating a partial revenue cushion.

The domestic economy also proved more resilient than the initial data suggested. GASTAT revised first-quarter annual growth from a 2.8% flash estimate to 3.0%, with oil and non-oil activities both expanding 2.9%. The IMF nevertheless projected full-year growth of only 1.7%, reflecting disrupted trade, weaker confidence and continuing uncertainty.

The pressure is structural as well as cyclical. SIPRI estimated Saudi military spending at $83.2 billion in 2025, eighth globally and about 6.5% of GDP. The war therefore struck an economy already carrying a high defence burden. More investment in air defence, infrastructure resilience and domestic production is plausible; its eventual scale remains unknown.

Saudi Arabia's alternative export route softened the shock, but could not remove its fiscal consequences.