Booming oil prices are flooding Arab countries with money, but where the lion's share of that wealth would once have been pumped into the world's financial markets, much of it is now being spent at home.

Gulf states are embarking on their biggest spending spree on record as they lavish funds on domestic projects—from new housing and hospitals to mosque restoration and job creation—largely as a defensive response to the Arab Spring uprisings that toppled other Middle East governments last year. Government outlays in the region are set to reach $488.6 billion this year, according to recent Institute of International Finance estimates, up 35% from 2009's figure.

The domestic focus hasn't yet eaten away at the region's external investments—net foreign assets in the Gulf region are expected to rise by around $300 billion this year alone—but the domestic focus has meant less oil money is being funneled into global capital markets than otherwise might have been. New patterns of spending are also pushing government budgets through the roof and sending money once set aside for things like increases to oil production capacity and military upgrades to social projects instead.

"When the Arab Spring happened, many governments discovered that the enemy was within and not without," said Mustafa Alani, a senior adviser at the Geneva-based Gulf Research Center and an expert on regional security issues.

In all, governments in the Gulf—including Saudi Arabia, the United Arab Emirates and Kuwait—have pledged $157 billion in additional spending directly following the Arab Spring uprisings, according to a Bank of America Merrill Lynch report from last year. That amounts to about 13.4% of the region's 2011 GDP. To stave off any potential unrest, Gulf monarchies splurged on population-pleasing projects such as spending on higher salaries, bonuses for government employees and new houses.