Fiscal Policy and Economic Growth in Saudi Arabia: A Study of Government Expenditures and Their Macroeconomic Effects

Abstract

This paper examines the relationship between government expenditures and economic growth in Saudi Arabia over the period from 1970 to 2023. The study aims to explore how changes in government spending have impacted the country's economic development, considering both short-term and long-term effects. By analyzing historical data, the paper seeks to uncover patterns and draw conclusions regarding the role of government expenditure in driving economic growth, focusing on key sectors such as infrastructure, social services, and public investment. This examination is particularly relevant for understanding the effectiveness of government spending as a policy tool in Saudi Arabia, especially in the context of its efforts to diversify its economy beyond oil dependence. The paper uses various econometric methods to analyze the data, providing insights into how shifts in government expenditures have influenced macroeconomic indicators such as GDP growth, employment, and inflation over the past five decades. The findings aim to contribute to the broader discourse on fiscal policy and its impact on economic growth in developing and oil-rich economies. The autoregressive distributed lag approach of co-integration is used in this study to validate the existence of a long-term relationship between government expenditures and economic growth in Saudi Arabia. The results from the ARDL model confirm the long-run validity of three models, demonstrating that government expenditure, government consumption expenditure, and government spending as a share of income significantly influence economic growth, and conversely, economic growth also significantly affects government expenditures over the long term. These findings suggest that government spending plays a crucial role in fostering economic development in Saudi Arabia. Specifically, the models indicate that increases in government expenditure, particularly in areas such as consumption and public investment, are associated with positive growth in the country's economy. Additionally, the reciprocal relationship suggests that as economic growth improves, there is an increased capacity for the government to allocate more resources, thereby further stimulating growth. This mutual influence highlights the importance of effective fiscal policy in driving sustainable economic growth in Saudi Arabia. However, the study reveals that there is no significant statistical evidence supporting the impact between per-capita income and either government expenditure per capita or total government expenditure. This suggests that, over the long term, changes in government spending do not have a strong or direct relationship with per-capita income in Saudi Arabia. Additionally, in the short run, the analysis found no evidence for the impact of economic growth on government spending. This indicates that, in the short term, fluctuations in economic growth do not lead to immediate changes in government expenditure, possibly due to fiscal constraints or the lag in the government’s response to economic shifts. These findings underscore the complexity of the relationship between government spending and economic growth, suggesting that while government expenditure may influence long-term growth, its immediate effect may be less pronounced in the short-term period.