Government Spending Volatility and Real Economic Growth: Evidence From a Major Oil Producing Country, Saudi Arabia, 1970 to 2018

Abstract

The objective of this paper is to examine the effect of government spending volatility on economic growth in an oil producing country—Saudi Arabia. The Hodrick–Prescott (HP) filtering approach was applied to decompose the data series into cyclical and trend components. The ordinary least squares, and nonlinear autoregressive distributed lag were also used, and the results confirm the negative effect of government spending volatility on real GDP growth in an oil-based economy. Moreover, the estimated coefficients of the nonlinear ARDL models indicate that changes in government spending have a significant short run and long run impact on real GDP growth, and real GDP growth responds asymmetrically to movements in government spending. Moreover, the more trade openness and credit fluctuate, the more volatile real economic growth is. Although the magnitude of government spending volatility is acceptable, the result proves that the exclusion of oil-based economies from the test of government spending volatility was inappropriate and unjustified. These results suggest that controlling the sources of instability in real GDP growth depends on the external sector and domestic credit. However, the successes of other countries should be presented and studied in order to choose appropriate policies that mitigate public spending volatility and contribute to sustainable economic growth.

Government Expenditure and Economic Growth: A Cross-Country Analysis

“…Intending to analyze and estimate the impact of government spending volatility on economic growth, tests the data for the period of 1970 to 2018 (Algaeed, 2022). The result suggests the negative impact of government spending volatility on real GDP growth.…”

Fiscal Sustainability and Its Implications for Economic Growth in Egypt: An Empirical Analysis

“…Furthermore, economists have no consensus on the relationship between fiscal policy and economic growth. Some follow the Keynesian view that government spending causes economic growth, while others follow the neoclassical view that government spending affects economic growth but not output levels (Algaeed, 2022; Nyasha & Odhiambo, 2019).…”