Examining government expenditure and economic *growth in a natural resource based economy: Case study of Saudi Arabia

The role of government spending in stimulating economic growth is a widely debated subject. In the basic neoclassical growth model, an increase in government spending may boost output temporarily, but in the long-run it is supplies of productive resources and productivity that determine growth. In endogenous growth models, an increase in government spending may raise the steady-state rate of growth due to positive spillover effects on investment in physical and/or human capital. This study examines the relationship between government spending and non-oil GDP in the case of Saudi Arabia. Using time-series methods and data for 1969-2005, the study finds that increases in government spending have a positive and significant long-run effect on the rate of growth. Estimated effects of current expenditure on growth turn out to exceed those of capital expenditure, whereas the growth effects of productive expenditure are larger than those of non-productive expenditure. The study discusses possible reasons for these findings in the Saudi case and draws some policy implications. Because of the important growth effect of the efficient use of government expenditure, this study reviews the Saudi budgeting system and provides some recommendations based on what are considered to be best practices in government expenditure management. To mitigate the problems associated with public spending management in general and line-item budget in particular, the Saudi budgeting system would benefit from adopting medium-term expenditure framework along with the associated spending ceiling, comprehensive coverage of the fiscal accounts, and some form of output oriented budgeting structure with the relevant budget classification.