The nexus between government spending and economic growth in Saudi Arabia

Abstract

This paper analyses the impact of government spending on economic growth in Saudi Arabia. A five variable of the Vector Error Correction model (VECM) is used to analyze the relationship between government spending, import, population, exchange rate, and economic growth (GDP). Data was obtained from the World Bank website from 1970 to 2022. Two of our variables were stationary at level alpha 5%, while the other three variables were not stationary at level alpha 5%. This makes us test them in the first difference where all the variables were stationary at alpha 5%. We also tested our lag length criteria, and we found out that the (*) were many in lag three (3). Furthermore, the results from the impulse response, variance decomposition, and five-year forecasting indicate that in the short run, government spending and imports have improved Saudi Arabia's economic growth. The results also indicate that there was no four-way Granger causality among the variables but just two-way. Our results for cointegration also indicate there was one cointegration result, which resulted in us using the VECM. The forecasting results indicate that the country's GDP also tends to decrease by one percent from 2023-205, and after that, it returns to its shock by increasing again by one percent from 2006 to 2008. (9% to 10%).