INTRODUCTION
A fundamental question in growth theory asks whether increasing government expenditure promotes economic growth. Yet the empirical evidence is inconclusive. On the one hand, government expenditure on education and health care would raise labor productivity. Further, government expenditure on such infrastructure as roads and communications would also boost the rate of private domestic investment, which in turn fosters economic growth. Barro
(1991, p. 430), for instance, argues that “expenditures on education and defense are more like public investment than public consumption; in particular, these expenditures are likely to affect private sector productivity or property rights, which matters for private investment.”
On the other hand, higher government spending may hinder overall economic performance if the spending comes at a cost of increased taxes and/or borrowing to finance the government expenditures. Fiscal policy is a key element of Saudi Arabia’s macroeconomic policy given the importance of public expenditures in financing investment and consumption activities and their role in meeting the growing need for public social services. Available statistics show that total government expenditures increased from US$1.6 billion in 1970 to US$158.9 billion in 2010
(a 9,800 percent increase in nominal and 1,700 percent increase in real terms) in order to meet continuing increase in demand due to population growth and higher standards of living.
Despite this fact,