This paper empirically examines the effects of different types of government expenditures, on economic growth in Saudi Arabia. We use different econometric techniques to estimate the short- and long-run effects of these expenditures on growth and employ annual data over the period 1969-2010. Our findings indicate that while private domestic and public investments, as well as healthcare expenditure, stimulate growth in the long-run, openness to trade and spending in the housing sector can also boost short-run production. These findings draw some policy implications for Saudi policymakers on maximizing the returns of the government spending on economic growth.

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.