Fiscal policy and private investment: some anomalies from Saudi Arabia

Abstract

This article examines the relationship between fiscal policy and private investment in Saudi Arabia, a country heavily dependent on government spending for its economy. Rather than solely analysing aggregate government expenditures, our study focuses on various government spending components, such as infrastructure, human resources, health and social development, economic resources, transport and communication, and municipal services. We employ the auto-regressive distributed lag (ARDL) model and an error-correction approach to assess the short-term and long-term impacts of these components on private investment. The empirical findings indicate that all components of public expenditures in Saudi Arabia have significant effects on private investment, in the long-run and/or the short-run, except spending on human resources. This lack of impact from expenditures on human resources development contradicts the theoretical prediction that such public spending stimulates labour productivity and encourages private investment.