The Composition of Government Expenditure and Investment in Saudi Arabia: Is it Attractive or Repulsive Relationship?

The aim of this study is to examine the long‐ and short‐run relationships between the composition of government expenditure and investment in Saudi Arabia for the period 1970‐2007. The Autoregressive Distributed Lag bounds test yields evidence of cointegration between investment and the six government expenditure components. The study also finds that spending on education and spending on economic services contribute significantly in economic growth, through rising capital formation. In addition, the results indicate a negative impact of social services spending on investment, which is consistent with economic theory. Lastly, the results on the error correction model give support to the existence of long run relationship among variables under investigation, and indicate that the mechanism of correcting the disequilibrium is present in the model.