In this section, relevant literature on the association between government expenditure and economic growth are discussed. Barro (1990) initiated a new line of enquiry into the effect of fiscal policy (government expenditure) on economic growth. Jones et al.
(1993), Stokey and Rebelo (1995) and Mendoza et al. (1997), among others, extended the exploration of the impact of endogenous growth models for fiscal policy. In this respect, the effect of government activity on the orientation of economic growth was highlighted by Barro and Sala (1992), Easterly and Rebelo (1993) and Brons, de Groot and Nijkamp (1999). In the same vein, Dar Atul and AmirKhalkhali (2002) emphasised the importance of fiscal policy in forecasting future economic growth in the endogenous growth models.
A number of researchers have attempted empirically to investigate the influence of fiscal policy on economic growth. For example, Laudau (1983), using a sample of 96 countries, studied the way in which government expenditure influenced economic growth and found that growth of real output was negatively affected by government expenditure. Erkin (1988) developed a new framework for New Zealand to examine the relationship between government expenditure and economic growth. According to the empirical findings, higher government expenditure does not have a negative effect on consumption, but rather increases private investment, thus accelerating economic growth.
The differential effects of several types of expenditures on economic growth for a sample of 58 countries were examined by Donald and Shuanglin (1993). Their findings suggested that while government expenditures on defence and education have a positive effect on economic growth, expenditure on welfare has an insignificant negative effect on economic growth. Oyinlola (1993) investigated the link between the defence sector and economic development in Nigeria, finding that defence expenditure had a positive effect on economic growth. Devarajan, Swaroop and Zou (1996) examined the connection between the components of government expenditure and economic growth for several developing countries. The regression results revealed that while capital expenditure has a significant negative relation to the growth of real GDP per capita, frequent expenditure is positively related to it.
For Nigeria, Akpan (2005) using a disaggregated approach, attempted to identify the features, such as capital, administrative, recurrent, transfers, and social, community and economic service, of government expenditure which improve growth, and those that do not. He did not find any significant relation between the features of government expenditure and economic growth.
Komain and Brahmasrene (2007), using the Granger causality test, studied the link between government expenditure and economic growth for Thailand, and found no co-integration between government expenditure and economic growth. Liu, Hsu, and Younis (2008) studied the causal relationship between GDP and government expenditure for the USA, using data for the period 1947-2002. The causality results showed growth of GDP is caused by total government expenditure. Conversely, expansion of government expenditure is not caused by growth of GDP. Further, the estimation results suggested that public expenditure increases economic growth.
Judging from the causality test, the conclusion was drawn that Wagner’s law has less influence than Keynesian hypothesis. Ranjan and Sharma (2008) studied the effect of government development expenditure on economic growth for India during the period 1950-2007. They found a significant positive effect of government expenditure on economic growth, as well as the existence of co-integration among the variables.
In Saudi Arabia. It was suggested by Al-Yousif (2000) that there was a positive relationship between government spending and economic growth. In another Saudi study, Abdullah (2000) also examined the relationship between government expenditure and economic growth and found that the size of government has a strong bearing on economic performance. He recommended that the government raise its expenditure on social and economic activities, and infrastructure. Moreover, in order to advance economic growth, the private sector should be supported and promoted by the government. Ageli (2012) studied the connection between government expenditure and economic growth for Saudi Arabia for the period 1968-2010. The study found that increased government expenditure was a salient feature of the Saudi Arabian economy during this period. The author suggests that, while this may be due in part to the requirement for economic development, it may also be attributed to the government’s desire to political stability.
The preceding discussion evidences the positive impact of fiscal policy on economic growth, which constituted the foundation of Keynesian understanding, but also through empirical studies, as mentioned above, this is verified and recognised by neo-classical economics. The fiscal policy-induced economic growth can articulate its growth impact through various paths and dimensions. In other words, fiscal policy expansion can induce further economic growth, and this increased growth may have
spillover impact in the economy by inducing other factors, sectors and instruments to contribute to the accelerated economic growth. For example, fiscal policy induced growth, for example, can expand the stock market operations due to increased transactions and better performance of the economy, as the listed firm are expected to benefit from the observed economic growth due to fiscal policy expansion; thus, stock market value and volume as a result increases leading to further economic growth. It is, however, important to also consider that this might reverse if the economy goes into recession leading to contraction in fiscal policy instruments.
2.8. REVIEW OF THE EMPIRICAL STUDIES RELATED TO ARAB