The Effect of Fiscal Policy on Economic Growth in Libya and Saudi Arabia

This research aims to examine the effect of fiscal policy on economic growth. To achieve this aim, the study has carried out an extensive review of the literature on the importance and challenges of fiscal policy, from which the associated theoretical and empirical frameworks have been critically reviewed. Moreover, the effects on economic growth through the instruments of the fiscal policy in Libya and Saudi Arabia in the long or short run have been examined. The research has employed annual time series data that contain 873 observations for nine variables for both countries. Libyan data includes 204 observations for four variables using the time series data during the period between 1962 and 2012, while Saudi Arabian data includes 180 observations for the same four variables between 1970 and 2014. To examine the long- and short-terms effects of fiscal policy on economic growth, the cointegration tests, the VECM and VAR models, and the causality tests, have been applied in this research, the findings of which indicate that there is a long-term effect of certain fiscal policy tools, namely government expenditure and revenues, on the economic growth of the Libyan economy. Additionally, there is a long-term causal relationship between government expenditure and revenues and economic growth. On the other hand, the outcomes found for the Saudi Arabian economy indicate that there is only a short-term effect of the fiscal policy tools – again, government expenditure and revenues – on economic growth, and short-term causal relationship between government expenditure and revenues on economic growth. Moreover, the econometric forecasting tests were applied in this research depending on the estimates found by the VECM and the VAR models. The outcomes of these tests revealed that the estimation models have a strong forecasting ability.