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Fiscal Policy Impact on Saudi Arabia’s Economy


The study of the fiscal policy of a country is important as it gives an understanding to the changes that arise on the aggregate demand and aggregate supply. This is achieved through the analysis of the three major government components namely borrowing, taxation and government spending (Riley, 2006). Through the study of the fiscal policy, one can determine the aggregate demand of the Saudi Arabian economy.

The research project is valuable in the following respects: First, it may help to understand the role fiscal policy plays in the economic growth of Saudi Arabia as well as the government’s expenditure. In terms of academic interest, the study has the potential to help scholars understand how fiscal policy works and the difference between fiscal and monetary policy. This will help minimize the confusion that exists between these two commonly used economic tools. The study also has a high practical significance as it shows the impact of fiscal policy on the economy of Saudi Arabia. This will provide in-depth knowledge and a working understanding of the future trends of government expenditure, and analyse the economy output especially during times of economic shocks.

Literature Review

Fiscal policy entails the usage of government taxation, spending and borrowing with the aim of stimulating economic growth, economic activity, employment, output, and aggregate demand (Riley, 2006). The contractionery and the expansionary effects affect both the aggregate supply and aggregate demand. According to the Keynesian school of thought, fiscal policy affects employment, output and demand especially when national full capacity output is below and when a demand stimulus is required (Riley, 2006). Through the use of fiscal policy, the government can determine the aggregate demand. On the other hand, monetarist economists hold on the belief that changes in taxes and government spending affect the aggregate demand, rate of employment, and output temporary. Therefore, fiscal policy can be useful in demand management as it influences government spending and economic growth (Joharji & Starr, 2010).

The fiscal policy transmission mechanism
Figure 1: The fiscal policy transmission mechanism

The chart above gives some of the effects fiscal policy has on an economy.

Saudi Arabia depends heavily on oil as the major source of revenue. Oil sector contributes 85% of the government’s revenue and a forty five percent of the GDP (Chai, 2005; EDC, 2011). However, because of the instability in the Middle East and the financial crises in the Europe and US, its production has reduced, thereby affecting economic growth. On the other hand, government spending has increased by at least 5%. As of 2010, the government debt was at 17% of the total GDP (EDC, 2011). This has reduced compared to the 27% deficit of 1991 (Ghali, 1997). This can be attributed to the effective fiscal policy employed by the Saudi Arabia Government.


Saudi Arabia was ranked as one of economic poor performers in the Middle East in the early 1990s (Ghali, 1997). However, it GDP and economic growth has been growing rapidly compared to other countries in the Middle East. The debt of Saudi Arabia has been reducing over the years, this is essential as it helps understand the impact fiscal policy has had on the economic growth of Saudi Arabia.

Problem description/statement

The research shall explore the impact of the fiscal policy in Saudi Arabia as well as answering the research question, “Has the fiscal policy in Saudi Arabia led to the country’s rapid economic growth?”

Formulation of a hypothesis and null hypothesis

  • H1o: Fiscal policy is not very important in stimulating economic growth.
  • H1a: Fiscal policy is very important in stimulating economic growth.

Research methodology or strategy

The research paper will use both qualitative and quantitative research methods. This is because both opinions on the impact of fiscal policy and data supporting the impact will be included in the study. The research is entirely based on a case study where Saudi Arabia government will be considered as the case study which will be used to answer the research question and objectives.

The instrumentation that will be applied in the research for data collection purposes will be based on primary and secondary data collection methods. The secondary data collection methods to be used include journals, books, government financial statements, policy brochures, and any other relevant material. Primary data collection methods will include 25 questionnaires that will be distributed to the officials in the Saudi Arabian government. Among the target population of 100 people, only 25 will be selected. Systematic sampling method will be applied where number of people will be divided by 25 to get 4. The fourth person will be the first and the sequence followed till the twenty fifth person. Then questionnaires will be mailed to the sample.

Following steps will be followed in carrying out the case study.

  • Defining the issue
  • Collecting secondary data like from journals, financial statements, brochures, market trends, and books among other relevant financial materials.
  • Analyzing the data collected in the case study
  • Evaluating the collected data and carrying out comparisons to come up with the relevance between collected data and the case study data collected through primary data collection methods
  • Conclusion based on the findings and analysis of the reserach


Once the qualitative data has been collected from the surveys, journals, and other secondary sources of data, a manual and digital analysis will be conducted. This will ensure that a SWOT is realised for further analysis. Relevant authorities and the institutes will. Analysis will be based on case and within analysis process to give the required results. Coding of the cases study will give an interpretation of how fiscal policy has impacted economic growth.

Clarification of concepts and terms

Fiscal policy involves the decisions that are carried by and put into place by the federal or national government. It entails programs like borrowing, taxation, and government spending.

Monetary policy involves control measures and programs carried out by the reserve or central banks. However, both the fiscal and monetary policies can be used to manipulate country’s economic performance.

Reference List

Chai, W. (2005). Saudi Arabia: A modern reader. Indianapolis, IN: University of Indianapolis Press.

EDC. (2011). Saudi Arabia. Web.

Ghali, K. F. (1997). Government spending and economic growth in Saudi Arabia. Journal of Economic Development, 22(2), 165-172.

Joharji, G. A., & Starr, M. A. (2010). Fiscal policy and growth in Saudi Arabia. Web.

Riley, G. (2006). Fiscal policy. Web.

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