The optimal government size in the kingdom of Saudi Arabia: An ARDL bounds testing approach to cointegration

Al-Abdulrazag, Bashier Article The optimal government size in the kingdom of Saudi Arabia: An ARDL bounds testing approach to cointegration Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Al-Abdulrazag, Bashier (2021) : The optimal government size in the kingdom of Saudi Arabia: An ARDL bounds testing approach to cointegration, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 9, Iss. 1, pp. 1-19, https://doi.org/10.1080/23322039.2021.2001960 This Version is available at: https://hdl.handle.net/10419/270179 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 Cogent Economics & Finance ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/oaef20 The optimal government size in the kingdom of Saudi Arabia: an ARDL bounds testing approach to cointegration Bashier Al-Abdulrazag | To cite this article: Bashier Al-Abdulrazag | (2021) The optimal government size in the kingdom of Saudi Arabia: an ARDL bounds testing approach to cointegration, Cogent Economics & Finance, 9:1, 2001960, DOI: 10.1080/23322039.2021.2001960 To link to this article: https://doi.org/10.1080/23322039.2021.2001960 © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 22 Nov 2021. Submit your article to this journal Article views: 923 View related articles View Crossmark data Citing articles: 1 View citing articles GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE The optimal government size in the kingdom of Saudi Arabia: an ARDL bounds testing approach to cointegration Bashier Al-Abdulrazag* Abstract: This study attempts to estimate the optimum government size in the kingdom of Saudi Arabia (KSA) using annual data covering the 1971–2019 period by applying the linear and nonlinear Autoregressive Distributed Lag ARDLð Þ Model. The main focus is whether the Armey curve is valid for KSA. The statistical diagnostic tests provide an evidence for the model adequacy and that the estimation results are reliable. Moreover, the ARDL short-run estimation results revealed that the speed of adjustment is (−0.82) indicating that it takes about 14 months to correct toward the long-run equilibrium due to a short-run shock. The NARDL estimation results revealed asymmetric relationship between government expenditures and economic growth. Further, a positive shock has a positive impact while a negative shock reduces economic growth. Based on the long-run estimation results, the optimum government size is 26.9 as a share of GDP, which is greater than the average share (24.2) during the study period. Based on such result, it is obvious that Saudi Arabia has a room to increase the expenditures share up to the optimal size estimated in the study. Subjects: Social Sciences; Economics, Finance, Business & Industry; Economic; Macroeconomics; Finance; Public Finance Keywords: E62; i18; q31 ABOUT THE AUTHOR Professor of economics at King Saud University (KSA) and Mu’tah University (Jordan). Holding PhD in economics Graduated from Texas Tech. University USA in 1991. My research interests focus Labor Economics, Applied econometrics (TSA), Economic Theory, and International trade. I have published in various Journals: The Journal of Energy and Development, European Scientific Journal, Journal of Empirical Economics., The Jordan Journal for Agricultural Science. Moreover, participating in refereeing for many journals, supervising many graduate theses. PUBLIC INTEREST STATEMENT Nowadays, countries are very concerned about achieving an acceptable economic growth that would maintain a high living standard. Following the economic theory, the involvement of government though increasing its expenditures is believed to achieve this goal. Hence, there is a direct link between economic growth and government expenditures; however, this link is nonlinear one. This means that up to a certain level of government share of GDP, the relation inversed from positive to negative. Therefore, understanding the true nature of such relation and the maximum government expenditure helps government in dealing with budget deficit. This article studies the validity of Armey curve in the Saudi Arabia and estimates the level of government share of GDP that achieve the maximum-level economic growth. The empirical findings show that for the economic growth to maximum, the government share of GDP should be 26.4. Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 1 of 19 Received 02 March 2021 Accepted 31 October 2021 *Corresponding author: Bashier AlAbdulrazag, College of Business Administration, King Saud University, PO Box 2459, Riyadh 11451, Jordan. E-mail: [email protected] Reviewing editor: Walid Mensi, University of Tunis el Manar, Tunisia Additional information is available at the end of the article © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. 1. Introduction No doubt that the government size and economic growth relationship have been crucial and important matters in economics for policy makers. However, this relation is still a controversial issue among economic schools regarding the role of government size in achieving and stimulating economic growth. According to Keynesian school, government expenditure is considered as one component of GDP, and hence, increase in its government expenditures increases GDP level, which is in turn translated into economic growth. However, the classical school, increasing government expenditures reduce economic growth particularly in the long run. Since the end of the 20 th century, the debate among policy makers and economists centers on the optimal and the negative impact of government size on economic growth (Richard Armey, 1995; Scully, 1994). The increasing government expenditures share, the relatively high budget deficit ratio, and public debt have motivated this debate. It is well documented in the applied research that the relation between government size and maximum economic growth is uncertain, and there must be a certain size that can be seen in the mix applied results (Altunc & Celil, 2013; Shaboot, 2018). This means that the effect will not be always positive infinitely. The applied economic research provided that the effect will be positive for developing countries since they are still in the early stages of economic process, whereas it is negative for developed countries since they are in very advanced stages. At the end of the 20 th century, a new strand of economic research led by (Armey, 1995; Barro, 1990; Scully, 1994) arose to determine the optimal government size that would achieve the maximum economic growth. Initially, effect was positive on economic growth up to a certain level, and then, any size beyond this caused economic growth to decline. This new strand of research enables policy makers to stimulate economic growth through controlling this ratio (size). A huge body of the previous applied research on this matter confirms the existence of Armey curve, where the relationship between the two variable is a nonlinear one, and it takes the inverted U-shaped. This conclusion implies that at lower government expenditures share, the relation is positive but at a diminishing pattern until it reaches a maximum share at which economic growth is optimal. Exceeding the optimal level, then the relation becomes negative. This kind of research uses different estimation approaches, different data set, different time horizon. Nevertheless, they reach the same conclusion that is the inverted U-shaped. Moreover, the optimal size in not unique for the countries (Turan, 2014). As for KSA case, the government is putting a maximum effort to achieve a high sustainable economic growth rate that exceeds population growth rate. However, this effort is faced with few problems, such as the ratio of budget deficit to GDP, and the volatile oil prices, which affects government revenues. Nevertheless, the Saudi government tries to cut the budget deficit ratio through implementing government expenditures rationale policy and restructuring the tax system laws. The importance of the study arises from the fact that determining the optimal government size is a crucial issue in achieving the pursued maximum economic growth. In addition, it differs from previous studies in KSA in few aspects, they used different estimation and approaches, for example, Barri (2001) used the Standard OLS estimation and Johansen cointegration, Aly and Strazicich (2000) used Barro (1990) and Karras (1997) approaches, and Ahmad (2020) used Khan and Senhadji (2001). Moreover, they utilized data length ranged from 1970 to 2016. Hence, the present study contributes to the present literature regarding Saudi Arabia through investigating the validity of The Army Curve (1995) by applying a modern estimation technique (ARDL) model Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 2 of 19 (Pesaran et al., 2001), using longer time horizon from 1971 to 2019, and adds variables that are believed to affect economic growth. Additionally, the study will suggest some policy implications. The study is constructed of five sections. In addition to the introduction, Section 2 presents the literature review including theoretical background and a survey of previous applied work. Section 3 presents a brief statistical descriptive analysis on the historical development of government expenditures in KSA over the study period. Section 4 contains the study’s methodology which describes the econometric model and data. Section 5 presents and discusses the estimation results. Finally, Section 6 contains a conclusion and policy implementation. 2. Review of literature The relation between government expenditures and economic growth has been investigated theoretically and empirically since the end of the 20 th century. Furthermore, the debate is still going on among different economic doctrines. This section consists of twofolds. The first fold presents the theoretical framework of the economic growth—government expenditures nexus as depicted in the existing economic theories. The second fold surveys the empirical research work carried out on this issue. 2.1. Theoretical framework This section reviews the debate and proposed models to measure the optimal government size that maximizes economic growth. 2.1.1. Wagner’s law The core theme of Wagner’s law introduced by Adolph Wagner (1886) is that government sector grows faster than the economy (Al-Abdulrazag & Azoubi, 2005). Additionally, the law proposed that causation runs from economic growth to government expenditures through the increase in demand for public goods and service. 2.1.2. The Keynesian theory The Keynesian theory relied on the concept of aggregate demand that would positively affect the level economic growth. This idea goes back to great depression period where Keynes argued that increasing government expenditures coupled with interest rate reduction would stimulate and encourage private sector to increase investment, and hence increase economic growth through the increase in aggregate demand. According to multiplier effect, increases in government spending encourage producers to produce more. 2.1.3. The army curve concept The assumed nonlinearity feature between government expenditures GE and economic growth EG was initially investigated by Richard Armey (1995). The Armey Curve is based on the theories of market failure, which support government intervention to provide public goods and correct for negative externalities (Magana, 2015). Moreover, the theory focuses on the possible adverse effects of government size. Armey (1995) introduces the optimal government size concept. The core of his work points out that the relation is an inverted U-shapes, and since then, it is referred to as Armey Curve. Moreover, at low levels of government size increases economic growth till it reaches an optimal size that maximizes economic growth, after which economic growth declines. Armey translates this relation into graphical representation as shown in the Figure 1. At point Að Þ, low government expenditures increase economic growth up to point Bð Þ, which represents the optimum size GE�maximizes economic growth. Further increase in government expenditure beyond the optimum level economic growth declines. Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 3 of 19 The Justification for the relation’s behavior stems from that fact that as the share of GE increases the EG in response also increases. Unfortunately, this behavior pattern of GE does not sustain infinitely. The positive correlation prevails up to GE�where the marginal productivity of public expenditures equals to private sector’s where this maximum EGis associated with GE�. Any level of GE beyond the, the marginal effect of GE becomes negative, and hence, exerts negative impact on maximum.EG: The initial positive relationship between GE and EG stems from the fact at early stages of development process, and increase in GE acts as a stimulus to private investors to engage in industrialization activities. At this stage, both GE and private sector jointly exert a positive effect on EG as expected. However, this positive relation is reversed after GE�level of GE where the EG is maximum. Any increase in GE beyond GE�triggers the crowding-out effect on private investment, and hence, GE becomes inefficient because of the diminishing returns. This discussion concludes that an increase in GEGE beyond the threshold level GE�declines growth rate (Abounori & Nademi, 2010). The Armey curve model is as follows: yt ¼β0þβ1GEtþβ2GE2 tþβ3Xtþεt Where GE2 t is the quadratic form, 1 yt represents economic growth, and Xt is a vector of some economic control variables, and εt is the error term assumed to be normal distributed with zero mean and constant variance. The estimated results are used later to calculate the optimum government size by differentiating equation (1) with respect to GE as follows: GE�¼β1 2β2 2.1.4. The Scully model Scully (1994) proposed estimated the optimal government size. His model takes the Cobb-Douglas production function as follows: Figure 1. Armey curve. Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 4 of 19 Y¼αGt1 ð Þb1τð ÞYt1 ½ �c Where τ is the tax rate measured as the share of government expenditures τ¼GE=GDPð Þ: Furthermore, the model assumes the budget-balanced case, and then, the government expenditures equal to the value of tax returns GE ¼τYð Þ. After modifying the model to include the balanced-budget assumption, the model becomes as follows: Y¼α τt1Yt1 ð Þb1τð ÞYt1 ½ �c The optimal size of government is determined by maximum τ�by differentiating the equation with respect to τ. The maximum size of government is calculated by using the following formula: τ�¼b=bþc The Scully model suffers from a weakness in that it relationship produces spurious estimate of an optimal tax (Magana, 2015). 2.2. Empirical literature The issue of the relationship between the optimal government expenditures and economic growth is still controversial. Some economists argued that this relation is positive where economic growth causes government expenditure, whereas, others believe it is negative. Nevertheless, the solution to this problem is an applied application matter. Another issue concerning this relation is the optimum size of government sector. A huge body of literature relied on Armey Curve that advocates the existence of nonlinear relation using various estimation techniques such as OLS, FMOLS, and DOLS, and indicate that the optimal government size varies among countries. Another research predicted the optimal share of government that maximizes economic growth avenue followed the Barro model (1990). Accordingly, economic growth reaches its maximum when the government expenditure level is at its optimal provided that the value of marginal productivity equals 1. Ahmad (2020) estimated the threshold of optimal government size (share of GDP) to be 27.2% in Saudi Arabia over the period 1970–2016 using the ARDL estimation technique. García (2019) confirm the Armey curve’s validity for Spain where the optimal size is 40.07% over the period 1980–2016 using the OLS estimation method. For the Algerian case, Rennane (2019) applying Sully model for 1973–2018 period using the (DOLS) and the (FMOLS) estimation methods, he showed that the estimated optimal government size is 29%. Moreover, applying Barro model using FMOLS and DOS methods, Nuredin (2019) found the optimum government spending between 23.6% and 34.9% in Algeria over the 1970–2017. Duasa (2018) could not confirm the optimum size of government for 49 Muslim countries over the period 2009–2013 using pool OLS and GMM estimations techniques. Shaboot (2018) estimated the optimal government size to be 37% in Algeria by applying the ARDL approach to Armani curve and Barro model over the 1980–2016 period. Murshed et al. (2017) investigated the validity of Armey Curve in south and Southeast Asian countries for 1980–2016 period using panel data estimation (FE). They estimated that the optimal government size was 148,627.5 and 57,765.7 million US dollars. Tabaghua (2017) estimated government optimal size to be 21% in Georgia by applying the correlation method for the period 2002–2014. Magana (2015) examine Army curve’s validity in Kenya over the period 1963–2012 using the OLS estimation method, estimated optimal government size was 23% of GDP. Turan (2014) examined the application of Armey curve for Turkey over the periods 1950–2012 and 1970–2012. The results for the two periods were different; 8.8–9.1% and 15.4–17% of GDP for the periods 1950–2012 and 1970– Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 5 of 19 2012, respectively, indicating that Armey curve is sensitive to the sample size. Altunc and Celil (2013) examined the validity of Armey curve over the period 1995–2011 using the OLS estimation method. They found the optimum size was 25.1%, 20.44%, and 22.45% for Turkey, Bulgaria, and Romania, respectively. Applying the standard OLS estimation method and Johansen cointegration to Saudi Arabia data over the period 1970–1998, Barri (2001) showed that the optimal government size is 29%. Aly and Strazicich (2000) findings revealed that the optimal government size is 2% in KSA. 3. Statistical descriptive analysis Table 1 reports the descriptive data analysis. Looking at the share of general government expenditures (LGE), one can observe that it averaged about 24.1% annually, reached its maximum at 35.23% in year 1987, and a minimum share at 8.432% in year 1974. Concerning the economic growth (EG), it averaged annually at 2.57%, reached a maximum value of 24.17% in year 1973, and a minimum equal to (−20.73) in year 1982. (Figure 2) shows the historical development of both economic growth and government size over the study period. It seems that government expenditures exhibit less fluctuation over time than economic growth. This could be attributed to the oil price fluctuations. Since GDP is the total oil and nonoil GDP; hence, any fluctuation in oil prices will affect GDP and then economic growth. For the government status, this can be explained by the effort of government to keep government expenditures steady and stable as possible. Another observation is that there is a kind of inverse relation between the two variables over the study period, where there are years where an increase in government, especially high share, is associated with a decrease in economic growth. Table 1. The statistical descriptive of the model data LEG LGE GFCF CPI OPEN FDISH Mean 3.575625 24.10201 6.23E+10 79.20242 4.329146 1.150417 Maximum 24.17000 35.22240 1.95E+11 120.9313 4.792648 8.500000 Minimum −20.73000 8.431734 1.18E+09 24.49945 4.026929 −8.220000 Std. Dev. 8.926783 5.874672 6.04E+10 22.11164 0.164521 2.962749 Jarque-Bera 0.768473 0.664211 9.799309 0.335970 1.023006 5.002392 Probability 0.680970 0.717411 0.007449 0.845367 0.599594 0.081987 -30.00 -20.00 -10.00 0.00 10.00 20.00 30.00 40.00 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 EConomic Growth (Z), GOV SIZE (Y) Year y z Figure 2. Economic growth-Gov. size (1971–2019. Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 6 of 19 (Figure 3) provides a better picture for the comovement of the two variables, government size on the horizontal Axis, while the economic growth on the vertical axis. It can be seen from the graph the association pattern between the two variables. Generally speaking, high levels of government expenditures is associated with low (even negative) economic growth. It is worth noting that this association cannot be attributed to the government expenditures only, but there are other factors that could have attributed to this association, in particular oil prices fluctuation among other factors. 4. Econometric methodology and data source The article utilizes the ARDL model (Pesaran et al., 2001) to investigate the long-run pass-through of government expenditures into economic growth in KSA. Moreover, the NARDL is employed to test the asymmetric relationship between government expenditure and economic growth. In economic literature, the economic growth–government expenditures nexus is usually investigated by employing the widely used estimation techniques: cointegration, error-correction model ECM, VCEM, Granger-Causality, FMOLS, and DOLS. 4.1. The econometric model Following the discussion of the previous applied research, the relationship is: LEGt¼α0þβ1LGEtþβ2LZtþεt(1) Where LEGt is the economic growth proxy by real GDP, LGEt is the government size (share of GDP), LZt is a set of control variables thought to affect LEGt, they are trade openness LOPENð Þ is the trade share, capital LKð Þ measured by gross fixed capital formation, the foreign direct investment share FDISHð Þ, and the Consumer Price Index LCPI;2010 ¼100ð Þ, εt is the error term, and L refers to the natural logarithm. Expressing the estimation model in the logarithm, transforms the variables’ parameters into elasticities. The expected positive sign of LGE parameter β1 means that there is a direct relation with LEGt. To estimate the Armey curve, a quadratic form of government expenditures LGESQt has been added to account for the nonlinearity of LGE, and it becomes as follows: LEGt¼α0þλ1LGEtþλ2LGESQtþλ3LZ þεt(2) The sign of λ1 and λ2 are expected to be positive and negative impacts on LEGt, meaning that government expenditures effect economic growth positively but at decreasing rate, that is the -25.00 -20.00 -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00 25.00 30.00 13.34 14.16 14.53 18.32 21.65 19.55 29.76 31.90 35.22 33.60 34.16 26.30 23.46 26.03 25.41 27.33 24.48 21.34 20.66 22.19 19.39 22.45 30.00 24.44 23.85 Egonomic Growth rate % govenment expenditure share of GDP % Figure 3. Development of GESH and EG. Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 7 of 19 Note that as k! 1;mþ k!βþandmþ k!β 5.4.1. Analyzing and discussing NARDL results The purpose of applying the NARDL methodology is to examine the response of economic growth to positive and negative shocks in general government expenditures, in other words, is there a long-run asymmetric relationship between economic growth and government expenditures in KSA over the study period. If the relation is asymmetric, then there is a nonlinear relation between the two variables. On the other hand, if relation is symmetric, then there is a linear association between the two variables. Table 7 presents the results of the bound test of cointegration. The results provide evidence on the rejection of the null hypothesis which states that there is no cointegration and the acceptance of the alternative hypothesis of the existence of a long-run relationship between model variables as shown by the significant F-bound test at 1% level of significance which is equal to 13.36. Having found that the model is valid and stable, the next step is to analyze the NARDL estimation results to examine the nature of the relationship between government expenditures and economic growth, that is whether it is asymmetric or symmetric. Table 8 presents the NARDL the positive and negative short-run government shocks estimation results. The results of statistical diagnostic tests required to ensure that the estimated model is free of such problem, and hence, the reliability of the estimated results are presented in Table 9. The statistical test results provide evidence that the model is free of statistical problems, i.e. the residuals are normally distributed show by the Jarque-Bera test, the model is free of the autocorrelation problem indicated by the LM test, and the variance of the error term is homoscedasticity and indicated by BPG test. Therefore, estimation results are valid and reliable. Moreover, the CUMUS and CUSMUSQ stability tests indicate the parameters are free of any structural break. Further, Table 10 presents the Wald-test results of the long-run and short-run asymmetries between the LGEX_POS and LGEX_NEG variables. Accordingly, the Wald-test statistics indicates that there is a difference between the effects of positive and negative shocks in government expenditures on economic growth in long run as well as short run. Hence, one can conclude that there is a long-run and a short-run asymmetric relationship between economic growth and general government expenditures. The long-run effects of the model variables on economic growth are reported in Table 11. It shows that all variables are statistically significant at less than 5% significant level except LOPEN and LCPI variables. Since the main objective of the paper is to examine the effect of positive and negative shocks in government expenditure, the discussion focuses on these two variables. The Table 7. The F-bound test results of NARDL F-bounds test Null hypothesis: No levels relationship Test statistic Value Sig. I(0) I(1) F-statistic 13.36 10% 1.99 2.94 k 6 5% 2.27 3.28 2.5% 2.55 3.61 1% 2.88 3.99 Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 14 of 19 long-run NARDL results presented in Table 11 indicate that both the positive and the negative shocks have negative signs. The negative relationship between positive shock in government expenditures and economic growth means that an increase in government expenditure reduces economic growth. A 1% increase in Government expenditures causes a 0.156% decrease in economic growth. Such relation reflects the crowding-out effect on the private-sector investment. The increase in government expenditures put upward pressure on government to finance through either taxes or bondTable 10. Results of short-run and long-run asymmetry tests Statistical test F-stat Prob H0 Long-run 2.738 0.0131 reject Short-run 2.476 0.0229 reject Table 8. Results of NARDL (2, 3, 2, 2, 3, 2, 4)* Variable Coefficient Std. error t-Statistic Prob.* EG(−1) 0.036735 0.144252 0.254656 0.8017 EG(−2) −0.453076 0.180167 −2.514752 0.0211 LGEX_POS −0.016070 0.131792 −0.121931 0.9042 LGEX_POS(−1) 0.054834 0.195969 0.279810 0.7826 LGEX_POS(−2) −0.490144 0.194493 −2.520116 0.0208 LGEX_POS(−3) 0.229310 0.086670 2.645780 0.0159 LGEX_NEG −0.598353 0.163831 −3.652255 0.0017 LGEX_NEG(−1) −0.427688 0.241873 −1.768235 0.0931 LGEX_NEG(−2) 0.537032 0.142516 3.768233 0.0013 LOPEN −0.328711 0.135094 −2.433203 0.0250 LOPEN(−1) 0.195544 0.186132 1.050564 0.3066 LOPEN(−2) −0.376788 0.120177 −3.135266 0.0054 LK 0.307476 0.114044 2.696108 0.0143 LK(−1) 0.114276 0.124759 0.915966 0.3712 LK(−2) 0.104205 0.118633 0.878378 0.3907 LK(−3) −0.226333 0.081399 −2.780552 0.0119 LFDISH −0.017372 0.003234 −5.372458 0.0000 LFDISH(−1) 0.007493 0.005241 1.429837 0.1690 LFDISH(−2) −0.017154 0.004562 −3.760573 0.0013 LCPI 0.629643 0.299830 2.099998 0.0493 LCPI(−1) −0.708961 0.576699 −1.229341 0.2340 LCPI(−2) 0.678718 0.566372 1.198360 0.2455 LCPI(−3) 0.751603 0.473789 1.586369 0.1292 LCPI(−4) −0.835498 0.204193 −4.091716 0.0006 DUM −0.017815 0.158812 −0.112173 0.9119 C 30.01589 4.672212 6.424342 0.0000 *The lag length was determined according to IAC to be 4 lags Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 15 of 19 Table 9. Statistical diagnostic tests Statistical test Breusch-Godfrey serial correlation LM Test: Heteroskedasticity test: Breusch-Pagan-Godfrey Jarque-Bera Stability Value 1.57 0.787 0.647 CUSUM (S) F-statistic 0.235 0.716 0.723 CUSUMSQ(s) Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 16 of 19 financing methods. Bond-financing, if exceeds high values, will compete with private sector leading to crowding-out effect, which in turn reduces private investment, and hence, reducing output. On the other hand, if the government chooses to finance its expenditures through taxes, this leads to increase tax rate which is close to average propensity to consume, leading to a decrease in the aggregate demand, and then economic growth. The negative change in government expenditure decreases government expenditure and economic growth. A 1% decrease in government expenditure leads to a 0.34% decrease in economic growth. This result implies that there is certain level of government expenditure that maintains a maximum level of economic growth, and any deviation from this level results in a decline in economic growth level. Further, this result supports the maximum level that was found by ARDL estimation. The estimation results show that both trade openness (OPEN) and price level (LCPI) indicate insignificant negative impacts on economic growth; foreign direct investment exerts a significant negative impact on economic growth, and capital (LK) has a significant positive impact on economic growth. The dynamic multiplier shows that there is a difference between positive and negative impacts on economic growth. 6. Conclusion and remarks The relationship between government expenditures and economic growth is a controversial issue among schools of economic thought. The Keynesians advocate the positive relation, while the classical doctrine believes it has a negative impact. As a result, a new strand of applied research has investigated whether a certain level of government size that maximizes economic growth exists. Recently, Saudi Arabia put forward the 2030 vision as a strategy to achieve economic goals as well as social goals. One major objective of the 2030 vision is to reduce the budget deficit as possible. Hence, the study estimates the long-run government optimum size in Saudi Arabia using annual data over the 1971–2019 period by applying the linear and nonlinear ARDL bounds-test approach to cointegration. The main focus is whether the Armey-curve is valid for KSA. The statistical diagnostic test provide evidence on the model adequacy. Moreover, the ARDL short-run results revealed that the speed of adjustment is (−0.82), and it take the model to correct toward the long-run equilibrium in about 14 months as a results of a short-run shock. The long-run estimation results provide that 26.9% is the optimal government size, which exceeds the average size (24.2%) over the study period. The NARDL estimation results revealed asymmetric relationship between government expenditures and economic growth. Further, a positive shock reduces economic growth as well as a negative shock. Hence, there is a certain level of government expenditure associated with maximum economic Table 11. Asymmetric NARDL long-run coefficients Variable Coefficient Std. error t-Statistic Prob LGEX_POS −0.156791 0.066062 −2.373410 0.0283 LGEX_NEG −0.345262 0.105348 −3.277358 0.0040 LOPEN −0.360051 0.194659 −1.849653 0.0800 LK 0.211548 0.090341 2.341660 0.0302 LFDISH −0.019086 0.003204 −5.957059 0.0000 LCPI 0.363970 0.271371 1.341227 0.1957 C 21.19255 0.472055 44.89426 0.0000 EC = EG—(−0.1568*LGEX_POS −0.3453*LGEX_NEG −0.3601*OPEN + 0.2115 *K − 0.0191*FDISH + 0.3640*LCPI + 21.1926) Al-Abdulrazag, Cogent Economics & Finance (2021), 9: 2001960 https://doi.org/10.1080/23322039.2021.2001960 Page 17 of 19 growth level. Further, any deviation away from this level reduces economic growth. Based on such result, Saudi Arabia has the chance to expand expenditures to its optimal. Hence, the study recommends that Saudi Arabia can increase its government expenditures share of GDP up to 26.9%. Funding The author received no direct funding for this research. 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