Wagner's Law and social welfare: The case of the Kingdom of Saudi Arabia

This paper uses data from the Kingdom of Saudi Arabia (KSA) to empirically test Wagner's Law in explaining public expenditure growth in association with economic growth; and if this growth enhanced the public welfare. The Kingdom of Saudi Arabia (KSA) has witnessed a marked increase in government expenditure. We use the Engle and Granger (E-G) two-step cointegration method to examine the relationship between government expenditure and economic growth. Out of the four model specifications that we have tested, two models indicate that a positive long run relationship exists between government expenditure and economic growth. However, the income elasticities are not large enough to suggest that the growth in government expenditure exceeds the growth in national income; only that upward pressure is exerted. Looking at available data it is clear that governmental expenditures from GDP expansions increased public welfare for Saudis over the test period.