Question

How is public finance concerned with the revenue and expenditure of public authorities? Discuss the three roles of public expenditure in the Saudi economy.

Answer 1

Although Saudi Arabia is one of the fastest growing economies in the Middle East and North Africa,2 its economy still depends heavily on the oil sector. Oil revenue accounts for roughly 90.0 percent of total government revenues, oil exports account for about 88.0 percent of total export earnings, and the oil sector contributes about 35.0 percent to GDP.

Given the importance of public expenditures in financing investment and consumption activities, Saudi Arabia’s fiscal policy plays a vital role in the economy. Saudi government activities may be divided into public investment, which is carried out by state-owned firms, and through government expenditures. The government expenditures consist of two types, current and capital. While the former includes wages, salaries, subsidies, transfers, and other expenses (i.e. consumption), the latter encompasses government spending on reinforcing human resources, providing social services and healthcare, developing economic resources, transportation and telecommunications, and increasing the availability of municipal and housing services.

In order to achieve better economic performance, Saudi Arabia adopted deliberate planning and careful implementation of a development program with clear goals by introducing the First Development Plan in 1970. With this first attempt, Saudi government has started a series of five-year plans that continues today. As can be seen from Figure 1, in the first three Development Plans (1970–1984) the government focused on financing the projects needed for improvement of education, health, housing, transportation, and telecommunication services. Thus, capital expenditure was as large as current expenditure. During the Fourth and the Fifth Development Plans (1985–1994), oil revenues significantly declined as the global prices for oil slumped. This drop was followed by a decline in real government spending. Furthermore, most infrastructure projects were completed, thus further eroding the share of capital expenditure.

Over the Sixth Development Plan (1995–99) the government’s strategic plans focused on development of human resources. Actual expenditure on development sectors amounted to US$112.1 billion of which US$57.7 billion was spent on human capital development.

The Seventh Development Plan (2000–04) further prioritized human capacity development. Total government expenditure amounted to US$129.4 billion of which 57.1 percent was allocated to human capital development, 19.1 percent for social and healthcare development, and 12.6 percent for infrastructure. During the Eighth Plan (2005–2009), total government expenditure reached US$230.4 billion of which 55.6 percent was allocated to human resources development, 18.0 percent for social and health development, 12.2 percent for economic resources, and 14.2 percent for infrastructure.

Please rate my answer