The Relationship between Government Expenditure and Revenues in the Kingdom of Saudi Arabia: Testing for Cointegration and Causality

This study examines the long run equilibrium relationship between government expenditure and revenues in the Kingdom of Saudi Arabia using Cointegration technique and the direction of causality relationship in the long and short runs between the variables through integrating the Error Correction Model (ECM) into the traditional Granger causality test. The unit root test shows that the series under investigation are non stationary at their levels, where they are stationary at their first differences. The Cointegration test indicates the existence of long run equilibrium between government expenditure and revenues. The causality tests indicate that there is a bi-directional causal relationship between government expenditure and revenues in both the long and the short run. I. Introduction