WAGNER'S LAW VS. KEYNESIAN THEORY: THE CASE FOR GCC COUNTRIES

Abstract

The relationship between government expenditure and economic growth is continually discussed. In some cases, one factor affects the other, and in other cases, the relationship does not exist. This paper provides further evidence on this relationship in the case of the Gulf Cooperation Council (GCC) countries during the period from 1992-2020. This research tests the view of Wagner's hypothesis that economic growth positively affects government expenditure. It also tests the opposite direction, which is the Keynesian view. Utilizing a panel data regression, the results prove a weak effect of both views for the GCC economies. Government expenditure is highly affected by changes in oil prices. Some governments cut their expenditure as a result of a drop in oil prices and others maintain current expenditure levels, at least in the short run. The form of government spending and the current structure of government finance in GCC economies prevent these two views from being valid.