Publication: Gulf Economic Update, June 2025: Smart Spending, Stronger Outcomes - Fiscal Policy for a Thriving GCC
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Published
2025-06-20
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Date
2025-06-20
Author(s)
Chattha, Muhammad Khudadad
Maseeh, Ashwaq Natiq
Luan, Zhao
Thelejane, Morakane
Ftomova, Olena
Youssef, Hoda
Kawalec, Tobias
Wang, Xinyue
Yacine, Ouahioune
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Abstract
This special focus chapter analyzes the effectiveness of fiscal policy in fostering economic growth in the Gulf Cooperation Council (GCC) region. In doing so, the principal focus of the chapter is on fiscal multipliers, which measure the effect of changes in government spending or revenue on the country’s output (GDP). In simple terms, they quantify how much economic activity is generated by each dollar of fiscal policy action. The need to evaluate the effectiveness of fiscal policy is especially relevant for GCC countries given their intensified economic diversification efforts in recent years. Globally, fiscal policy has been playing a growing role, with public expenditure as a share of GDP growing in more than 70 percent of all countries since the Global Financial Crisis. In the GCC, the share of fiscal expenditure in non-hydrocarbon GDP ranges between 36 percent and 84 percent. As public spending is often undertaken through large-scale public investments, this calls for a better understanding of the returns on GDP from those investments, the effectiveness of capital allocation, and whether fiscal policies are well designed to maximize employment and job creation, among other objectives. On the revenue side, most of the income is related to sales of hydrocarbon products, as hydrocarbon sales revenue makes up between 40 and 90 percent of overall government revenues in 2023. The main policy takeaway is that fiscal policy is broadly effective at stabilizing cyclical fluctuations of (non-hydrocarbon) output, especially during times of economic dearth. While fiscal multipliers in the GCC appear to be positive across the board, they are generally weak and less than one, in line with the estimates in the literature for a multitude of other countries. Policymakers should therefore not expect multiplying effects in response to stabilizing fiscal policy measures, which occur for fiscal multipliers that are larger than one. This does not, however, imply a total absence of fiscal policy impact on output. As the estimated multipliers are significantly larger during recessions, the findings make a robust case for adopting countercyclical fiscal policy. Such countercyclical policy should aim at an expansion of demand through fiscal stimulus only during demand-driven downturns.
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“Chattha, Muhammad Khudadad; Maseeh, Ashwaq Natiq; Luan, Zhao; Thelejane, Morakane; Ftomova, Olena; Youssef, Hoda; Kawalec, Tobias; Wang, Xinyue; Yacine, Ouahioune; Bogetić, Željko. 2025. Gulf Economic Update, June 2025: Smart Spending, Stronger Outcomes - Fiscal Policy for a Thriving GCC. © World Bank. http://hdl.handle.net/10986/43355 License: CC BY-NC 3.0 IGO.”
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