Said Alshaikh1
Hoda Mansour- 1College of Business Administration, University of Business and Technology, Jeddah, Saudi Arabia
- 2Faculty of Commerce, Assiut University, Asyut, Egypt
This study provides a rigorous assessment of Saudi Arabia’s fiscal sustainability over 1991–2023 using an advanced ARDL framework that simultaneously captures short-run fiscal dynamics and long-run equilibrium behavior. Modeling the fiscal balance as a function of government revenue, expenditure, and public debt (as shares of GDP), and supported by mixed orders of integration in the data, the ARDL bounds test confirms a stable long-run cointegrating relationship among the fiscal variables. The error-correction term is highly significant and large in magnitude, indicating rapid reversion of fiscal imbalances toward equilibrium. Structural break tests identify a major regime shift around 2016, reflecting the combined effects of the oil price collapse and the institutional reforms introduced under Vision 2030. Long-run estimates reveal that government revenue is the principal determinant of fiscal sustainability, whereas expenditure and public debt exhibit weaker long-run effects. Short-run dynamics show that the fiscal balance responds sharply and asymmetrically to changes in revenue and spending, underscoring its sensitivity to policy adjustments and external shocks. Extensive robustness checks—stability diagnostics, causality tests, and residual analysis—validate the coherence of the estimated model. Overall, the findings contribute to the fiscal sustainability literature by offering country-specific evidence that incorporates structural breaks and institutional reforms into an ARDL framework, demonstrating that Saudi Arabia’s post-2016 policy transformation has materially strengthened the economy’s long-run fiscal adjustment mechanism.
Introduction
Fiscal sustainability is widely recognized as a cornerstone of macroeconomic stability, as it reflects a government’s ability to meet its present and future obligations without resorting to excessive debt accumulation or undermining long-term growth (Buiter, 1985; Blanchard, 1990). The COVID-19 pandemic reignited global concerns about solvency, as public debt ratios surged across advanced and emerging economies (International Monetary Fund, 2023). Recent cross-country studies show that while many economies exhibited sustainable fiscal responses prior to 2020, fiscal reaction coefficients weakened significantly thereafter—particularly in emerging markets—highlighting more fragile post-pandemic trajectories (Campos and Cysne, 2025; Afonso et al., 2025).
These concerns are magnified in resource-dependent economies, where government revenues are tightly linked to volatile commodity prices. Oil exporters, in particular, experience pronounced boom–bust fiscal cycles that complicate long-term planning and heighten vulnerability to external shocks (Magazzino, 2022; Kharbach and Sbia, 2022). When prices are high, governments expand spending; when they fall, abrupt fiscal adjustments become necessary, often involving spending cuts, borrowing, or depletion of sovereign assets (Hamdi and Sbia, 2013; Ma et al., 2022). Countries such as Nigeria illustrate how reliance on a narrow revenue base, combined with procyclical expenditure patterns, can lead to recurrent fiscal stress and heightened debt vulnerability (Reinhart et al., 2012; Adebisi and Salako, 2020). By contrast, commodity exporters that save windfalls in stabilization funds and diversify their tax systems tend to enjoy more stable fiscal paths (Shabsigh and Ilahi, 2007; Baunsgaard and Symansky, 2022).
Saudi Arabia exemplifies these challenges. Historically, fiscal outcomes have mirrored movements in global oil prices, with windfalls financing investment and social spending, and downturns—such as the 2014–2016 oil price collapse—exposing structural weaknesses (International Monetary Fund, 2023; World Bank, 2024). Expenditure has tracked oil revenue closely, contributing to procyclical fiscal behavior observed across the GCC (Magazzino, 2022). This model supported rapid development but left public finances exposed to terms-of-trade shocks and raised questions about sustainability in an era of increasingly uncertain oil demand.
In response, the Kingdom launched Vision 2030 in 2016, an ambitious reform program aimed at diversification and fiscal restructuring. Key measures include VAT introduction and expansion, new non-oil revenue instruments, subsidy and energy-price reforms, and the establishment of the Fiscal Sustainability Program to mitigate procyclicality (International Monetary Fund, 2023; World Bank, 2024). These shifts coincide with a period of low oil prices and represent a structural break in fiscal behavior. Whether these reforms have fundamentally improved long-run sustainability remains an open empirical question, particularly in the face of continued oil price volatility, rising public debt, and global uncertainty.
This question matters beyond Saudi Arabia. Oil exporters across the Middle East, Africa, and Eurasia confront similar fiscal pressures, amplified by the accelerating global energy transition (Arezki and Gylfason, 2021; Baunsgaard and Symansky, 2022). Vision 2030 stands as one of the most comprehensive attempts to “future-proof” a hydrocarbon-dependent economy, offering potential lessons for peers such as the United Arab Emirates, Kuwait, Russia, and Nigeria. As decarbonization progresses, risks of stranded assets and declining oil revenue intensify, making diversification and stronger fiscal institutions imperative (Arezki and Gylfason, 2021; Ma et al., 2022).
Given these dynamics, a rigorous, country-specific assessment of Saudi Arabia’s fiscal sustainability is both timely and policy-relevant. Existing panel-based studies provide valuable cross-country insights but may obscure national-level dynamics, institutional features, and reform episodes (Campos and Cysne, 2025; Afonso et al., 2025; Magazzino, 2022). Moreover, the 2014–2016 oil price collapse and the launch of Vision 2030 represent structural breaks that conventional time-invariant models are unlikely to capture.
This study addresses these gaps by applying an ARDL framework to assess Saudi Arabia’s fiscal sustainability over 1991–2023. The fiscal balance is modelled as a function of government revenue, expenditure, and public debt, consistent with intertemporal budget-constraint and fiscal-reaction-function theory (Bohn, 1998; Escolano, 2010). The ARDL approach is particularly suitable because it accommodates mixed integration orders, estimates both short-run dynamics and long-run cointegration, and allows explicit modelling of structural breaks (Pesaran et al., 2001; Akinkunmi, 2016; Menegaki, 2019; Rathnayake, 2019; Behera and Dash, 2020).
The results provide updated empirical evidence on whether Saudi Arabia is progressing toward a more sustainable fiscal path under Vision 2030. Revenue—supported by emerging non-oil streams—dominates long-run fiscal dynamics, while expenditure and debt exert more short-run effects. A large and significant error-correction term indicates rapid adjustment to long-run equilibrium, and the significant post-2016 structural break confirms a meaningful shift in fiscal behavior.
Overall, this study offers a focused, country-specific contribution to the fiscal sustainability literature, linking Saudi Arabia’s evolving fiscal structure to broader debates on oil-exporter vulnerabilities, global transition risks, and the implications of large-scale reform agendas such as Vision 2030.
Literature review
Fiscal sustainability is traditionally framed through the government’s intertemporal budget constraint, which requires the present value of future primary balances to cover existing debt (Buiter, 1985; Blanchard, 1990). Two empirical traditions follow from this framework. The first tests whether government revenues and expenditures are cointegrated, implying long-run fiscal discipline and the absence of persistent deficits (Hamilton and Flavin, 1986; Trehan and Walsh, 1991). The second, the fiscal reaction function (FRF), evaluates whether governments adjust the primary balance in response to rising debt (Bohn, 1998). A positive reaction coefficient indicates that fiscal authorities “lean against” debt accumulation (Afonso, 2005; Escolano, 2010).
Earlier approaches relying on unit-root tests and simple cointegration often produced inconclusive sustainability assessments, especially in environments subject to structural shocks (Afonso, 2005; Escolano, 2010). This led to increasing reliance on dynamic error-correction frameworks capable of capturing both short-run fiscal adjustments and long-run equilibrium relationships (Mahmood, 2021). Structural-break modelling also became essential as fiscal series for many countries—including oil exporters—were shaped by crises, policy reforms, and volatility episodes. Studies drawing on Zivot and Andrews (1992) and Perron-type break tests highlight that ignoring regime shifts can distort unit-root and cointegration inference (Chibi et al., 2019; Behera and Dash, 2020).
The Autoregressive Distributed Lag (ARDL) framework (Pesaran et al., 2001) has gained prominence because it accommodates variables with mixed orders of integration, performs well in small samples, and jointly estimates long-run relationships and short-run adjustment dynamics (Akinkunmi, 2016; Menegaki, 2019; Mahmood, 2021). The associated error-correction term offers a direct measure of fiscal adjustment speed, a key indicator of sustainability.
Recent developments include nonlinear ARDL (NARDL) and dynamic ARDL simulations, which capture asymmetric fiscal responses and allow scenario-based projections (Khan and Khan, 2023; Darwez et al., 2023; Abderzag et al., 2024). These methods are particularly relevant for oil-exporting economies, where fiscal variables respond differently to positive and negative oil price shocks (Abdel-Latif et al., 2018; Aljarallah, 2020). Recent empirical and theoretical studies highlight the importance of institutional quality, revenue diversification, and fiscal reaction mechanisms in sustaining public finances across both advanced and emerging economies. Evidence from resource-dependent and developing countries shows that fiscal sustainability is closely linked to revenue volatility, debt dynamics, and policy responsiveness (Abdulle et al., 2025; Afonso and Jalles, 2021; Alalmai, 2025; Malik and Nagesh, 2020; Olushola et al., 2023; Salaudeen, 2023). ARDL-based and nonlinear approaches have been widely applied to examine fiscal behavior and macroeconomic adjustment, particularly in oil-exporting and emerging economies (AlMarzoqi et al., 2023; Alshaib et al., 2023; Eita et al., 2021; Fadol, 2020; Islam et al., 2021; Tadesse and Merra, 2019). Recent panel and country-specific studies further emphasize the role of institutional reforms, fiscal rules, and structural change in shaping long-run sustainability outcomes (Elmassah and Hassanein, 2025; Ezzat and Emira, 2025; Filho et al., 2022; Lima Campos and Cysne, 2025; Limoa and Weku, 2024; Michailidis et al., 2025; Mohaddes et al., 2018; Schmidt-Hebbel, 2012).
Building on these broad insights, recent empirical applications provide more granular evidence from both country-specific and panel settings. Campos and Cysne (2025) build a panel ARDL-FRF for 88 countries, finding strong fiscal responses to rising debt pre-COVID-19 but weakened post-2020—especially in emerging markets. Afonso et al. (2025) show that institutional strength and fiscal rules significantly enhance sustainability across advanced economies. In the EU, Ramos-Herrera and Prats (2020) document fiscal reactions that weaken at high debt levels, suggesting nonlinearities consistent with the broader threshold literature (Reinhart et al., 2012).
Resource-rich economies face unique sustainability challenges due to volatile commodity revenues and procyclical spending patterns (Hamdi and Sbia, 2013; Magazzino, 2022). Hydrocarbon wealth complicates the interpretation of standard fiscal indicators, prompting recommendations to adopt non-oil fiscal balance metrics and medium-term frameworks (Al-Kawaz, 2005; International Monetary Fund, 2018; Baunsgaard and Symansky, 2022).
Studies on GCC economies show long-run revenue–expenditure cointegration but mixed evidence on debt-adjustment behavior. Magazzino (2022) identifies fiscal synchronization across GCC states but highlights sustainability vulnerabilities in Saudi Arabia, Bahrain, and Qatar. Kharbach and Sbia (2022) emphasize that oil-price shocks remain the dominant determinant of GCC fiscal dynamics, though recent reforms—such as VAT and energy-price rationalization—have strengthened medium-term positions.
Country-specific analyses in the MENA region reveal substantial heterogeneity. Menshad (2022) finds strong debt reactions in Iraq, weak but positive adjustment in Egypt, and no evidence of long-run fiscal equilibrium in Jordan, underscoring the role of institutional quality and reform commitment. In sub-Saharan Africa, the Nigerian case illustrates how limited diversification and unstable oil revenues can produce unsustainable debt-service burdens despite moderate debt ratios (Adebisi and Salako, 2020; World Bank, 2022).
Institutional frameworks play an increasingly central role. Studies highlight the importance of transparent fiscal rules, medium-term budgeting, and sovereign wealth funds in mitigating volatility and strengthening solvency (Debrun et al., 2009; Shabsigh and Ilahi, 2007). Resource exporters with stabilization funds—such as Chile, Norway, Qatar, and the UAE—exhibit lower fiscal volatility and stronger long-term balance-sheet positions (Baunsgaard and Symansky, 2022; Ma et al., 2022). Existing fiscal research on Saudi Arabia focuses primarily on oil-price transmission, public spending, or non-oil revenue growth (Abdel-Latif et al., 2018; Alabdulwahab, 2021; Almarzoqi and Mahmah, 2020). Panel studies place the Kingdom within the broader GCC context (Magazzino, 2022; Kharbach and Sbia, 2022), but few undertake a comprehensive country-specific sustainability assessment integrating revenues, expenditures, public debt, and structural breaks.
The 2014–2016 oil price collapse, the launch of Vision 2030, and subsequent VAT and subsidy reforms represent major regime shifts that likely altered the long-run fiscal structure. Yet these structural breaks are rarely modelled explicitly, leaving open questions about the degree to which post-2016 fiscal behavior reflects lasting shifts in policy design, revenue diversification, and expenditure discipline. There is also limited empirical work integrating sustainability testing with emerging global risks facing oil exporters, including energy-transition pressures (Arezki and Gylfason, 2021; Baunsgaard and Symansky, 2022).
This study addresses these gaps by applying an ARDL framework to Saudi Arabia (1991–2023), modelling the fiscal balance as a function of revenues, expenditures, and public debt, while capturing the structural break associated with the Vision 2030 reform regime. In doing so, it contributes a focused, country-specific assessment of fiscal sustainability that aligns with evolving international evidence on resource-dependent economies undergoing structural transformation.
Materials and methods
Data sources and variables
The current study employs an annual time-series dataset for Saudi Arabia spanning 1991–2023. The data were compiled from multiple authoritative sources, including the Saudi Central Bank (SAMA), the Ministry of Finance (MoF), the International Monetary Fund (IMF), and the World Bank. The extended timeframe encompasses several critical macro-fiscal episodes—such as the early-2000s oil cycle, the 2008 global financial crisis, the 2014–2016 oil price collapse, the launch of Vision 2030 in 2016, the COVID-19 pandemic, and the subsequent post-pandemic fiscal adjustments—providing a rich context for examining fiscal sustainability in a resource-dependent economy (Blanchard, 1990; Bohn, 1998; Arezki and Gylfason, 2021).
The dependent variable is the fiscal balance-to-GDP ratio (FBGDP), a comprehensive measure of the government’s fiscal stance and a core indicator in intertemporal budget constraint and fiscal reaction frameworks (Escolano, 2010). The explanatory variables, selected based on fiscal theory and demonstrated empirical relevance in studies of emerging and hydrocarbon-based economies (Pesaran et al., 2001; Menegaki, 2019; Afonso et al., 2025), include:
• Debt-to-GDP Ratio (DTGDP): A proxy for the fiscal burden and intertemporal solvency conditions, capturing the cumulative consequence of past fiscal policies. Public debt dynamics are central to long-run fiscal sustainability analyses and play a key role in fiscal reaction function models (Bohn, 1998; Debrun et al., 2009).
• Government Expenditure-to-GDP Ratio (GOVEXGDP): This variable measures the scale of total public outlays—current and capital spending—and reflects the government’s fiscal commitments. In oil-exporting economies, expenditure is often procyclical and a major source of fiscal vulnerability (Hamdi and Sbia, 2013; Magazzino, 2022).
• Government Revenue-to-GDP Ratio (GOVREVGDP): Representing oil and non-oil revenues, this variable captures the fiscal capacity and resilience of the state. Revenue volatility is a defining characteristic of hydrocarbon economies, and robust revenues are critical for long-run fiscal stability (Kharbach and Sbia, 2022; Campos and Cysne, 2025). Its relevance has grown in the context of Saudi Arabia’s Vision 2030 revenue diversification initiatives (International Monetary Fund, 2023).
• DUM2016 (Structural Reform Dummy): A binary indicator capturing the structural fiscal break associated with the introduction of Vision 2030 in 2016. It takes the value 1 in 2016 and 0 otherwise. The ARDL estimates confirm the statistical significance of this variable, consistent with evidence that 2016 marked a fundamental shift in Saudi Arabia’s fiscal regime following the oil price collapse and subsequent institutional reforms (Arezki and Gylfason, 2021; World Bank, 2024).
This configuration of variables is consistent with contemporary ARDL-based approaches used to study fiscal sustainability in emerging and resource-dependent economies (Alkhathlan et al., 2020; Osman, 2024; Mahmood, 2021). It permits the simultaneous evaluation of short-run dynamics and long-run fiscal equilibrium while accommodating potential structural breaks and regime shifts—an essential feature for analyzing Saudi Arabia’s evolving fiscal framework in the Vision 2030 era.
Conceptual framework
The conceptual framework for this study (Figure 1) is grounded in the strategic pillars of Saudi Arabia’s Vision 2030, which aims to institutionalize fiscal sustainability through a coordinated approach to revenue diversification, expenditure rationalization, and prudent debt management. Within this framework, government revenue, expenditure, and public debt function as the core policy levers shaping fiscal balance, consistent with intertemporal budget constraint theory and fiscal reaction function models (Bohn, 1998; Escolano, 2010).
Figure 1. Conceptual framework.
These fiscal levers influence macroeconomic outcomes—namely long-run fiscal stability, sustainable economic growth, and structural diversification—through both direct effects and dynamic feedback mechanisms. Revenue diversification reduces exposure to oil-price volatility and stabilizes the fiscal position; expenditure discipline mitigates procyclical spending patterns that have historically amplified economic cycles in resource-dependent economies; and prudent debt strategies ensure solvency while supporting productive public investment. Vision 2030 acts as a structural reform anchor that strengthens these channels by enhancing institutional capacity, improving budgetary governance, and embedding medium-term fiscal planning.
Econometric framework: ARDL model
The empirical strategy employs the Autoregressive Distributed Lag (ARDL) methodology proposed by Pesaran et al. (2001), which offers several advantages for modeling fiscal dynamics in a resource-dependent economy. The ARDL framework is particularly appropriate for this study for four main reasons.
First, ARDL accommodates regressors with mixed orders of integration, specifically I(0) and I(1), without requiring all variables to be integrated of the same order. This circumvents the limitations of the Johansen cointegration approach, which requires that all variables be I(1) and imposes stricter pre-testing requirements (Pesaran et al., 2001; Menegaki, 2019). Given that fiscal time series such as revenue, expenditure, and debt often exhibit heterogeneous integration properties, ARDL ensures methodological consistency.
Second, ARDL performs well in small samples, yielding unbiased and efficient long-run coefficients and valid inference even when the available dataset is limited (Narayan, 2005). This property is essential for a country-specific study such as Saudi Arabia, where annual observations over 1991–2023 produce a relatively modest sample size.
Third, the framework offers clear policy relevance by decomposing fiscal relationships into short-run adjustment dynamics and long-run equilibrium effects. This structure allows the analysis to capture how fiscal variables react to shocks in the immediate term while simultaneously identifying the stable long-run relationships consistent with the intertemporal budget constraint and fiscal reaction function approaches (Bohn, 1998; Escolano, 2010).
Finally, ARDL provides substantial flexibility, allowing each variable to have its own optimal lag structure. This characteristic is particularly valuable in fiscal policy analysis, where revenue, expenditure, and debt may respond to macroeconomic shocks at different speeds and with varying degrees of persistence.
Together, these features make the ARDL approach ideally suited to evaluating fiscal sustainability under structural reforms such as Vision 2030, enabling a rigorous assessment of both transient deviations and long-run fiscal equilibria.
The general ARDL specification is:
Where:
• Yt is the dependent variable (FBGDP),
• Xt is a vector of regressors (DTGDP, GOVEXGDP, GOVREVGDP),
• Δ denotes the first-difference operator,
• φ and ψ represent long-run coefficients,
• εt is the stochastic disturbance term.
Model selection was guided by the Akaike Information Criterion (AIC) to determine optimal lag length. Cointegration was tested using the bounds approach, and—where confirmed—long-run estimates and the associated error correction model (ECM) were derived.
Diagnostic tests and robustness
To ensure the econometric soundness of the ARDL estimates, a comprehensive suite of diagnostic and stability tests was implemented. Residual autocorrelation—a common concern in dynamic specifications—was assessed using the Breusch–Godfrey LM test, as serial correlation would distort standard errors and undermine the validity of t-statistics and F-tests in the ARDL framework. Heteroskedasticity was examined using White’s general test, enabling the detection of non-constant error variance that could bias inference even when coefficient estimates remain unbiased.
Model stability, a critical requirement for long-run fiscal analysis, was evaluated through recursive coefficient estimation and the CUSUM and CUSUMSQ tests of Brown et al. (1975). These procedures monitor the evolution of recursive residuals and their squared counterparts over the sample period; the model is considered structurally stable when the cumulative sums remain within the 5% critical bounds. This is particularly relevant for Saudi Arabia, an economy subject to major policy and oil-market shocks.
Because fiscal time series in resource-dependent economies may exhibit endogenous structural shifts, we further applied the Zivot and Andrews (1992) test to each variable to identify potential single endogenous breaks. This complements the explicit incorporation of the 2016 Vision 2030 dummy variable by verifying whether the data themselves signal structural change near the reform period. The convergence of these two approaches—parametric dummy modeling and endogenous break detection—enhances the credibility of the long-run estimates.
To address potential endogeneity and investigate dynamic interactions among fiscal variables, pairwise Granger causality tests were conducted. While the core ARDL specification focuses on how revenue, expenditure, and debt influence the fiscal balance, the causality tests reveal possible feedback mechanisms—such as whether fiscal balance outcomes trigger subsequent adjustments in revenue mobilization or spending policies. Identifying such bidirectional relationships strengthens the interpretation of both short-run dynamics and long-run equilibria.
Overall, by combining unit-root testing, bounds testing for cointegration, structural break analysis, and a full set of diagnostics, we ensure that the ARDL model is well-specified and that its estimated parameters are robust to serial correlation, heteroskedasticity, and structural instability. All estimations were conducted using standard econometric software, and statistical significance was assessed at the 1, 5, and 10% levels. The following section presents the empirical results, beginning with preliminary stationarity and break tests, followed by the estimated long-run relationships, short-run adjustment dynamics, and the full set of stability diagnostics.
Results
Preliminary tests: stationarity and structural breaks
As a first step, we examine the stationarity properties of each time series. The stationarity tests using the Augmented Dickey–Fuller (ADF) method indicate that the Fiscal Balance-to-GDP ratio (FBGDP) and Government Revenue-to-GDP ratio (GOVREVGDP) are integrated of order one, I(1), while the Government Expenditure-to-GDP ratio (GOVEXGDP) is stationary in levels, I(0). The Debt-to-GDP ratio (DTGDP) initially displayed ambiguous integration status under ADF—non-stationary in both levels and first differences—possibly due to structural breaks or low-test power. However, complementary KPSS testing confirms stationarity of D(DTGDP), resolving its integration order as I(1). This reinforces the robustness of the model design and justifies using the ARDL bounds testing approach, which accommodates variables with mixed integration orders. This integration pattern also supports the study’s decision to avoid cointegration techniques that require all variables to be I(1), such as Johansen’s VECM, and instead opt for ARDL, which is more flexible and suitable for small-sample contexts. The results are summarized in Table 1.
Table 1. ADF and KPSS unit root test results.
To rigorously assess the presence of regime shifts in Saudi Arabia’s fiscal indicators—particularly surrounding Vision 2030 reforms and the oil price shock of 2015–2016—we apply both the Zivot-Andrews test for endogenous breaks and the Chow test for known structural breaks. The Zivot-Andrews test results suggest statistically relevant breaks for several variables near 2016. Although not all t-statistics breach the 5% critical threshold, the clustering of breaks—particularly for GOVEXGDP and GOVREVGDP around 2016 signals a notable regime change. Complementing this, the Chow test confirms statistically significant breaks in 2016 for all variables, especially FBGDP (F = 5.87, p = 0.007), reinforcing the view that fiscal behavior shifted materially at that point. We evaluated two dummy variable specifications: one marking only 2016 (dum2016), and another capturing the full post-2016 period (postdum2016). The ARDL model using dum2016 as a discrete shock indicator performed better, showing higher statistical significance and avoiding distortion of long-run coefficients. Thus, dum2016 is retained in the final model (Table 2).
Table 2. Zivot-Andrews and Chow structural break tests.
ARDL bounds test for cointegration
This study investigates the fiscal adjustment dynamics of Saudi Arabia through an ARDL modeling approach using annual data from 1991 to 2023. The dependent variable is the fiscal balance-to-GDP ratio (FBGDP), modeled against key fiscal policy variables—public debt (DTGDP), government spending (GOVEXGDP), government revenues (GOVREVGDP)—with a structural dummy (DUM2016) capturing the exogenous fiscal shock related to the oil price collapse and the launch of Vision 2030 reforms. Optimal lag selection was guided by the Akaike Information Criterion (AIC), selecting an ARDL (3,4,3,3,2) specification. The model demonstrates a strong overall fit (Adjusted R2 = 0.982) and passes serial correlation tests (Durbin–Watson = 2.17), indicating valid dynamic specification. In line with fiscal theory, the contemporaneous coefficient of GOVEXGDP is strongly negative and significant, implying that unsynchronized spending expansions have short-run destabilizing effects. On the other hand, GOVREVGDP shows statistically significant positive effects in both contemporaneous and lagged terms, underscoring the critical role of stable revenue sources—primarily hydrocarbon-based—in supporting fiscal resilience. Importantly, the inclusion of a one-time dummy for 2016 (DUM2016) was statistically superior to a post-2016 trend dummy, suggesting a structural break in fiscal behavior rather than a gradual policy shift. Its coefficient is negative and marginally significant (t = −2.14, p = 0.061), reflecting the immediate fiscal strain induced by energy subsidy reforms, revenue diversification challenges, and broader macroeconomic adjustment under the Vision 2030 transformation program.
ARDL model estimation: long-run coefficients
The long-run coefficients derived from the ARDL framework, validated through a significantly negative and high-magnitude error correction term (−0.99, p < 0.01), offer robust evidence of a stable equilibrium relationship between fiscal balance and its determinants. In particular, the long-run elasticity of GOVREVGDP is both economically meaningful and statistically significant (coefficient = 0.713, p < 0.05), suggesting that revenue generation—largely driven by oil exports—remains the cornerstone of Saudi fiscal sustainability. This aligns with the broader literature on resource-dependent economies, where volatile revenues challenge countercyclical fiscal planning.
In contrast, the long-run coefficient of GOVEXGDP is negative but statistically insignificant, implying that expenditure-based consolidation alone may not yield sustainable outcomes without institutional reforms and improved public spending efficiency. Public debt (DTGDP), while often emphasized in global sustainability benchmarks, shows no significant long-run association with the fiscal balance in this context, likely reflecting sovereign borrowing buffers and relatively low debt service burdens. Notably, DUM2016 maintains a large and negative long-run effect (−9.01), significant at the 10% level, providing further evidence of a structural regime shift that constrained fiscal performance despite subsequent policy interventions, (Table 3).
Table 3. Long-run coefficients (cointegrating relationship).
Short-run dynamics and error correction mechanism
The short-run dynamics, as captured by the error correction representation of the ARDL model, offer critical insights into the fiscal adjustment process in an oil-dependent economy undergoing structural transformation. The estimated coefficient of the error correction term (ECM(t-1)) is −0.990 and highly statistically significant at the 1% level, indicating a very rapid speed of adjustment to long-run equilibrium—approximately 99% of any short-term fiscal imbalance is corrected in 1 year. This suggests strong mean-reverting behavior in Saudi Arabia’s fiscal balance, consistent with institutional mechanisms enforcing fiscal discipline during periods of volatility, (Table 4).
Table 4. Short-run dynamics (error correction representation).
Revenue-side variables play a prominent stabilizing role. The first difference of government revenues (ΔGOVREVGDP) exerts a large, positive, and highly significant effect (0.927, p < 0.01), confirming that short-run improvements in revenue mobilization—likely linked to oil price recoveries or policy shifts—translate quickly into fiscal consolidation. However, the lagged revenue term (ΔGOVREVGDP(t-1)) has a negative sign, potentially capturing over-correction or base effects from revenue volatility. On the expenditure side, contemporaneous increases in government spending (ΔGOVEXGDP) significantly worsen the fiscal balance (−1.350, p < 0.01), supporting procyclical spending concerns. Interestingly, lagged expenditure terms show partially offsetting positive effects, which may reflect delayed capital disbursements or automatic stabilizer effects mitigating fiscal volatility.
Debt dynamics appear complex and nonlinear in the short run. While contemporaneous changes in debt-to-GDP (ΔDTGDP) have a positive and marginally significant impact, the first and third lags exhibit significant negative coefficients, suggesting that recent borrowing may initially support fiscal space but quickly turns contractionary, possibly due to rising debt service costs or market constraints. Crucially, the DUM2016 variable remains highly significant and negative (−4.899, p < 0.01), reinforcing the interpretation that the fiscal regime shift during the Vision 2030 reform launch—and its accompanying subsidy cuts and fiscal consolidation—imposed an acute short-run fiscal contraction.
Collectively, these findings underscore the importance of revenue responsiveness and spending flexibility in short-run fiscal management under commodity price volatility. The strong performance of the ECM further confirms the validity of the ARDL framework for modeling fiscal adjustment in resource-dependent contexts.
Granger causality and endogeneity checks
The Granger causality results provide additional insight into the dynamic fiscal interactions in Saudi Arabia. The fiscal balance (FBGDP) is significantly Granger-caused by government revenue, expenditure, and debt, confirming that short-run fluctuations in fiscal instruments precede movements in the fiscal balance. Notably, the strongest causal effect arises from government revenue (p < 0.01), consistent with the central role of oil-linked revenues in the Saudi fiscal framework. Expenditure changes also significantly drive fiscal balance movements, while debt exerts a weaker but statistically meaningful influence.
Conversely, no variable significantly Granger-causes public debt, reinforcing the interpretation of DTGDP as more of a fiscal outcome than a short-term driver. Limited causality from revenue or debt to expenditure suggests that expenditure adjustments may reflect medium-term budgeting rules rather than reactive short-term policies. Revenue and expenditure show bidirectional causality, indicating internal fiscal feedback loops. Overall, these results validate the ARDL specification by confirming that regressors influence the fiscal balance in a forward-looking manner, mitigating simultaneity concerns (Table 5).
Table 5. Granger causality test results.
Stability and diagnostic tests
To assess the robustness and temporal stability of the estimated ARDL (3,4,3,3,2) model, recursive residual diagnostics were employed using both the CUSUM and CUSUM of Squares (CUSUMSQ) tests, following the methodology proposed by Brown et al. (1975). These tests evaluate whether the model’s coefficients remain stable over time, which is particularly critical for fiscal sustainability studies where structural shifts—such as oil price shocks, major policy reforms, or institutional overhauls—are plausible.
The CUSUM test, constructed from the cumulative sum of recursive residuals, remained well within the 5% confidence bounds throughout the full sample period (1991–2023), as shown in Figure 2. This suggests no statistically significant deviation from parameter stability and thus supports the reliability of the estimated long-run and short-run relationships. Importantly, the slope and curvature of the CUSUM path do not indicate persistent drift or breakpoints, aligning with the smooth evolution of Saudi fiscal balances during the examined period, even amid transformative policy shifts post-2016.
Figure 2. CUMSUM stability test.
Similarly, the CUSUMSQ test, which tracks the cumulative sum of squared standardized residuals and is more sensitive to sudden changes in variance (heteroskedasticity or regime shifts), also showed the test statistic remaining well within the critical bounds, as shown in Figure 3. The confidence bands were derived using a recursive formulation based on the sample’s degrees of freedom and the ARDL model’s dynamic structure. The absence of upward or downward divergence in the squared residual trace confirms that the variance of errors remained stable, enhancing confidence in the error-correction mechanism’s reliability and mitigating concerns over potential model misspecification.
Figure 3. CUMSUMSQ stability test.
Together, these stability diagnostics validate the internal consistency and structural resilience of the model, suggesting that the fiscal balance determinants, particularly government revenue, expenditure, and public debt ratios, exhibited stable effects on fiscal outcomes throughout the period. This reinforces the credibility of the policy inferences drawn from the ARDL estimations and enhances the empirical robustness of the study’s contribution to sustainability-oriented fiscal policy literature. From a policy standpoint, these results imply that further revenue diversification and improved expenditure efficiency will have more immediate long-run payoffs for fiscal sustainability than adjustments to the debt portfolio.
To assess the presence of a long-run equilibrium relationship among the fiscal balance and its determinants, the ARDL bounds testing procedure was conducted using Case 3 (unrestricted constant) with three dynamic regressors over a sample period from 1991 to 2023 (n = 33). The results confirm strong evidence of cointegration. Specifically, the computed F-statistic of 8.279 significantly exceeds the critical upper bound (I(1)) at the 1% level (6.67), as well as the 5 and 10% levels, thereby rejecting the null hypothesis of no levels relationship. Additionally, the accompanying t-statistic of −4.945 surpasses the absolute values of the I(1) bounds, further corroborating the existence of a long-run relationship. This confirms that fiscal balance (FBGDP), debt ratio (DTGDP), government expenditure (GOVEXGDP), and government revenue (GOVREVGDP) are bound by a stable long-term cointegration path. These findings validate the suitability of the ARDL framework for modeling fiscal sustainability dynamics and justify the estimation of an error correction model (ECM) to explore short-run adjustments and convergence behavior toward long-run fiscal equilibrium, (Table 6).
Table 6. Long run cointegration.
To assess the reliability and robustness of the estimated ARDL model, we conducted standard post-estimation diagnostic tests, including the Breusch-Godfrey LM test for serial correlation (2 lags) and the White test for heteroskedasticity. The results are reported in Table 7. The F-statistic for the serial correlation test was 1.6337 (p = 0.2617), indicating no evidence of residual autocorrelation at the 5% significance level, thus validating the independence of residuals assumption. Similarly, the White test produced an F-statistic of 1.4250 (p = 0.3140), confirming the absence of heteroskedasticity and supporting the assumption of homoscedastic error variance. These outcomes reinforce the statistical adequacy of the ARDL specification, ensuring that the inference drawn from the model is not compromised by common violations such as serial dependence or heteroskedastic disturbances.
Table 7. Serial correlation and heteroskedasticity tests.
Discussion
This study provides a comprehensive empirical assessment of Saudi Arabia’s fiscal sustainability over the period 1991–2023, positioned within the broader Vision 2030 reform agenda and the structural vulnerabilities characteristic of resource-dependent economies. By applying an ARDL framework that jointly estimates long-run equilibrium relationships and short-run fiscal adjustments—while explicitly modelling the 2016 reform-driven structural break—the results speak directly to the theoretical expectations and empirical patterns outlined in the introduction and literature review. In doing so, the findings illustrate how Saudi Arabia’s fiscal dynamics both conform to and diverge from established global evidence on fiscal behavior in commodity-exporting countries.
Long-run determinants of fiscal sustainability: evidence consistent with literature
The presence of a stable long-run cointegrating relationship among the fiscal balance, revenues, and expenditures is fully consistent with the intertemporal budget constraint theory (Buiter, 1985; Blanchard, 1990) and the fiscal sustainability criteria highlighted in both cointegration-based studies and fiscal reaction function frameworks (Bohn, 1998; Escolano, 2010). The long-run significance of government revenue underscores the centrality of revenue mobilization for maintaining fiscal solvency in oil-based economies—an insight firmly aligned with the international evidence, including panel ARDL results for GCC and broader emerging markets (Magazzino, 2022; Campos and Cysne, 2025).
Importantly, the positive revenue coefficient validates Saudi Arabia’s post-2016 reforms—particularly the expansion of VAT, excise taxes, and administrative fees—as effective tools for reducing reliance on oil receipts. This mirrors findings from other resource exporters, where broadening the tax base enhances resilience to commodity shocks and strengthens long-run fiscal sustainability (Shabsigh and Ilahi, 2007; Baunsgaard and Symansky, 2022).
By contrast, government expenditure shows a negative but statistically insignificant long-run effect, a pattern consistent with GCC-wide evidence of fiscal synchronization, in which spending tends to adjust to revenue cycles (Magazzino, 2022). This inertia explains why expenditure does not appear as an autonomous long-run driver—yet the literature emphasizes that expenditure rationalization, efficiency improvements, and procyclicality mitigation remain essential for durable sustainability. Thus, the empirical insignificance observed here should be interpreted through the lens of policy behavior rather than policy irrelevance.
Similarly, the insignificant long-run role of public debt aligns with the broader fiscal literature, which indicates that debt becomes destabilizing primarily when accompanied by structural deficits, high borrowing costs, or weak governance (Reinhart et al., 2012). Saudi Arabia’s historically low debt levels and prudent post-2016 debt strategy help explain why debt has not exerted long-run fiscal pressure. Nonetheless, the literature cautions that nonlinear or threshold effects may emerge as global financial conditions evolve—particularly in the context of the energy transition.
Short-run adjustment dynamics: strong responsiveness consistent with empirical patterns in oil economies
The short-run ARDL results reveal that increases in government revenue lead to immediate improvements in the fiscal balance, whereas increases in expenditure deteriorate the balance contemporaneously—patterns widely documented in studies of procyclical fiscal policy in oil exporters (Hamdi and Sbia, 2013; Kharbach and Sbia, 2022). The strong immediate responsiveness highlights the agility of fiscal policy in Saudi Arabia, consistent with the literature emphasizing the role of executive capacity and fiscal buffers in enabling rapid fiscal adjustment.
Debt dynamics in the short run exhibit lagged effects consistent with international nonlinear fiscal reaction literature, which finds that debt can affect fiscal balances with a delay, particularly when borrowing is used to smooth shocks rather than finance structural investments.
Of particular note is the magnitude of the error-correction term (ECM ≈ −0.99), which implies near-full fiscal adjustment within 1 year—an unusually high degree of responsiveness relative to international benchmarks. This finding resonates with studies of Gulf economies that attribute rapid adjustment capacity to strong institutional mechanisms, sovereign wealth buffers, and coordinated executive authority. It also lends empirical support to the argument in the literature that fiscal reforms under Vision 2030 have significantly strengthened adjustment mechanisms.
Structural break and the vision 2030 regime shift
The statistically significant 2016 structural dummy confirms that Vision 2030 represents a material and persistent regime shift in Saudi fiscal behavior. This supports the broader argument in the literature that major structural reforms—particularly those involving revenue diversification, subsidy rationalization, and institutional modernization—reconfigure fiscal dynamics in resource economies (Ramos-Herrera and Prats, 2020; Kharbach and Sbia, 2022).
The persistence of the structural break in the long-run relationship suggests that the reforms have not only produced short-term adjustments but have altered the fiscal baseline in meaningful ways. This aligns with empirical findings for other reforming resource economies (e.g., Chile, Norway, Indonesia), where institutionalized fiscal rules and diversification efforts yield long-lasting improvements in fiscal stability.
The results thus reinforce the theoretical proposition that structural reforms embedded within medium-term frameworks have greater fiscal payoff than isolated policy actions—a cornerstone principle of Vision 2030’s fiscal architecture.
Conclusion
This study reassesses fiscal sustainability in Saudi Arabia over the period 1991–2023 by examining long-run fiscal relationships and short-run adjustment dynamics in a resource-dependent economy undergoing major policy reforms. Using an autoregressive distributed lag framework that accommodates mixed integration orders and incorporates a structural break consistent with the reform period beginning in 2016, the analysis identifies a clear shift in fiscal dynamics. The results indicate that fiscal outcomes are not driven solely by oil-linked revenue cycles but are increasingly associated with revenue mobilization capacity and the speed of fiscal adjustment.
The existence of a stable long-run relationship among fiscal balance, government revenue, expenditure, and public debt is consistent with intertemporal budget-constraint logic. Within this relationship, government revenue shows the strongest and most robust long-run association with fiscal balance, while expenditure and public debt display weaker and statistically less stable long-run effects. This pattern suggests that, in the Saudi context, long-run fiscal performance is more closely linked to revenue dynamics than to expenditure compression or debt accumulation. Fiscal sustainability therefore appears to rest primarily on the ability to generate and stabilize revenues rather than on repeated short-term consolidation efforts.
Short-run dynamics reinforce this interpretation. Fiscal balance responds strongly to changes in both revenue and expenditure, indicating substantial sensitivity to fiscal and revenue shocks. At the same time, the exceptionally large and statistically significant error-correction mechanism implies rapid convergence toward long-run equilibrium. Fiscal imbalances tend not to persist, as deviations from equilibrium are corrected within a short horizon. This adjustment pattern is notable in a resource-dependent setting, where fiscal responses are often delayed or incomplete. The results suggest that fiscal policy during the latter part of the sample period is characterized by a high degree of responsiveness and internal consistency.
The structural break identified around 2016 provides further insight into the evolution of fiscal behavior. The significance of this break suggests that the reform period coincided with a meaningful change in fiscal dynamics rather than a temporary response to adverse economic conditions. While the break is associated with short-run fiscal pressure, the post-break adjustment process is consistent with faster convergence and improved stability. These findings support the interpretation that fiscal behavior during the reform period reflects a reconfiguration of both short-run adjustment mechanisms and long-run fiscal relationships.
Taken together, the results highlight the importance of fiscal governance and policy frameworks in shaping fiscal outcomes. Fiscal sustainability appears to depend not only on fiscal aggregates but also on the credibility and coherence of the framework within which fiscal policy operates. Revenue diversification, spending efficiency, and prudent debt management are most effective when embedded in transparent and medium-term oriented fiscal structures that facilitate timely adjustment. The estimated speed of convergence toward equilibrium underscores the relevance of such frameworks in environments characterized by revenue volatility and external uncertainty.
The findings also carry broader implications in the context of rising uncertainty surrounding future oil demand. Heavy reliance on hydrocarbon revenues can increase fiscal vulnerability as global energy markets evolve. In this setting, the results support the relevance of continued revenue diversification and credible fiscal anchors that reduce exposure to structural shocks. At the same time, the continued sensitivity of fiscal balances to short-run expenditure and revenue movements indicates that fiscal sustainability remains an active policy challenge rather than a settled outcome.
Looking forward, maintaining the observed post-2016 adjustment pattern will likely depend on sustained reforms and adaptive fiscal planning. Forward-looking fiscal strategies that incorporate uncertainty and risk into the budget process are essential for preserving stability over time. Aligning fiscal policy with long-term development objectives, while maintaining buffers and credible adjustment mechanisms, can help translate short-run responsiveness into durable sustainability.
In conclusion, the evidence from 1991 to 2023 indicates a shift toward a more sustainable fiscal adjustment pattern in Saudi Arabia. Fiscal dynamics appear less purely cyclical and more consistent with a framework in which revenue mobilization and rapid adjustment play central roles. While challenges remain, the results suggest that the reform period coincided with conditions supportive of improved fiscal resilience. Sustaining this trajectory will depend on the continued evolution of the fiscal framework in response to an increasingly complex and uncertain global environment.
Data availability statement
The raw data supporting the conclusions of this article will be made available by the authors, without undue reservation.
Author contributions
SA: Conceptualization, Writing – original draft, Writing – review & editing, Data curation, Formal analysis, Investigation, Methodology. HM: Conceptualization, Writing – original draft, Writing – review & editing, Project administration, Validation. SH: Conceptualization, Data curation, Writing – original draft, Writing – review & editing.
Funding
The author(s) declared that financial support was not received for this work and/or its publication.
Conflict of interest
The author(s) declared that this work was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.
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Keywords: ARDL, cointegration, endogeneity, error correction model, fiscal sustainability, government revenue, public debt, Saudi Arabia
Citation: Alshaikh S, Mansour H and Hassan S (2026) Fiscal sustainability in Saudi Arabia under Vision 2030: evidence from an ARDL analysis, 1991–2023. Front. Sustain. 6:1718304. doi: 10.3389/frsus.2025.1718304
Edited by:
Idiano D'Adamo, Sapienza University of Rome, ItalyReviewed by:
Mohamed Benbouziane, University of Abou Bekr Belkaïd, AlgeriaImane Said, University Center of Maghnia, Algeria
Copyright © 2026 Alshaikh, Mansour and Hassan. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) and the copyright owner(s) are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
*Correspondence: Hoda Mansour, aC5tYW5zb3VyQHVidC5lZHUuc2E=