Fiscal policy and economic performance in Oman during 1970-2003

Abstract

The state's calculated intervention in the economy is an issue accepted by researchers. To fulfil the overall goals of the economy and to achieve its full potential, the state has to involve itself in the economics of production and distribution throughout the nation. Within this framework, the state national budget emerges as an essential method in the fiscal planning's implementation process. Thus, the economic policies' goals should comply with the goals of ûie economic plans. The Sultanate of Oman has adopted the economic planning approach since 1976, when successive five-year plans began. Since that time, a high level of investment in infrastructure and social services has been achieved. Nonetheless, by having a look at the economic indicators in the overall economy and in particular sectors, a significant conclusion can be drawn; that those indicators do not reflect the ambitious objectives outlined in the original development plans. As fiscal policies are on the top of the economic policies and methods, which some researchers hold responsible for economic success and failure, the main goal of this study is to investigate to what extent the fiscal policies in the Sultanate of Oman could play a positive role in accomplishing the developmental targets. To achieve the goals of the study, both quantitative and qualitative methods are utilized. Assessment and evaluation are used as secondary approaches and employ modem econometrics approaches as well as diagrammatic and tabular data representations. Examining the currently adopted fiscal policies in three areas, taxation, expenditure, and policies dealing with planned budgetary deficit and public debt and employing OLS, ECM methods, the most important findings show a wide gap between actual and potential tax revenues; tax rates positively relate to FDI inflows suggesting that foreign investors do not necessarily respond to tax incentives and that other determinants lie behind the deterioration of FDI inflows; government investment expenditure can be associated with lower growth; a crowding-out phenomenon exists between public investment and private investment indicating that the government investment in projects acting as a substitute for private investment; there is a negative link between foreign debt and growth; finally, the fiscal deficit is influencing the stance of the balance of payments negatively. Moreover, to inspect whether a fiscal policy aiming at rationalizing government expenditure in the Sultanate of Oman's economy may diminish the growth of output; in other words, to check whether the disaggregated government expenditures Granger-cause output or vice versa, the contemporaneous relationship between disaggregated public expenditure and GDP/GNP was examined. The study deployed the Johansen cointegration test, the standard Granger causality test and the Granger causality test in the context of an ECM, to determine the long-run relationship as well as the directions and patterns of causality between the disaggregated public expenditure and GDP/GNP. Neither the empirical results obtained sustain the Wagnerian law which states that economic growth causes the growth of government expenditure, nor was it possible to conclude in the favour of the opposing Keynesian hypothesis. Thus, the results do not support the argument that changes in government expenditure tend to accelerate or slow GDP/GNP growth" suggesting a proposition that a shrinking in government expenditure, as a strategy to control the fiscal imbalances in the Omani economy, could be adopted.