The Impact of Government Expenditure on the Palestinian Economy: A CGE Analysis

Abstract

An important question in growth theory is whether government expenditure promotes economic growth. However the empirical evidence is inconclusive. This paper investigates the impact of increasing government expenditure by 25% from the base line on the aggregate Palestinian economy variables. A simulation of increasing government expenditure is carried out using a 2015 Palestinian Social Accounting Matrix (SAM) and Computable General Equilibrium (CGE). We simulate   the impact of a 25% increase in government expenditure, which could come about due to the Palestinian reconciliation agreement that has ended a decade old political divide between the West Bank and Gaza Strip.  The simulation results illustrate that real GDP increases by 4.73%.  The real private consumption declined by 2.60%.  Import and export are increased by 3.09% and 10.53% in real term respectively.  Net taxes increase by 1.23%, as a percentage of GDP the trade deficit declines by 2.00 percentages. Real exchange rate appreciated by 12.9 % from the base line.  In addition absorption increases by 3.12 % in real terms.

Keywords: government expenditure, Social Accounting Matrix, Computable General Equilibrium, Palestine.

JEL Classification: E62, H50, C23 C68, D58, E62, F15, H62, I32