Turning oil swings into stability: Effectiveness of fiscal policy in Gulf Cooperation Council (GCC) countries

Fiscal policy is one of the primary macroeconomic instruments available to governments. Its objectives are wide-ranging, spanning all government revenues and expenditures, but one of its core aims is to promote macroeconomic stability, which in turn supports long-term growth. In an ideal scenario, GDP follows a stable, upward trend. In reality, economies experience expansions and recessions (business cycles) that introduce instability. Fiscal policy can help smooth these cycles by making recessions less severe and expansions more sustainable. For instance, when private activity weakens during a recession, the government can increase spending to boost demand and cushion the downturn. Such an approach is known as countercyclical fiscal policy.

GCC economies face a central policy problem: how to stabilize growth when business cycles are amplified by oil price swings. Since government spending is large relative to GDP in the GCC and monetary policy is constrained by exchange rate pegs to the U.S. dollar, fiscal policy remains the main tool for macroeconomic stabilization. Policymakers therefore need clear answers to two questions:

1. Is fiscal policy countercyclical in practice?
2. How much does fiscal policy affect non-hydrocarbon GDP, especially in downturns when support is most needed?

We conducted a series of studies to answer these core questions for the GCC. A recent paper by Bogetic and Naeher, featured in December 2024 Gulf Economic Update, evaluates whether GCC countries implement countercyclical fiscal policy. Countercyclical fiscal policy is reflected in a negative correlation between the cyclical component of GDP growth and the cyclical component of government expenditures, and in a positive correlation between the cyclical components of GDP growth and government revenues. In most GCC economies, the data showcases precisely these relationships. Figure 1 summarizes these findings.
 

Figure 1: Fiscal Policy in the GCC is in line with principles of countercyclical fiscal policy

The second step asks how strongly fiscal policy influences output. A recent working paper by our team, featured in the June 2025 Gulf Economic Update estimates the size of fiscal multipliers for the GCC. In the macroeconomic literature, the fiscal multiplier is the effect of a given fiscal instrument (such as government consumption spending) on GDP. For instance, a multiplier of 0.1 for government consumption means that each dollar of government consumption is associated with a 0.1 dollar increase in non-hydrocarbon GDP.

Our results show that spending multipliers in GCC economies are positive and statistically significant, typically ranging from 0.1 to 0.4 (Figure 2). In other words, government consumption spending contributes to increases in non-hydrocarbon GDP within that range, though the magnitude varies across countries.
 

Figure 2: Fiscal multiplier estimates for government expenditures across GCC countries

To understand implications for stabilization policy, we further split the sample into expansionary and recessionary episodes to test whether multipliers depend on the state of the economy. This state-dependence is policy-relevant: when there is slack in the economy during downturns, one might expect fiscal policy to be more effective.

This is precisely what we find. In the GCC, multipliers are notably larger during recessions than during expansions, providing more powerful support to output when the economy is weak (Figure 3). In expansionary periods, by contrast, the estimated multiplier is near zero, indicating that additional government consumption has little measurable impact on non-hydrocarbon GDP.
 

Figure 3: Fiscal multipliers for government consumption spending vary depending on the state of the economy

Taken together, the findings clarify both the strengths and limits of fiscal policy in the GCC context. On the positive side, fiscal policy in most GCC economies operates countercyclically, spending multipliers are positive on average, and their potency increases in recessions—exactly when stabilization is most valuable. At the same time, average multipliers are modest compared to those reported in some other high-income economies, and the impact of spending during expansions appears limited. These results underscore the importance of timing and design: the payoff is highest when stimulus is deployed during downturns, and the composition of spending matters for effectiveness.

These research efforts aim to inform better fiscal policy design in the GCC. Future, micro-founded work can further pinpoint which spending categories and delivery mechanisms deliver the highest growth impact and resilience benefits in GCC economies.