Estimating the Threshold Level of Public Expenditure and Fiscal Deficit in the United Arab Emirates (UAE): Evidence from Kuznets Curve Hypothesis

This study estimates the threshold level of the relationship between fiscal deficit and public expenditure in the United Arab Emirates (UAE) based on the public expenditure Kuznets curve (PEKC) hypothesis during the 1975-2020 period. Employing the autoregressive distributed lag (ARDL) bound testing approach, the results indicate the existence of an inverted U-shaped PECK. In other words, public expenditure- fiscal deficit relationship exhibits an inverted U-shaped in the long-run, feature with public expenditure expanding in the early phases of rising fiscal deficit, and falling in the latter phases. Using the quadratic specification, the threshold of 22.45 percent is obtained for fiscal deficit (as a share of the GDP), and Dh. 6.583 billion for public expenditure. Moreover, the results illustrate that oil price, outflow of money, FDI outflow and interest rate are other important determinants of public expenditure in the country. Based on this evidence, policies aimed at reducing fiscal deficit through rationalisation of spending and prioritising of investment in human capital development are encouraged.