**Abstract**

The drop of oil prices since the second half of 2014 have affected the credit risk and liquidity situation in Bahrain. Therefore, Bahrain have implemented substantial economic diversification in the economic structure including manufacturing, refining, tourism, trade and finance. With the recognition of the importance of governments expenditure restructuring, Bahrain government introduced number of initiatives such as streamlining government expenditure, increasing revenues, and redirecting government subsidies towards eligible citizens. Understanding the relationship between revenues, government spending and economic growth is an essential perception in evaluating the efficiency of government's strategy in managing its resources and the impact on the standard of living in any country. This chapter examines the relationship between total government expenditure as well as sectoral government spending (specifically education and health sectors), oil revenues and the economic growth of Bahrain using time series data over the period 1989–2015. To achieve this aim, the vector error correction model (VECM) is employed. In order to ensure the sustainability of resources and maintain economic growth, Bahrain should continue managing its expenditure, by cutting down expenses on certain sectors through privatization, and increasing spending on health and education sectors.

**Keywords:** Economic Growth, Health Expenditure, Education Expenditure, Human Capital, Oil Revenues, VECM
