Impact of Government Expenditure on Economic Growth in Malaysia

Ho, Zhi Yen (2024) Impact of Government Expenditure on Economic Growth in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study delves into the intricate relationship between government spending and economic growth in Malaysia, employing a robust methodology encompassing theoretical frameworks, empirical analysis, and econometric methods. Drawing on Keynesian and Wagner's law hypotheses, the Aggregate Demand-Aggregate Supply (AD-AS) model was utilised to understand how government expenditure influences economic development. The research posits that government spending acts as a potent force, capable of stimulating immediate growth and progress, as advocated by Keynesian economics. Additionally, Wagner's law contends that rising per capita income leads to a corresponding increase in the significance of the public sector, further accentuating the role of government expenditure in economic expansion. Data for this study is sourced from the Department of Statistics Malaysia (DOSM), providing a comprehensive overview of government spending across various sectors from 1970 to the first quarter of 2023. By categorizing expenditure into specific sectors such as healthcare and education, aim to capture the nuanced effects of government spending on economic growth. Gross Domestic Product (GDP) serves as the dependent variable, while government operating expenditure (OPE), healthcare expenditure (HEA), and education expenditure (EDU) are considered as independent variables. The econometric methods employed in this study are diverse and rigorous. We begin by conducting unit root tests, including the Augmented Dickey-Fuller (ADF) test, Phillips-Perron (PP) test, and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test, to ensure data stationarity. Lag length selection criteria, such as the Akaike Information Criterion (AIC) and Schwarz Information Criterion (SIC), aid in determining the optimal autoregressive lag length. Granger causality tests shed light on the causal relationships between government spending and economic growth, while the Johansen-Juselius co-integration test explores long-term relationships among variables. The model specification encompasses both Vector Autoregression (VAR) and Vector Error Correction (VECM) models, allowing for a comprehensive analysis of multiple endogenous variables. Diagnostic checks, including Recursive Least Squares, CUSUM tests, serial correlation LM tests, Ramsey's RESET test, ARCH tests, and Jarque Bera tests, ensure the robustness and validity of the findings. This study contributes to a deeper understanding of the impact of government spending on economic growth in Malaysia. By combining theoretical insights with empirical analysis and rigorous econometric methods, we provide valuable insights for policymakers and researchers seeking to enhance economic development strategies in Malaysia and beyond.