Fiscal policy and public expenditure on sustainable economic growth Malaysia: An empirical assessment of budgetary priorities

Abstract

Public spending is a key factor in determining the economic path of countries in promoting sustainable growth and improving social welfare. Over the past forty years, the structure of the government expenditure in Malaysia has undergone substantial changes, including global economic disturbances. The objective of the study is to examine the impact of different types of public spending on Malaysia’s economic growth from 1981 to 2023, based on Keynesian theory and Wagner’s Law. This study employs methods such as Autoregressive Distributed Lag (ARDL), Vector Autoregression (VAR) Granger causality test, impulse response function and variance decomposition. This study contributes novelty in term of integrating long-run and dynamic shock response analysis of the disaggregated public spending-growth nexus of Malaysia. The findings of the study indicate that development spending, particularly on general administration, supports growth, while subsidies show weaker or mixed effects. Crises like in 1998, 2009 and 2020 influence these relationships. The study provides policy insights to support long-term economic growth.