Does Government Spending Crowd Out Private Consumption in Malaysia

This paper investigates the relationship between government spending and private consumption in Malaysia. The empirical results show that: first, in Malaysia, government spending and private consumption are best described as complementary rather than as substitutes. So, this paper rejects the arguments that there is a significant degree of substitutability between government spending and private consumption. Private consumption cannot be held responsible for any crowding-out effects that government spending might have on aggregate demand. Second, in Malaysia, the tax variable is significantly different from zero. So, the rejection of Ricardian equivalence is confirmed statistically. Therefore, demand management policies, especially expansionary fiscal policy should be continued to foster economic growth.