The effects of government expenditure on economic growth: the case of Malaysia

The relationship between government expenditure and economic growth has been debated for decades and has not clearly stated yet. This paper gives a further evidence on the relationship between government expenditure and economic growth in the case of Malaysia. In this study, the government expenditure has been disaggregated in to the government operating and development expenditure. We also classified the government expenditure based on the sector of which it expensed. We used OLS technique to find the fixed effects of government expenditure on economic growth for the last 45 years. This investigation is made by using the time series data during the period 1970 – 2014. Our result indicates that there is a negative correlation between government expenditure and economic growth in Malaysia for the last 45 years. Moreover, the classification of government expenditure indicates that only housing sector expenditure and development expenditure significantly contribute to a lower economic growth. Education, defense, healthcare, and operating expenditure do not show significant any evidence of its impact on the economic growth. These finding may give some overview of policy implications to the Malaysia policymakers on optimizing the effects of government expenditure in economic growth.