The impact of government expenditure on economic growth in Sri Lanka: An Econometric Analysis

Abstract

For decades, government sector in developing countries has been playing a vital role in promoting economic growth and development. The general view is that government sector tries to achieve its macroeconomic objectives through its fiscal and monetary policy. However, in macroeconomics, the increasing government expenditures and its impacts on long run economic growth stimulate a great issue theoretically as well as empirically. This study examines the effects of government expenditure on economic growth in Sri Lanka over the period 1977-2009. In particular, this study seeks to investigate the impact of specific government expenditure components including education, health, defense, transport and communication. In this context the present study employed a multivariate co-integration and error correction modeling technique by utilizing the time series annual data drawn from various annual reports of Central Bank of Sri Lanka. The empirical evidence from the study displays the existence of long run dynamic relationship among the variables. Further the study reveals that the expenditure on education has a significant positive impact on economic growth while, defense and health expenditure have a significant negative impact on economic growth in Sri Lanka. Therefore, the implication from this study is that increasing allocation of government expenditure towards education is critical in increasing economic growth in the long run in Sri Lanka.