PUBLIC SPENDING AND ECONOMIC GROWTH: AN EMPIRICAL EVIDENCE FROM STATEGOVERNMENT IN PENINSULAR MALAYSIA

Purpose – This paper investigates the relationship between public spending and economic growth using the state level data in Peninsular Malaysia. Several other variables namely tax revenue, fiscal balance, and total population have also been considered in estimating the baseline model. Design/methodology/approach – This study applied the Johansen cointegration test in analyzing the long run relationship (cointegration) among the variables of interest, and a vector error correction model (VECM) in investigating the direction of causality in the long-run and short run among the variables. Findings – The empirical findings can be summarized as follows. First, there is no long-run relationship among state output and public spending in Selangor. Second, in Pahang and Melaka, there is a long run bi-directional causality between state output and public spending. Third, in the short run, a changes in output is significantly to Granger cause the public spending in Negeri Sembilan, Kedah, Melaka and Pulau Pinang, in which has supported the Wagner hypothesis. In contrast, in Pahang and Perak, a changes in public spending has a significance effect to Granger cause the changes of output in the short run, in which has confirmed the existence of Keynesian hypothesis in those states. Originality/value – This study provides new empirical evidence on the relationship between public spending and economic growth using the state level data in Peninsular Malaysia. Moreover, several other variables namely tax revenue, fiscal balance, and state population have also been considered in the baseline model.