The impact of fiscal policy on economic growth : fresh evidence from Malaysia

Abstract

Many scholars have researched the connection between fiscal policy and economic growth and how fiscal policy can be a crucial factor for economic development and growth. Despite this, it still remains a critical debate amongst policymakers and scholars. Thus, this study fills the gap by analyzing the impact of fiscal policy on economic growth in Malaysia spanning 1990 to 2022. The secondary data from World Bank Indicators (WDI) is collected. This study examines the impact of fiscal policy (government expenditure) on Malaysia's economic growth by adding more macro factors such as unemployment, tax revenue, and inflation. This study employs the Autoregressive distributed lag (ARDL) model to examine the long-run correlation to meet this objective. Furthermore, various econometric models are employed, including the ARDL bound test and the error correction model (ECM), to check the relationship between the variables. Based on empirical results and findings, the study suggests that there is a strong relationship between GDP and expenditure, unemployment, tax revenue and inflation since the probability value is less than significant in the short-term relationship with constant and unrestricted constant form. Additionally, with the ARDL Model boundary test, government expenditure, unemployment, tax revenue, and inflation have a long-term relationship with GDP in Malaysia, where the F-statistic value is smaller than the lower boundary. Moreover, the Error correction method with restricted constant suggests a long-term link between the expenditure and GDP. Notwithstanding the results, fiscal policymakers must carefully evaluate the efficacy of government expenditure allocation to ensure that it is consistent with the longterm economic growth goals. The potential limitation of this study is its dependency on secondary data from the World Bank Indicators (WDI), which may not capture all relevant nuances of Malaysian fiscal policy and economic dynamics.