Government Allocation and Economic Growth: An Empirical Evidence from States in Malaysia

Abstract

Academic researchers are still interested in government fiscal management and its economic consequences. The impact of federal government fiscal policy on the economy has gotten a lot of attention. Nonetheless, little is known about state-level fiscal management. The main goal of this research is to investigate the relationship between state government fiscal and economic growth across Malaysia's states. We also investigate the economic impact of the federal government's contribution on each state's budget allocation. We identified disparities in federal funding. We use a panel dataset that spans 13 Malaysian states and ten years, from 2008 to 2017. We found that government spending drives growth in domestic products for most state governments using the panel autoregressive distributed lag (ARDL) model. The Granger causality test reveals that state government spending and federal allocation to states significantly impact Malaysian state economic growth. In general, our empirical evidence backs up Wagner's theory.