Public Expenditure in a Simple Model of Economic Growth: The Case of Malaysia

Abstract

This paper develops the public expenditure in a simple model of economic growth inMalaysia. The model investigates the relationship between the development expenditure (DE), investment (I), trade balance (TB) and Gross Domestic Product (GDP). The study used the annual data from 1970 to 2014. Simultaneous equation model, in particularly, Two-Stage Least Squares Method (TSLS) applied in this model. The result showed that investment (I) and trade balance (TB) are the most important variables determine the GDP. In determination of the level of investment (I), it appeared that GDP and trade balance (TB) are the important factors. GDP and investment (I) are the important factors determine the amount of trade balance (TB). Moreover, the results contradict to Wagner’s Law of government expenditure generally rises in tandem with income increases. It could be drawn from the results are either the size of government is driven from non-economic factors, or insufficient public expenditure is channeled toward development expenditure. Therefore, the development expenditure is merely not productive or supportive toward long term economic growth inMalaysia.