Abstract
This study investigates the linkages between fiscal deficit and economic growth in Malaysia. Using data from 1980 to 2017, our results indicate: Firstly, there exists a long-run relationship between fiscal deficit and real GDP; secondly, on information flow, the fiscal deficit is found to precede real GDP. Further analysis of the impact of fiscal deficit on real GDP proves that the Keynesian Growth Theory is valid in Malaysia. Specifically, the fiscal deficit has a positive impact on Malaysia’s GDP. Moreover, the fiscal deficit is found to be growth-enhancing during the 1997-98 and 2008-09 economic crisis. Hence, it can be concluded that the fiscal deficit is imperative in helping the Malaysian economy restore itself after an economic crisis. As a policy suggestion, fiscal deficit results from the expansionary fiscal policy should be countercyclical to smoothen the business cycle and subsequently improve Malaysia's macroeconomic performance. Keywords: fiscal deficit, economic growth, countercyclical, business cycle
Highlights
Malaysia is a small open economy country, yet its progress has been remarkable in the recent years compared to other developing countries
Using real gross domestic product (GDP) as a proxy of economic growth, the findings suggest that the government's fiscal deficit has a statistically significant negative impact on Bangladesh's economic growth
This paper reveals the influence of fiscal deficit on Malaysia's GDP during the 1997-98 and 2008-09 economic crisis
Summary
Malaysia is a small open economy country, yet its progress has been remarkable in the recent years compared to other developing countries. Malaysia reverted to the budget deficit in 1998 due to the Asian Financial Crisis in 1997-98 This was an unprecedented period in Malaysian history. During the corresponding period from 1997 to 2000, there was a rise in the real GDP This implies the fiscal deficit incurred in earlier years has enabled the economy to recover, albeit at a slower pace. The fiscal deficit incurred in 2008 and 2009 had enabled the Malaysian economy to recover from the economic stagnation, as evidenced by the annual GDP growth of 6.75% in 2010. On this basis, this study attempts to investigate the linkages between fiscal deficit and economic growth in Malaysia.
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