Abstract:
This paper examines the causality between public expenditure and economic growth
in Sri Lanka using time series annual data over the period of 1977-2009. In
particular, this study keeps a special focused on various selected components of
public expenditure by applying a multivariate cointegration and Vector Error
Correction Modeling (VECM) techniques. The empirical evidence suggests, in long
run, public expenditure on education, agriculture, health and transport and
communication have positive and statistically significant effects on economic growth
while defense expenditure shows a negative but a statistically significant effect
on economic growth. Granger causality analysis confirms that there is a
unidirectional causality running from education expenditure to economic growth,
defense expenditure to economic growth, and agriculture expenditure to economic
growth, which supports the existence of Keynesian hypothesis in Sri Lanka. Analysis
also indicates that existence of bidirectional causality between health expenditure
and economic growth, transport and communication expenditure and economic
growth. Therefore, the findings of this study provide an important implication to
policy makers to improve the efficiency of public expenditure by reallocating
among sectors in a growth context.
