Revisiting the Government Expenditure–Growth Nexus in Asia: Evidence from Panel Cointegration and Granger Causality

Abstract

This study re-examines the long-run relationship between government expenditure and economic growth in nine Asian countries, namely Singapore, Malaysia, Thailand, South Korea, Japan, China, Sri Lanka, India, and Bhutan, over the period 2000–2023. Using a balanced panel of 216 observations, the study applies panel unit root, cointegration, random-effects, and Granger causality techniques to examine the magnitude and direction of the government expenditure and growth nexus. The Levin–Lin–Chu and Im–Pesaran–Shin tests indicate that the variables are integrated of order one, while the Pedroni and Kao tests confirm a long-run cointegrating relationship. The estimated long-run results show that government expenditure has a positive and statistically significant effect on economic growth, with an elasticity of 0.51 after controlling for gross fixed capital formation, trade openness, and inflation. Gross fixed capital formation and trade openness also contribute positively to growth, whereas inflation negatively affects economic performance. The Granger causality analysis reveals a bidirectional relationship between government expenditure and economic growth, supporting both the Keynesian hypothesis and Wagner’s Law. The findings imply that fiscal policy remains important for sustaining growth, although spending quality and macroeconomic stability are equally essential.