Public Expenditure and Economic Growth in Sri Lanka: Cointegration Analysis and Causality Testing

The purpose of this study is to analyze the relationship between public expenditure and economic growth in Sri Lanka during 1952-2002. The study tests the validity of Wagner's Law that there is a long-run tendency for public expenditure to grow relative to national income. This implies that public expenditure can be treated as an endogenous factor, not a cause of growth in national income. In contrast, Keynesian hypothesis treats public expenditure as an exogenous factor. In former approach, the causality runs from national income to the public expenditure while in the latter approach causality runs from public expenditure to national income. The study finds no empirical support either for the Wagner's Law or the Keynesian hypothesis, in the case of Sri Lanka. (JEL H10, C52)  

DOI: 10.4038/ss.v34i1.1239

Staff Studies Volume 34 Numbers 1& 2 2004 p.51-68