The Impact of Sectoral Government Expenditure on Economic Growth: Evidence from Sri Lanka

This paper investigates the impact of sectoral government expenditure on economic growth using Sri Lanka as a case study. For this purpose, we use Sri Lankan data at the national and sectoral levels for the period 1985-2016. In the empirical analysis, six different models were estimated at the aggregate and sectoral levels taking two cases of the dependent variable, namely the real GDP and per capita real GDP growth rate. Results indicate that government expenditure plays a positive and significant role in improving the level of GDP in Sri Lanka. However, economic growth was lower during the war years compared to non-war years in Sri Lanka. The results also indicate that capital expenditure plays a positive and significant role in enhancing economic growth. At the sectoral level, expenditure on health, education, and transport and communication appear to have a positive impact on the economy, while expenditure on agriculture and irrigation demonstrate a negative impact. Expenditure on defence, on the other hand, indicated mixed results, depending on the model specification. These findings provide some important insights for the policy makers in the country to consider when allocating sectoral level government expenditure budgets.