THE IMPACT OF FISCAL POLICY ON GDP PER CAPITA: EVIDENCE FROM MALAYSIA

Abstract

This study investigated the relationship between income per capita and government spending in Malaysia using annual data spanning from 1980-2018. Auto-regressive distributed lag (ARDL) and VAR-differenced model (VECM) was employed to examine the relationship between income per capita, government consumption, and government expenditure on education. Inflation is used as a control variable in the model. The result concluded that government consumption, government expenditure in education, and inflation have a unidirectional short-run causal effect on income per capita. In the long run, income per capita has a negative relationship with government consumption spending, while has a positive relationship with government expenditure in education. Government expenditure in education is crucially important in Malaysia and it should be continued to give more opportunities for Malaysians to get a better education and as a result, get a better job and improve the standard of living.