Pros And Cons Of Government Spending

3.0 IMPLICATIONS OF GOVERNMENT SPENDING

Government spending or also known as government expenditure has both positive and negative implications. There are some arguments related to the relationship between government spending and economic growth. Economic growth consist of Gross Domestic Product (GDP), interest rates, supply and demand of economy and inflation. According to Hasnul, A.G. (2015), Wagner’s law suggested that government expenditure increase because of the economic growth. According Hasnul, A.G. (2015) , in contrast, Keynesian hypothesis state that expansion of government expenditure accelerates economic growth.

3.1 BENEFITS OF GOVERNMENT SPENDING

Government spending has been allocated to many components such as welfare benefits,

As mentioned there are two different arguments. According to Govindaraju, Rao and Anwar (2011), Wagner’s Law suggests that there is a long-run equilibrium relationship between public spending and GDP. However, referring to Govindaraju, Rao and Anwar (2011), Keynesians view government expenditure as an exogenous policy instrument that influences GDP growth. According to Phua (2014), GDP per capita is defined as sum of gross value added by all resident producers in the economy plus any taxes from products and less any subsidies which are not incorporated in the products value. GDP per capita is calculated without deductions of fictional assets depreciation and natural resources depletion. Referring to the appendix, Figure 3.1 shows the GDP per capita of Malaysia from year 1970 to 2012. The graph shows that GDP per capita is rapidly increasing during that time. Next, Figure 3.2 shows the government expenditure and GDP per capita of Malaysia from year 1970 to 2012. The graph shows that government expenditure and GDP per capita is rapidly growing during the period of time with an upward sloping curve, which gives a positive impact on economic growth resulted from government expenditure. Therefore, the benefit of government spending is the increase in

One way to do this is by spending in things of value to people which they cannot otherwise attain. Spending on infrastructure, healthcare, and education also provides an external benefit to the rest of the economy which can have long run effects in comparison with reductions in interest rates, which are often short-term. One of those is equity. While most of us would prefer to see less inequality and poverty, individually we do not have much of an incentive to do something about it, since a large share of the benefits go to others. Myrdal (1960) stated that a greater government involvement in the economy can foster growth because the greater involvement can be used partly to reduce social inequality, which is seen as detrimental to growth for at least two reasons. The first reason is it leads to a waste of human capital as a consequence of poverty. Secondly, it restricts the opportunities for low-income individuals to exploit their talent. Therefore, it can be seen that government expenditure increases the national welfare benefits and reduces the cost of inequality at the same time. This shows a positive impact of government