THE NEXUS BETWEEN FISCAL DEFICIT AND ECONOMIC GROWTH IN MALAYSIA

Abstract

This study investigates the linkages between fiscal deficit and economic growth in Malaysia. Using data from 1980 to 2017, our results indicate: Firstly, there exists a long-run relationship between fiscal deficit and real GDP; secondly, on information flow, the fiscal deficit is found to precede real GDP. Further analysis of the impact of fiscal deficit on real GDP proves that the Keynesian Growth Theory is valid in Malaysia. Specifically, the fiscal deficit has a positive impact on Malaysia’s GDP. Moreover, the fiscal deficit is found to be growth-enhancing during the 1997-98 and 2008-09 economic crisis. Hence, it can be concluded that the fiscal deficit is imperative in helping the Malaysian economy restore itself after an economic crisis. As a policy suggestion, fiscal deficit results from the expansionary fiscal policy should be countercyclical to smoothen the business cycle and subsequently improve Malaysia's macroeconomic performance.     Keywords: fiscal deficit, economic growth, countercyclical, business cycle