EMPIRICAL INVESTIGATION OF THE DYNAMIC RELATIONSHIP BETWEEN PUBLIC EXPENDITURE AND ECONOMIC GROWTH

Abstract

This study investigates the impact of public expenditure on economic growth in Pakistan, focusing on the role of key expenditure categories such as education, health, defense, and gross fixed capital formation (GCF). Using time-series data from 2005 to 2023, the study employs the Autoregressive Distributed Lag (ARDL) model to analyze both short- and long-term relationships between government spending and economic growth. The research also incorporates diagnostic tests such as multicollinearity, heteroscedasticity, and serial correlation to ensure the robustness of the model. The results indicate a negative short-term relationship between education and economic growth, with a coefficient of -0.810914 and statistical significance at the 1% level (p-value = 0.01333). This suggests that in the short run, increased public investment in education may detract from other sectors that drive economic growth. The health expenditure results show a significant negative effect (-5.222281) in the short term but a positive lagged effect (5.522142), implying that health investments may yield long-term benefits, improving public health and productivity. The GCF variable exhibits a strong positive relationship with economic growth, with a coefficient of 0.233545 (p-value = 0.0003), confirming the importance of capital formation in driving long-term economic development. Defense expenditure shows a positive but statistically insignificant relationship, suggesting that while it may contribute to national stability, its direct impact on economic growth is less pronounced in the short run. Furthermore, foreign direct investment (FDI) and developmental expenditure were found to have no significant impact on economic growth, highlighting the importance of effective resource allocation and policy frameworks in maximizing their potential benefits.The findings emphasize the need for strategic public expenditure policies that prioritize capital formation (GCF) and efficiency in education and health investments to stimulate sustainable growth. Moreover, the study underscores the importance of improving the investment climate for foreign direct investment (FDI) and refining developmental spending practices to ensure long-term economic progress. These results contribute to the growing literature on the relationship between public spending and economic performance, providing valuable insights for policymakers and researchers in Pakistan and other developing economies.

Keywords:    Public Expenditure, Economic Growth, ARDL Model, Education Expenditure, Health Expenditure, Defense Expenditure, Gross Fixed Capital Formation, Foreign Direct Investment, Policy Analysis, Pakistan.

https://doi.org/10.5281/zenodo.17379414