This study examines the impact of government spending on educational and healthcare development outcomes at the provincial level in Sri Lanka with the objectives of (1) to investigate the impact of government expenditure on education in terms of the student failure rate at the provincial level; (2) to investigate the impact of government expenditure on health in terms of infant mortality rate at the provincial level; (3) investigate the performance of other provinces in terms of social outcomes compare with that of Western Province and recommends policy implications based on the results. Panel data analysis technique has been utilized for the data set of seven provinces2 of Sri Lanaka for the period of 1995 to 2011.

The empirical results imply that government spending by provincial councils does have an effect on student failure rates and infant mortality rates. But with the presence of other regional factors the quality of government spending is questionable. These findings are confirmed by the previous research in this field such as Rajkumar and Swaroop (2008), Baldacci, et al. (2008). Moreover, the performance of provinces in education and health sectors are varied with reference to Western Province. To attain the goals of education and healthcare sectors, the sum of government spending is not always what matters, but the quality. Therefore the provincial councils should not depend entirely on increasing the allocation of budget to improve the outcomes. Implementing monitoring and evaluation systems would be advantageous in advancing the effectiveness and quality of provincial budget allocation.