Government expenditure is one of the key fiscal policy variables that can influence economic growth in any country. Empirical studies examining the impact of government expenditure on economic growth have been heavily debated in recent years, in both developed and developing countries, and most investigations provided mixed results. This study recommends policy implications based on results derived from the following objectives: (1) to investigate the impact of government size on economic growth and determine which government budget will provide the biggest impact on economic growth; (2) to investigate the impact of each component of government investment and government consumption on economic growth.
This study employed the Ordinary Least Squares (OLS) regression technique. Data from the Central Bank of Sri Lanka and World Bank from 1960 to 2013 were employed for the aggregated and disaggregated analysis. This study confirms that government size is positively associated with economic growth in Sri Lanka, while government investment provides the biggest impact on growth. Government consumption in Agriculture, Health, and Welfare, and government investment in Education, Agriculture, and Transportation and Communication, have a positive and statistically significant impact on economic growth. However, government consumption in Education and Defense has a negative, but significant, impact on economic growth. Moreover, this study found that private investment and exports promote economic growth of Sri Lanka.