Strategic spending: a sectoral analysis of government expenditure and its impact on Malaysia’s economy and income distribution

Persistent income inequality and uneven economic development remain pressing challenges in Malaysia despite decades of public investment across key sectors. This study investigates the sectoral allocation of government spending and its impact on economic growth and income distribution, focusing on four critical areas: public pension payments, agriculture and rural development, education and training, and healthcare. Motivated by concerns about rising public debt, inefficient fiscal allocation, and growing public dissatisfaction, this study addresses a gap in the literature by providing a comparative long-term analysis of spending effectiveness across key sectors. Using time series data from 1980 to 2021 and applying the autoregressive distributed lag (ARDL) model, the study reveals that spending on agriculture and rural development and education and training significantly contribute to long-term economic growth. By contrast, health and pension expenditures were found to be statistically insignificant in driving growth. Regarding income inequality, only agriculture and rural development spending show a long-term impact, while pension spending has short-run significance. This study makes a novel contribution by jointly examining the effects of government spending on both economic growth and income inequality across key sectors, providing actionable insights for more focused and efficient fiscal policymaking. The findings highlight the importance of prioritizing productive sectors, re-evaluating pension policies, and ensuring transparency in fiscal management to enhance growth and equity outcomes in Malaysia.