The new growth theory establishes, among other things, that government
expenditure can manipulate the economic growth of a country. This study
attempts to explain whether government expenditure increases or decreases
economic growth in the context of Sri Lanka. Results obtained employing a
productive output series and applying an analytical framework based on second
degree polynomial regression are generally consistent with previous findings:
government expenditure and economic growth are positively correlated;
excessive government expenditure is negatively correlated with economic
growth; and investment promotes growth. In a separate section, the article
examines Armey?s idea of a quadratic curve that explains the level of
government expenditure in an economy and the corresponding level of economic
growth [Armey, D. (1995). The Freedom Revolution. Washington, D.C.: Regnery
Publishing Co.]. The findings confirm the possibility of constructing the
Armey curve for Sri Lanka, and it estimates the optimal level of government
expenditure to be approximately 27%. This article adds to the literature
indicating that the Armey curve is a reality not only for developed
economies, but also for developing economies.