Developed nations, especially Nordic countries such as Iceland, Sweden, Norway, Denmark and
Finland allocate a sizeable portion of their budget for social welfare. On the contrary, developing
counties’ allocation for social welfare has been negligible. The question is: can state intervention
through social welfare provisions ensure sustained economic growth? In other words, do social
expenditures promote economic growth? This study seeks to answer this question by establishing
links between social expenditures and economic growth in Australia and New Zealand, and draw
lessons for fast developing ASEAN economies as they aspire to be developed nations soon. Using
annual data from 1980 to 2012, we deploy cointegration and error correction methods for
establishing long-run relationship between social expenditures and economic growth. We conduct
Granger causality tests for testing short-term direction of causality among the variables. For
Australia, economic growth is found to have three main determinants- education, health and social
expenditures. For New Zealand, health and social expenditures have been found as the main
determinants of growth. However, no long-run relationship could be established among the
variables when we included budget deficit in our model. The Granger causality tests indicate that
one way causality running from economic growth to health expenditure, and social expenditure to
economic growth in Australia. In case of New Zealand, on the other hand, one-way causality runs
from education expenditure to economic growth, health expenditure to education expenditure,
economic growth to health expenditure, and education expenditure to budget deficit. Social welfare
expenditures also Granger cause economic growth. Our findings suggest that social expenditures
promoted growth in Australia and New Zealand. The fast developing economies such as Singapore
and Malaysia, which aim to achieve the developed country status by 2020 and usually do not
allocate sizeable portion of their budget for social welfare, should adopt more ‘generous’ social
policies for the sake of a balanced development.