Do Welfare Payments, and Development Subsidies Promote Sustainable Economic Growth in Sri Lanka? Empirical Evidence Using a Wavelet Coherence and ARDL Approach

ABSTRACT This paper examines the causal relationship between welfare payments, development subsidies and economic growth in Sri Lanka to evaluate the country's trajectory towards sustainable development. Utilising annual data from 2000 to 2023, the research employs the ARDL bounds testing approach to examine short‐run and long‐run relationships, while incorporating FDI inflows, trade openness and inflation as intermediate variables. Furthermore, wavelet coherence analysis is applied to capture dynamic causality across different time frequencies, complemented by pairwise Granger causality tests to determine the overall direction of the relationship. The ARDL results reveal that welfare payments and development subsidies have a statistically significant negative association with economic growth in both the long run and short run. Specifically, the long‐run coefficient of LWFS is −25.4332, while the short‐run coefficients are −7.3751 for the current period and −10.7571 for the first lag, indicating that increases in aggregate welfare and development subsidy expenditure are associated with lower GDP growth during the study period. The wavelet coherence results show that the GDP‐welfare/subsidy relationship is time‐varying and frequency‐dependent, with stronger short‐run co‐movement, weaker medium‐run coherence and moderate to relatively high long‐run coherence that is not consistently growth‐enhancing. The study concludes that the current fiscal framework imposes a significant burden on economic expansion, potentially hindering the achievement of sustainable development goals (SDGs) related to economic resilience. To ensure long‐term sustainability, the findings suggest a critical need for improved targeting, structural reforms and the integration of welfare programmes into productive economic activities to foster inclusive and sustainable growth.