Dynamic Effect of Government Expenditure on Nigeria Economic Growth: Long Run Propensity and Short Run Adjustments

Abstract

The nexus between government expenditure and economic growth remains a controversial issue in public finance literature as scholars have divergent opinion backed by empirical findings. In this study, we examine the long run relationship between government expenditure and economic growth, short run and long run adjustment and the effect of government expenditure on Nigeria’s economic growth for a period of forty five (45) years from 1970 to 2015. Prior to model estimation, we subjected the model to diagnostic of Heteroskedasticity, Serial Correlation LM, Ramsey RESET and Multicollinearity tests. The stationarity test was performed to ensure that the variables were not encumbered by stationarity flaws linked with most time series data. Johansen co-integration was applied in testing the long run relationship, short run and long run adjustments by vector error correction model and effect of government expenditure on economic growth by granger causality effect test. The result of the long run test reveals the existence of a long run relationship between government expenditure and economic growth in Nigeria, VECM analysis suggests that Nigeria would achieve a steady level of growth if preference is giving to capital expenditure over recurrent expenditure, and the granger causality effect result envisages that recurrent and capital expenditure which are the two components of government expenditure have significant effect on Nigeria’s economic growth thus, supporting the Adolph Wagner’s hypothesis on public expenditure. Findings also indicates that government application of fiscal policy via increasing expenditure as the sole tool for economic growth as currently the case will not spur economic growth in the long run. The practical implication of this study research result is that the federal government of Nigeria should embark more on capital/development projects as it will in the long run spur economic growth and development. The current situation where recurrent expenditure takes over 85% of the yearly budget should be discontinued with so as to achieve our vision to be rank in the league of world top economies.