Forecasting expenditure components in Nigeria

Abstract

PurposeThis study forecasts the government expenditure components in Nigeria, including recurrent and capital expenditures for 2021 and 2022, based on data from 1981 to 2020.Design/methodology/approachThe study employs statistical/econometric problems using the Feasible Quasi Generalized Least Squares approach. Expenditure forecasts involve three simulation scenarios: (1) do nothing where the economy follows its natural path; (2) an optimistic scenario, where the economy grows by specific percentages and (3) a pessimistic scenario that defines specific economic contractions.FindingsThe estimation model is informed by Wagner's law specifying a positive link between economic activities and public spending. Model estimation affirms the expected positive relationship and is relevant for generating forecasts. The out-of-sample results show that a higher proportion of the total government expenditure (7.6% in 2021 and 15.6% in 2022) is required to achieve a predefined growth target (5%).Originality/valueThis study offers empirical evidence that specifically requires Nigeria to invest a ratio of 3 to 1 or more in capital expenditure to recurrent expenditure for the economy to be guided on growth.