Increasing Size of Government: Implication for Output Growth in Nigeria

Abstract

This study investigates the interaction between government expenditure and economic growth in Nigeria. Core public spending theories are discussed and time series data covering 1961-2011 period, used. The study is analyzed using two different econometric methods: the neoclassical growth framework and Granger causality test in examining the level of impact and direction of causality respectively. The growth model was decomposed into long run static equation and short run dynamic error correction model during the analyses. Public expenditure is statistically significant in promoting economic growth in Nigeria. A unit increase in public expenditure induces at least 16 percent growth in gross domestic product. The causality test between recurrent expenditure and gross domestic product reveal a uni-directional case; with growth running from the latter to the former. Also, causal relationship between capital expenditure and gross domestic product is uni-directional; with growth running from gross domestic product to capital expenditure. However, the result shows a bi-directional case between recurrent and capital expenditure. On the overall, we recommend that government expenditure be increased so as to improve the impact of government size on Nigeria’s economy.