Impact of Government Expenditure Components on Economic Performance

Background

The Classical School of Thought are of the view that the working principles of the invisible hands of

demand and supply will interplay interplay to create necessary adjustments in relation to output

determination and employment (Johnson et al. 2001; Shaikh 2009; Backhouse 2015). However, following

the aftermath of the Great Economic Depression of the 1930s that culminated in the birth of the

Keynesian Economics School of thought, the attention of a significant number of nations has been drawn

to the relevance of government involvement in stabilizing and regulating aggregates of the general

economy.

There are two major categories of economic policies that have been widely utilized over a vast period of

time for the general purpose of economic stabilization and for the achievement of some essential

macroeconomic goals and objectives. In specific terms, these policies are fiscal and monetary. Although

the two policies are different in terms of their structure and the application of their fundamental

instruments, however, they are generally targeted at achieving similar goals and objectives of maintaining

economic stability in most nations (Beetsma and Jensen 2005; Claeys 2006). While the latter is generally

a formidable instrument in the hands of the apex bank of various nations, the former which are

strategically designed to regulate or stabilize the economy through various forms of taxes and

expenditures, exists as an important economic instrument in the hands of the governments of various

nations

Government spending as argued by various scholars has significant effects on economic growth.

Whenever the rate of government spending on health and education for instance increases, the outcome is

higher rate of economic growth. Also, government spending on infrastructures such as road projects,

transportation, agriculture, etc. attracts more investments and increases the profits of firms and incomes of

individuals thereby accelerating economic growth. The government’s investment in physical and social
infrastructures, health care facilities, and educational institutions has significant effects on economic

growth for it provides a suitable climate for investments in a country.

In a quest to achieve these growth objectives, policies have been stimulated to increase Nigeria’s Gross

Domestic Products (GDP), achieve balance of payment equilibrium, achieve price stability, and increase

business activities with the consequence that expenditure financing in Nigeria witnessed a rising trend,

growing continuously over the years and more especially in the last two decades. Disappointedly, the

growth rates have not been consistent with the increasing rate of government expenditure in

Nigeria; government expenditure growth rate was 37.9% in 2008, before dropping to 6.4% in 2009

and increased to 21.5% in 2010, and then started declining from 12.3% in 2011 to -2.3% in 2012

while the growth rate of the GDP was 6.0% in 2008, 7.0% in 2009, 8.0% in 2010, 7.4% in 2011 and

6.6% in 2012. However, from 2011 to 2019, it grew by 181.35%. GDP growth rate averaged at

3.15% from 2010 to 2020 with recessions of -1.62% and -1.79% in 2016 and 2020 respectively.

These values, no doubt, points to the obvious that the government incremental spending has not translated

to desired economic growth and prosperity of the people as the growth rate of public expenditure was far

higher than that of economic growth. The pertinent question then is to ask that what causes the

disproportionate mismatch between public expenditure spending and economic performance in Nigeria.

Although empirical evidences on the effect of government expenditure on output growth, especially for

developing economies like Nigeria, present two opposing views; some suggesting that government

expenditure has negative effect on output growth (Abu & Abdullahi, 2010; Devarajan, Swaroop & Zou,

1996; Folster & Henrekson, 2001; ¨ Gukat & Ogboru, 2017; Nurudeen & Usman, 2010; Saidu & Ibrahim,

2019; Segun & Adelowokan, 2015). while other studies established that government expenditure

promotes output growth and development of a country (Aigbeyisi, 2013; Akanbi, 2014; Ahuja & Pandit,

2020; Awode & Akpa, 2018; Nyarko-Asomani, et al., 2019; Bose, Haque & Osborn, 2007; Idris & Bakar,

2017; Ihugba & Njoku, 2017; Jibir & Aluthge, 2019a; Jibir & Babayo, 2015; Srinivasan, 2013;

Olayungbo & Olayemi, 2018). The conflicting results can be attributed to differences in methodological
approach, scope, or dataset. Irrespective of which of the argument may be more convincing, what remains

obvious is that there is need for further studies to go beyond their specifications and methodologies. Thus,

the focus of this study is to empirically investigate the impact of government expenditure on economic

growth in Nigeria.

Objective of the Study

Arising from the foregoing, the central objective of this study will be to empirically investigate the

relationship between government expenditure (public expenditure) and economic growth in Nigeria. The

specific objectives that operationalize the main objective are:

1. To investigate the determinants of public expenditures in Nigeria.

2. To examine the short run impact of capital expenditure on economic growth in Nigeria.

3. To examine the short-run impact of recurrent expenditure on economic growth in Nigeria.

4. To investigate the long run impact of capitalt expenditure on economic growth in Nigeria.

5. To investigate the long run impact of recurrent expenditure on economic growth in Nigeria.