Impact of Government Expenditure on Economic Growth in Nigeria From 2000 to 2024
Chapter One
Objectives of the Study
The main objective of this study is to examine the impact of government expenditure on economic growth in Nigeria from 2000 to 2024. The specific objectives are:
- To analyze the relationship between total government expenditure and Gross Domestic Product (GDP) growth in Nigeria from 2000 to 2024.
- To assess the impact of recurrent and capital government expenditures separately on Nigeria’s economic growth.
- To evaluate the effectiveness of sectoral government expenditures (such as education, health, and infrastructure) on economic performance during the study period.
CHAPTER TWO
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
Theoretical Framework
This section will discuss two relevant and recent economic theories that explain the link between government expenditure and economic growth:
Wagner’s Law of Increasing State Activities (Adolph Wagner, 1883)
Wagner’s Law, propounded by Adolph Wagner in 1883, postulates that government expenditure increases as a natural consequence of economic growth. This theory asserts that as a nation’s economy expands, the demand for public services such as education, health, infrastructure, and welfare also rises, necessitating a proportional or even greater increase in government spending (Abdulrahman, 2022). Wagner emphasized that this expansion is structural and inevitable, driven by increased urbanization, industrialization, and societal expectations for public goods and services (Agbonkhese & Asekhome, 2024).
In the context of Nigeria, Wagner’s Law provides a useful framework to understand the persistent rise in government expenditure over the years. As economic activities expand, the government is often compelled to invest more in human capital and infrastructure to support and sustain growth (Akpan & Abang, 2023). This aligns with findings by Aremu et al. (2023), who argue that sectoral public spending in Nigeria, particularly in health and education, tends to increase alongside national income levels.
However, Wagner’s Law has been criticized for assuming a unidirectional causality from economic growth to public expenditure, ignoring the possibility that government spending can itself drive growth (Egbetunde & Fasanya, 2023). This limitation becomes evident in Nigeria, where increases in government expenditure do not always translate to proportionate economic outcomes, partly due to inefficiencies and misallocation of funds (Onuorah & Akajuabi, 2022). Moreover, Aregbeyeni and Kolawole (2023) point out that oil revenue volatility and political factors often drive public expenditure trends in Nigeria, independent of actual economic growth.
Despite these criticisms, the relevance of Wagner’s Law to Nigeria remains significant. It helps in contextualizing the rising fiscal obligations of the government in relation to its developmental aspirations. As emphasized by Anyanwu et al. (2023), Nigeria’s socio-economic development goals necessitate increasing investments in human capital and physical infrastructure, consistent with Wagner’s assumptions.
Nonetheless, critics argue that Wagner’s Law may not be fully applicable in contexts like Nigeria where state spending has increased without commensurate economic growth. For instance, studies by Fasoranti (2022) and Arewa and Nwakahma (2023) highlight the inefficiencies and corruption that undermine the effectiveness of increased expenditure in fostering economic growth. Thus, while Wagner’s Law provides a theoretical basis for analyzing public spending patterns, its assumptions must be adapted to reflect Nigeria’s complex fiscal and institutional realities.
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CHAPTER THREE
METHODOLOGY
Research Design
This study adopts a correlational research design to examine the impact of government expenditure on economic growth in Nigeria between 2000 and 2024. A correlational design is appropriate for identifying the nature and strength of relationships between two or more variables without manipulating any of them. In the context of this study, the design allows for the statistical analysis of the relationship between various components of government expenditure—namely total, recurrent, capital, and sectoral (e.g., health, education, infrastructure)—and economic growth, typically measured by changes in Gross Domestic Product (GDP).
The justification for using this design is grounded in the study’s objectives, which aim to determine whether changes in government expenditure significantly correlate with and influence economic performance over time. Correlational studies are particularly relevant in macroeconomic analysis, where it is impractical to experimentally manipulate national fiscal variables. Therefore, this design provides a robust framework for analyzing longitudinal macroeconomic data while ensuring the study remains non-intrusive, reliable, and generalizable. Furthermore, correlational research helps to identify patterns and trends in economic indicators, allowing policymakers to understand the implications of government spending over the 25-year period under investigation.
Population of the Study
The population of this study comprises all relevant macroeconomic and fiscal indicators in Nigeria between the years 2000 and 2024. These indicators were selected based on their relevance to government financial activities and their potential impact on the country’s economic performance. The variables reflect the core components of government expenditure and key economic metrics needed to assess economic growth within the Nigerian context. The primary variable of interest, which serves as the dependent variable, is the Gross Domestic Product (GDP). GDP is measured annually in constant Nigerian Naira and serves as the standard indicator of economic growth, capturing the overall value of goods and services produced in the country each year.
To evaluate the effect of government expenditure on economic growth, several independent variables were considered. These include total government expenditure, which accounts for the sum of all annual federal government spending, encompassing both recurrent and capital components. Recurrent expenditure involves routine spending such as salaries, wages, and overhead costs essential for the daily operation of the government. Capital expenditure focuses on long-term investments such as infrastructure, equipment, and capital projects aimed at enhancing the productive capacity of the economy. The study also includes sector-specific government expenditures, particularly in education, health, and infrastructure, given their crucial role in national development.
In addition to these, control variables were included to account for external factors that may influence economic growth. These are the inflation rate, measured by the annual percentage change in the Consumer Price Index; the exchange rate, reflecting the average value of the Nigerian Naira against the US Dollar; and oil revenue, which is critical due to Nigeria’s reliance on crude oil exports as a major source of national income. The inclusion of these variables ensures a comprehensive analysis of the influence of government spending on Nigeria’s economic growth from 2000 to 2024.
CHAPTER FOUR
RESULTS AND DISCUSSION
Results
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
The study aimed to assess the relationship between government expenditure and economic growth in Nigeria from 2000 to 2024. The regression analysis and unit root tests were employed to test the significance of various forms of government expenditure on economic growth, measured by the country’s Gross Domestic Product (GDP). The results revealed several key insights regarding the influence of government spending on Nigeria’s economic performance.
First, the analysis indicated that total government expenditure (TOTEXP) had no significant relationship with Nigeria’s GDP growth. The coefficient for total government expenditure was very small and the p-value was 0.325, which is well above the commonly accepted threshold of 0.05 for statistical significance. This suggests that the overall level of government spending in Nigeria did not have a measurable impact on the country’s economic growth during the study period. This result raises questions about the effectiveness of government expenditure as a tool for stimulating economic growth, possibly due to inefficiencies in how these funds were allocated or the misalignment between spending priorities and economic needs.
When examining recurrent and capital expenditures, the findings were also revealing. The results showed that neither recurrent expenditure (RECEXP) nor capital expenditure (CAPEXP) significantly influenced GDP growth, with p-values of 0.537 and 0.594, respectively. Recurrent expenditure refers to the portion of government spending used for day-to-day operations, while capital expenditure is directed toward long-term investment in infrastructure and development projects. The lack of significance in both categories indicates that these forms of spending did not have a discernible effect on economic growth. This could be due to the inefficiencies in public spending, corruption, or poor project execution, which can undermine the potential benefits of such expenditures. Additionally, it could be argued that the economic environment may have limited the impact of public investment in infrastructure and recurrent expenditures on economic growth.
The study also investigated the impact of sectoral government expenditures, specifically in the education, health, and infrastructure sectors. These sectors are often considered essential for long-term economic development, as they contribute to human capital development and provide the necessary infrastructure for business activities. However, the findings indicated that government expenditure in these sectors (EDUEXP for education, HEALEXP for health, and INFRAEXP for infrastructure) did not significantly affect GDP growth, with p-values ranging from 0.336 to 0.743. The lack of significance suggests that despite the critical role these sectors play in fostering economic development, government spending in these areas may not have been effectively managed or utilized. This could be attributed to issues such as inadequate planning, corruption, and inefficiencies in the execution of projects that fail to translate into tangible economic outcomes. Moreover, while public spending in education, health, and infrastructure is necessary for long-term growth, the immediate effects on GDP growth may be less direct, with these expenditures yielding returns only in the medium to long term.
The results also revealed that oil revenue (OILREV), which is a significant source of government income in Nigeria, did not have a significant impact on economic growth, with a p-value of 0.553. This could suggest that oil revenue, despite being a key source of funding for government expenditure, did not contribute to sustainable economic growth. It is possible that the volatility of oil prices, combined with mismanagement and lack of diversification in the Nigerian economy, has reduced the effectiveness of oil revenues in driving stable growth.
Additionally, the study examined the relationship between inflation (INFL) and government expenditure. The results showed a very low t-statistic for inflation (0.094) with a p-value of 0.926, indicating that inflation had no significant effect on the relationship between government expenditure and economic growth during the period under review. This finding could suggest that inflation was not a major factor in influencing the economic outcomes of government spending, potentially due to the instability and structural issues in the Nigerian economy that overshadowed the impact of inflation.
Exchange rate (EXCHR) was another variable tested in the analysis, with a coefficient of 0.0280 and a t-statistic of 1.909. The p-value of 0.076 suggests that exchange rate movements had a marginally significant effect on economic growth. This result may indicate that exchange rate fluctuations had some impact on the overall economic environment, influencing the cost of imports and exports, and thereby affecting the broader economy. However, the effect was not strong enough to establish a clear and significant link between exchange rate movements and GDP growth.
In summary, the study found that government expenditure, both in total and by sector, had little to no significant impact on Nigeria’s economic growth between 2000 and 2024. This suggests that despite the considerable amount of public spending during this period, the country’s economic growth may have been hampered by inefficiencies in the management of public funds, a lack of effective implementation, and possibly external economic factors such as fluctuations in oil prices. The findings emphasize the need for better targeting and more efficient allocation of government expenditures, particularly in critical sectors like education, health, and infrastructure, to foster long-term economic growth. Additionally, it highlights the importance of addressing structural issues in the Nigerian economy to ensure that public spending can be more effectively translated into economic development. The results suggest that government expenditure alone, without proper management and a conducive economic environment, may not be sufficient to achieve the desired economic outcomes. Further research could explore the role of governance, institutional quality, and the broader economic framework in influencing the effectiveness of government spending on economic growth in Nigeria.
Conclusion
Based on the results from the hypotheses tested, the study concluded that government expenditure in Nigeria, including total, recurrent, capital, and sectoral expenditures, did not have a significant impact on economic growth from 2000 to 2024. The p-values for all forms of expenditure were well above the commonly accepted threshold of 0.05, indicating that these expenditures were not statistically significant in driving GDP growth during the period under review. This finding suggests that while government spending is critical for economic development, inefficiencies in public spending, poor management, and possibly corruption may have undermined its potential to stimulate growth. Additionally, oil revenue, despite being a major source of funding, did not show a significant relationship with economic growth, further supporting the notion that the Nigerian economy’s over-reliance on oil revenues has not contributed to sustainable growth. Furthermore, the marginal effect of exchange rate fluctuations indicated that while exchange rates may influence the economy, their impact was not strong enough to directly affect GDP growth. Overall, the findings highlight the need for improved management of public funds, better-targeted investments in critical sectors, and the establishment of a more conducive economic environment for government expenditures to foster meaningful and sustained economic growth in Nigeria.
Recommendations
Based on the findings of the study, the following recommendations are made to improve the relationship between government expenditure and economic growth in Nigeria:
- Enhance the Efficiency of Public Expenditure: The study indicates that government expenditure, despite its significance, has not had a notable impact on economic growth. To improve this, Nigeria should focus on enhancing the efficiency of public spending by ensuring that funds allocated to critical sectors such as education, health, and infrastructure are properly utilized. This can be achieved by strengthening monitoring and evaluation systems to track the effectiveness of government projects and reducing wastage.
- Diversify the Economy Beyond Oil: Since oil revenue was found not to significantly influence economic growth, Nigeria must take deliberate steps to diversify its economy away from oil dependency. Investments in non-oil sectors such as agriculture, manufacturing, and technology should be prioritized to create a more resilient and sustainable economic base.
- Targeted Sectoral Investments: While sectoral expenditures such as education, health, and infrastructure showed minimal direct effects on economic growth, they are still essential for long-term development. The government should ensure that these sectors receive well-targeted investments aimed at addressing existing gaps, improving quality, and fostering long-term growth.
- Strengthen Institutional Frameworks for Public Spending: The inefficiency in public spending suggests that institutional frameworks for managing government expenditure need to be improved. Strengthening anti-corruption measures, ensuring transparency in budget allocation, and improving public sector management can significantly enhance the impact of government expenditure on economic growth.
- Focus on Human Capital Development: Given the critical role of human capital in economic growth, greater investments should be made in education and vocational training programs. This will help build a skilled workforce capable of driving productivity in various sectors of the economy. Fostering innovation and entrepreneurship through education and skill development will also play a crucial role in sustaining long-term economic growth.
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