Economic Growth and Wagner’s Hypothesis: The Nigerian Experience

Abstract

Wagner’s law viewed that public expenditure is a consequence rather than cause of national income hence; it plays no role in generating national income. While Keynes viewed that public expenditure is a cause rather than effect of national income therefore can be used to heighten economic activities. In the developing economy like Nigeria, which of these schools prevails, Wagner or Keynes?  This study seeks to answer this question by determining the nature and direction of causality between government spending and the economic growth as well as the relationship between these macroeconomic variables. The study employs the Granger causality and ordinary least square (OLS) technique to evaluate the empirical evidence of the relationship between fiscal policy and economic growth in Nigeria by using an econometric technique through multiple regression models that was derived from the Solow growth model. After testing for granger causality, the result reveals that there is a bidirectional relationship between government spending and economic growth in Nigeria, thus we find support of Wagner’s and Keynesian hypotheses. Also, the analysis showed that government expenditure in our Nigerian economy had direct effect on economic growth; therefore, there is need for appropriate policies with respect to government spending knowing that it affects the level of growth. To achieve sustainable economic growth, Government expenditure should be increased in the economy.

Keywords: Government Expenditure, Economic Growth, Wagner law and Granger causality.