Does Government Spending Spur Economic Growth? Evidence from Nigeria

Abstract

This paper investigates the impact of government spending on economic growth in Nigeria. Utilizing annual time series data from 1970 to 2010, we applied OLS technique to a modified Ram (1986)’s two-sector production growth model. Overall, our results show that at the aggregate level, government spending in Nigeria is growth promoting, although the impact is very small and less than unity (0.16%). At the disaggregated level, only recurrent spending is significantly and positively related to growth, while the impact of capital spending is negative and insignificant. Since this is contrary to conventional wisdom and economic theory, we posit that the result should cautiously be interpreted as a special case for the Nigerian economy, which is not only characterized by poor institutional quality and corruption but also with a very weak capital infrastructural base.  Thus, the paper submits that for a robust growth, recurrent spending may still be necessary but government may also need to re-adjust its spending priorities to accommodate capital spending. Doing this would not only complements and improve the competitiveness of private sector productivity but may also corrects for the observed insignificant and negative impact of the variable on Nigeria’s economic growth.

Keywords: Nigeria, economic growth, recurrent and capital spending