Public Debt and Public Expenditure in Nigeria: A Causality Analysis

Abstract

This study investigated the causal relationship between total public debt and public expenditure in Nigeria from 1980 to 2015.The focus of the study is to determine if government borrowing in Nigeria is based on the need to provide social services and infrastructure as provided in the budget or by mere reason of privileged access to financial institutions both domestically and internationally as posited by Adam Smith (1776) in his theory of public debt. Applying co integration, vector error correction model and Wald test econometric tools of analysis to public debt, government capital expenditure, government recurrent expenditure and interest rate variables within the study period, the study obtained the following results. The trace statistics indicates two (2) co integration equations at five percent (5%) level of significance, suggesting that there is a long run relationship among the variables tested and that the results can be relied upon in taking long run policy decisions in the economy. The findings of the VEC test indicate that government capital and recurrent expenditure has significant positive relationship with public debt in the Nigerian economy. The Wald test result shows that unidirectional causality runs from both capital and recurrent expenditure to public debt in Nigeria. An obvious implication of this result is that government borrowing in Nigeria is triggered by government deficit budgeting, a situation which is well known in Nigeria at both federal and state levels. It therefore becomes necessary that the government budgeting process need to be reexamined to ensure that allocative efficiency is achieved in our budgeting system and that borrowing to finance budget deficit must be done objectively and realistically. This study therefore recommends the introduction of planning-programming-budgeting systems (PPBS) and Zero based budgeting (ZBB) in preference to the current practice of incremental budgeting (IB) in our public finance at both federal and state levels as is the current global practice considering that these budgeting approach seeks to intensify competition for budget resources and consequently aids the realization of government fiscal policy goals in the economy.

Keywords: public debt, government capital expenditure, government recurrent expenditure, causality, Allocative efficiency, Zero based budgeting, fiscal policy.