Government Expenditure and Economic Growth in Nigeria: A Cointegration and Error Correction Modeling

This study examined the relationship between government expenditure and economic growth in Nigeria using a co-integration and error correction model for the period 1970-2010. A time-series data was obtained from the Central Bank of Nigeria for the analysis. The outcome of the ADF unit root test indicated that all variables included in the model were non-stationary at their levels but integrated of order one, I(1). From the long-run analysis, the results revealed a positive and significant linear relationship between the two categories of government expenditure and economic growth (measured by real GDP), whereas on the short-run, economic growth had a positive and significant linear relationship with recurrent expenditure and negative but significant relationship with capital expenditure. The result of the Pairwise Granger Causality test in a Vector Error Correction Model indicated a unidirectional (one-way) causality, running from economic growth to capital expenditure and recurrent expenditure to economic growth, while bi-directional causality runs from capital expenditure to recurrent expenditure and vice versa. Therefore, the study recommended the need to stimulate economic growth by allocating appropriate proportion to capital expenditure of government in the national budget.