THE CAUSALITY BETWEEN ECONOMIC GROWTH AND GOVERNMENT EXPENDITURE IN NIGERIA

The Purpose. The paper studies the causal relationship between economic growth and government expenditure between 1970 and 2016. Design/Methodology/Approach. The study employed modern co-integration techniques, Granger causality test within an error-correction modeling framework and variance decomposition analysis. Findings/Implications. The co-integration test found that a co-integration relationship exists between economic growth and government expenditure. The Granger Causality test result shows that there exist both short run and long run bidirectional relationships between the variables with causality stronger from economic growth to government expenditure than the opposite direction as proved by the variance decomposition analysis. Originality. The Granger Causality test results found that both economic growth and government expenditure have a cause effect on each other, suggesting that both variables are growing substantially. Using the variance decomposition analysis result as a basis for policy formulation, the government should ensure that resources are well managed and allocated efficiently among competing needs to accelerate economic growth.