A Disaggregated Approach to the Public Spending-Growth Nexus in Nigeria

Abstract

Optimising limited budgetary resources by directing spending to high-impact areas such as technology, health, and education is a major challenge for policymakers. This paper examines the effect of public expenditure on economic growth in Nigeria by disaggregating it into capital and recurrent components. The novelty of this study lies in its disaggregated approach, which is highly relevant, as it offers policy recommendations to aid the achievement of SDG 8 in Nigeria. The study's data covered the period 1985 to 2022. They were analysed using the augmented Dickey-Fuller unit root test, the Johansen cointegration test, the vector error correction model (VECM) for estimation, and the impulse response function. Findings from the study portrayed that the recurrent expenditure components that stifle growth were economic services, social and community services, and transfers. In contrast, the recurrent expenditure component that propels growth was administration. Further, all capital expenditure components, except administration, were observed to positively affect the growth of the Nigerian economy during the period of analysis. The impulse response functions also indicated that growth responded negatively to shocks in most recurrent expenditure components but positively to shocks in capital expenditure components. The study recommended substantially reducing capital expenditure on administration. In contrast, expenditure on areas such as social and community services should be increased,as they have a long-term impact on promoting growth.