Aggregate Government Spending and Economic Growth in Nigeria: Short-Run Dynamics and Long-Run Relationships

Abstract

This study investigates the relationship between aggregate government spending and economic 
growth in Nigeria, with particular emphasis on both short-run dynamics and long-run 
relationships. Using annual time-series data from the Central Bank of Nigeria (CBN) 
Statistical Bulletin spanning the period 1981–2023. The analysis employs techniques like the 
unit root test, the Johansen cointegration test and the Vector Error Correction Model (VECM) 
to determine the existence of a long-run equilibrium relationship among the variables. Given 
the evidence of cointegration, the Vector Error Correction Model (VECM) is utilised to 
estimate both the short-run effects and the speed of adjustment toward long-run equilibrium 
and long-run relationships. The variables considered included Real Gross Domestic Product 
(RGDP) as a proxy for economic growth and aggregate expenditure, which combines recurrent 
and capital expenditures. The findings reveal a significant negative long-run effect of 
aggregate expenditure on economic growth, highlighting inefficiencies in public spending. 
However, short-run results indicate a temporary positive response to expenditure shocks. The 
variance decomposition shows a moderate contribution of aggregate expenditure to GDP 
growth. The findings challenged the Keynesian hypothesis in the long run and underscored the 
necessity for directing public spending towards productive sectors to achieve sustainable 
economic growth. These results align with existing empirical literature emphasising the 
importance of efficient and targeted government spending. The study concludes by 
recommending the enhancement of public spending efficiency and a focus on productive 
expenditures in critical sectors like infrastructure, education, and healthcare to foster 
sustainable economic growth.