CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The case for government involvement in resource allocation rests on the limits of the market mechanism. In the classical laissez-faire tradition associated with Adam Smith, the state was not meant to run the economy from day to day. Its role was to provide an enabling environment, keep law and order and defend the nation against external threats. Markets can handle the allocation of private goods reasonably well through exchange and competition, but they cannot be relied on for public goods. A public good is non-rivalrous, so one person's consumption does not reduce what is available to others, and non-excludable, so no one can be effectively prevented from using it. Few goods meet both conditions absolutely, but defence, public health and roads come close enough for the concept to be useful in economic analysis.

Following Richard Musgrave's framework, government activity is commonly divided into three branches: allocation, distribution, and stabilisation and growth. In practice, governments provide education, health care, defence, policing and fire protection, support housing and recreation, set health standards, and supply infrastructure such as water and transport. They also try to achieve a fairer distribution of income, stabilise the economy and sustain growth. Financing all this requires large resources, raised through oil revenue, taxes and borrowing.

The relationship between the size of government spending and long-run economic growth has been debated for decades. Two broad strands of theory and evidence stand out. One treats growth as the cause of public sector expansion. Wagner's Law of increasing state activity holds that as an economy develops, the functions and spending of government rise. Peacock and Wiseman's displacement hypothesis explains expenditure growth through periodic shocks that shift what the public will accept in taxation. The other strand, associated with Keynesian economics, treats government spending as an exogenous source of change in aggregate output, so that higher spending raises growth. Against this, a number of scholars argue that higher spending can slow growth because financing it requires higher taxes or borrowing, which can discourage work, raise production costs and crowd out private investment.

Nigerian evidence reflects the same unresolved debate. Anowor and Nwanji (2018) note that the size of Nigeria's public expenditure has been rising for some three decades and that this has raised questions about its relationship with growth. Their re-examination of data for 1980 to 2016 found that capital spending had an inverse and significant relationship with growth, that recurrent spending had a positive but statistically insignificant effect, that capital spending and growth were not causally related, and that growth caused recurrent spending. Adegboyo and Olaniyan (2021) used data for 1981 to 2019 and a disaggregated approach. They found that recurrent and capital spending on social and community services, together with recurrent spending on administration, stimulated growth, while spending on economic services and on transfers deterred it. Sokunbi et al. (2023), using 1980 to 2022 data and an error correction model, found that capital expenditure had a favourable and significant short-run association with growth, whereas recurrent expenditure and inflation had negative but insignificant effects. More recently, Dauda and Elegu (2026) covered 1988 to 2023 and found that recurrent expenditure had a positive and significant effect on growth, capital expenditure a positive but insignificant effect, and that causality ran from recurrent expenditure to growth but not from capital expenditure. They conclude that the growth effect of public spending in Nigeria depends not only on its size but also on its composition, efficiency and the quality of implementation.

The diversity of these findings is the main motivation for the present study. Estimates differ by period, by how expenditure is classified and by method, and few studies cover the most recent decade. This study therefore examines the effect of public expenditure on economic growth in Nigeria using disaggregated capital and recurrent expenditure as the explanatory variables and real gross domestic product (GDP) as the measure of growth. It covers 1981 to 2024.

1.2 Statement of the Research Problem

Government expenditure in Nigeria has risen steadily over the past several decades, with the composition of spending tilted toward recurrent items (Anowor & Nwanji, 2018). In principle, a larger public budget, particularly one directed at capital projects such as roads, power, schools and hospitals, should raise productivity, lower costs for private firms and support growth and human development. Yet the outcomes have been disappointing. Poverty has risen in recent years: the World Bank's April 2026 Nigeria Development Update reported, as relayed by Nairametrics (2026), that poverty rose from 56 per cent in 2023 to 61 per cent in 2024 and 63 per cent in 2025, about 140 million people, even as inflation fell sharply. The report noted that household incomes have not grown fast enough to offset still-elevated prices.

This gap between spending and welfare raises questions about the quality, composition and effectiveness of public expenditure. If capital expenditure is the main route through which spending raises growth, it would be expected to take a larger share of the budget than recurrent expenditure, and to show a clearer positive effect on growth. Existing studies, however, report that capital expenditure has an inverse effect (Anowor & Nwanji, 2018), a positive but insignificant effect (Dauda & Elegu, 2026) or a favourable effect only in the short run (Sokunbi et al., 2023), while recurrent spending appears to promote growth in some samples (Dauda & Elegu, 2026) and not in others (Anowor & Nwanji, 2018; Sokunbi et al., 2023). Adegboyo and Olaniyan (2021) show that effects differ markedly across functional categories, and that some spending categories deter growth.

It is therefore appropriate to ask whether increases in government spending, and changes in its composition, help or hinder economic growth in Nigeria; whether increases in capital and recurrent spending are effective in raising growth and complementing private investment; and whether public spending can promote long-term growth given persistent weaknesses in budget administration. This study examines the effect of public expenditure on economic growth in Nigeria, with real GDP as the dependent variable and capital and recurrent expenditure as independent variables, using time series data for 1981 to 2024.

1.3 Research Questions

The study seeks answers to the following questions:

1. How far does capital expenditure affect economic growth in Nigeria?
2. How far does recurrent expenditure affect economic growth in Nigeria?
3. To what degree is there a cointegrating relationship between government expenditure and economic growth?
4. Is there a causal relationship between government expenditure and economic growth in Nigeria?
5. How far does total government expenditure affect economic growth?

1.4 Objectives of the Study

The main objective is to examine the effect of public expenditure on economic growth in Nigeria. The specific objectives are to:

1. examine the effect of capital expenditure on economic growth in Nigeria;
2. analyse the effect of recurrent expenditure on economic growth in Nigeria;
3. investigate whether a cointegrating relationship exists between government expenditure and economic growth;
4. determine the direction of causality between government expenditure and economic growth in Nigeria; and
5. examine the effect of total government expenditure on economic growth.

1.5 Research Hypotheses

The following null hypotheses are tested:

1. H01: Capital expenditure does not have a positive and significant effect on economic growth in Nigeria.
2. H02: Recurrent expenditure does not have a positive and significant effect on economic growth in Nigeria.
3. H03: Aggregate government expenditure does not have a cointegrating relationship with economic growth in Nigeria over the study period.
4. H04: Capital expenditure and recurrent expenditure do not have a causal relationship with economic growth in Nigeria.
5. H05: Aggregate public expenditure does not have a positive and significant effect on economic growth in Nigeria over the study period.

1.6 Scope of the Study

The study examines the relationship between public expenditure and economic growth in Nigeria in order to establish whether a long-run relationship exists and in which direction causality runs. Public expenditure is disaggregated into capital expenditure and recurrent expenditure, which serve as the independent variables, while real GDP proxies economic growth. The study uses annual time series data for 1981 to 2024, a period that spans the years before, during and after the structural adjustment programme and extends through the most recent episodes of macroeconomic reform and adjustment. Estimation uses ordinary least squares (OLS), supported by unit root, cointegration and causality tests.

1.7 Significance of the Study

Policymakers and government authorities. The findings should help government choose policies to address Nigeria's fiscal challenges. Because different categories of spending appear to affect growth differently (Adegboyo & Olaniyan, 2021; Dauda & Elegu, 2026), the results may show where reallocating spending across sectors could raise efficiency. They may also support stronger monitoring of capital projects and better alignment of spending with productivity-enhancing sectors, which recent evidence suggests matter as much as the volume of spending (Dauda & Elegu, 2026). By using data through 2024, the study provides results that reflect the most recent fiscal experience.

Academia. The study adds to the empirical literature on public finance and growth in a developing economy such as Nigeria. The divergent findings of earlier studies show that the question is far from settled, and this work offers a further reference point and a basis for additional research.

General public. The findings will interest members of the public who follow public finance, including politicians and other stakeholders concerned with how public money is spent.

1.8 Limitations of the Study

The first limitation is the lack of consensus on the determinants of economic growth. Because the relative importance of the many factors that influence growth is still debated, it is difficult to draw firm conclusions about the effect of government expenditure alone.

The second is that the study does not explicitly measure the quality of government spending, which may be the most important factor. The capability of civil servants and the conditions under which they work affect how efficiently public resources are used. Spending is unproductive when it goes on payroll irregularities such as ghost workers, when funds do not reach their intended purposes, or when corruption or favouritism affects who benefits from public programmes and projects.

The third is limited coverage. The data cover only 1981 to 2024, and only real GDP, capital expenditure and recurrent expenditure are included. Other variables that may help explain the effect of public expenditure on growth are not considered.

1.9 Operational Definition of Terms

Capital expenditure: Government spending on fixed assets such as roads, schools, hospitals, buildings, plant and machinery, whose benefits last for several years.

Recurrent expenditure: Government spending on items such as wages and salaries, supplies and services, rent, pensions and interest payments, whose benefits are consumed within the financial year.

Government expenditure: Spending by government at any level, including purchases of goods and services, employment in public services such as administration, defence, education and health, transfer payments and spending on community and economic services.

Economic growth: A sustained increase in an economy's output or productive capacity over time, usually measured as growth in real GDP or real GDP per capita.

Gross domestic product: The money value of all goods and services produced within an economy over a given period.

Classical economics: The body of macroeconomic thinking, dominant before the 1930s, which concluded that a capitalist economy tends to employ its resources fully.

Keynesian economics: The view that a capitalist economy does not always employ its resources fully, so that total spending, including government spending, can affect output.

Neoclassical economics: The view that although unanticipated price changes may cause short-run instability, price and wage flexibility keep the economy at full employment in the long run.

Market failure: A situation in which the market does not by itself deliver an efficient allocation of resources, which is often used to justify government intervention.

REFERENCES

Adegboyo, S. O., & Olaniyan, N. O. (2021). The viability of public expenditure in stimulating economic growth in Nigeria (mediating on the role of public sector). Acta Universitatis Danubius. Oeconomica, 17(1), 70–86. https://dj.univ-danubius.ro/index.php/AUDOE/article/view/787

Anowor, O. F., & Nwanji, M. O. (2018). Are there nexus between public expenditures and economic growth in Nigeria? A re-examination. Godfrey Okoye University eprints, 2(2). https://eprints.gouni.edu.ng/4564/

Dauda, G., & Elegu, U. S. (2026). Impact of government expenditure on economic growth in Nigeria. ADSU International Journal of Applied Economics, Finance and Management. https://ajaefm.adsu.edu.ng/index.php/journals/article/view/415

Nairametrics. (2026, April 10). Nigeria's poverty rate hits 63% in 2025 despite inflation slowdown – World Bank [Report on the World Bank's Nigeria Development Update, April 2026]. https://nairametrics.com/2026/04/10/nigerias-poverty-rate-hits-63-in-2025-despite-inflation-slowdown-world-bank/

Sokunbi, A. R., Alebiosu, A. A., Aworinde, A. T., & Nze, A. I. (2023). Examining government spending and its effect on economic growth in Nigeria: An error correction approach. ADSU International Journal of Applied Economics, Finance and Management. https://ajaefm.adsu.edu.ng/index.php/journals/article/view/3