Analyzing the Impact of Public Expenditure on Economic Development: Evidence from Nigeria

Abstract

This study thoroughly investigates the intricate relationship between public expenditure and economic development in Nigeria by employing advanced econometric techniques such as cointegration and causality analysis. Economic development, a multifaceted concept, is measured using the gross domestic product per capita, while public expenditure is delineated based on sectoral allocations provided by the Central Bank of Nigeria spanning the period from 1981 to 2015. Through a rigorous analytical framework comprising tests for stationarity, Ordinary Least Squares estimation, and exploration of cointegration and causality, the study convincingly rejects the null hypothesis positing an insignificant association between public expenditure and economic development in Nigeria. Notably, expenditures allocated to the Administration and Transfers sectors emerge as statistically significant at the 1% level, indicating their substantial impact on Nigeria's economic progress. Conversely, expenditure directed towards economic services demonstrates a weaker influence on economic development, falling short of anticipated expectations. This discrepancy underscores the complexity of public expenditure dynamics and highlights the need for targeted interventions to optimize resource allocation and enhance efficacy. The study sheds light on the underperformance of public expenditure, particularly within the economic and social/community services sectors. This underperformance is attributed, in part, to discrepancies between budgeted and actual expenditures, as well as deficiencies in implementation. Moreover, the study underscores the inadequate attention afforded to sectors directly impacting citizens' welfare, such as economic and social/community services, further exacerbating the observed suboptimal outcomes. The findings of this study underscore the importance of strategic resource allocation and effective implementation in maximizing the impact of public expenditure on economic development in Nigeria. Addressing the identified shortcomings and recalibrating expenditure priorities towards sectors with the greatest potential for socioeconomic impact are imperative steps towards fostering sustainable and inclusive growth.