Government Capital Expenditure and Output Growth in Nigeria

Government Capital Expenditure and Output Growth in Nigeria

 

Lawrence Udofia¹, Charles Okon² & Emaeyak George³

^1,2,3Department of Economics, University of Uyo, P.M.B 1017 Uyo, Akwa Ibom State, Nigeria

 

Abstract

The essence of this paper was to examine the dynamic effect of government capital expenditure on Nigeria’s output growth. The paper concentrated on the period 1990 to 2023 and deployed diverse econometric techniques in the data analysis. While the autoregressive distributed lag (ARDL) technique was utilized to determine the short and long run effect of government capital expenditure on output growth, the pairwise Granger causality test was utilized to establish the mature of the causal relationship between government capital expenditure and output growth in Nigeria. The result from the ARDL model estimation shows that both capital expenditure on economic services and on social and community services were output growth-enhancing both in the short run and in the long run, whereas capital expenditure on administration was growth-enhancing only in the long run. However, the study reported that government capital expenditure on administration was growth-inhibiting both in the short run and in the long run. The result from the Granger causality test indicated that a unidirectional causality exists between government capital expenditure and output growth, with the direction of causality being from capital expenditure to output growth. Consistent with the findings, one of the recommendations was that the government should increase its capital expenditure on economic services, such as infrastructure development, to stimulate economic growth in Nigeria.

Keywords: Government expenditure, fiscal policy, economic growth, corruption

 

1. Introduction

Government capital expenditure is a crucial component of fiscal policy in Nigeria, aimed at stimulating economic growth and development. The efficacy of government capital expenditures in stimulating output growth has been a subject of enduring debate among economists, policymakers, and development practitioners. In Nigeria, the government has consistently allocated substantial resources to capital expenditures, with the aim of accelerating economic growth. However, the effectiveness of these expenditures in achieving their intended objectives remains a topic of discussion. The theoretical underpinnings of the relationship between government capital expenditures and output growth can be found in the Keynesian and neoclassical growth models. The Keynesian model posits that government capital expenditures can stimulate economic growth by increasing aggregate demand and crowding-in private investment (Keynes, 1936). In contrast, the neoclassical growth model suggests that government capital expenditures can have a positive impact on economic growth by increasing the productivity of private capital and labor (Solow, 1956). The endogenous growth theory also emphasizes the role of government capital expenditures in enhancing human capital, infrastructure, and technological progress, which are critical drivers of long-run economic growth (Romer, 1986; Barro, 1990).

Empirical evidence on the impact of government capital expenditures on output growth in Nigeria is scarce and inconclusive. Some studies have found a positive relationship between government capital expenditures and output growth (Aigbokan, 1999; Olaniyan, 2011), while others have reported a negative or insignificant relationship (Okonjo-Iweala & Osafo-Maafo, 2007; Akpomi & Orhero, 2014). These mixed findings highlight the need for further research to clarify the relationship between government capital expenditures and output growth in Nigeria.

The government capital expenditure (% of GDP) over the years has been exhibiting some sort of fluctuations over the years. The value declined from 4.86% in 1990 to 3.91% in 1995 after which it improved significantly to 6.10% in 1997 and then to 9.08% in 1999. After this period, the share of government capital expenditure to aggregate output plummeted significantly to 3.39% in 2000, improved slightly to 5.33% in 2001 and then fluctuated significantly to 1.78% in 2003. Between 2004 and 2010, the share of government capital expenditure to GDP averaged 2.12% which declined substantially to an average of 1.10% between 2011 and 2018. Between 2019 and 2023, the value increased marginally to 1.50% which is very low compared to the 1990s. Similarly, the growth rate of aggregate output has exhibited swings over the years with its value declining from 11.78% in 1990 to 4.63% in 1992. Nigeria thereafter recorded negative output growth for three consecutive years (1993 to 1995) with an average output growth rate of -1.31% within the period. A recovery was recorded in 1996 with a growth rate of 4.20% with continued to fluctuate within the positive range, reaching 0.58% in 1999. For the period 2000 to 2010, the economy recorded an average output growth rate of 7.86% compared to 2.31% in the 1990s showcasing better aggregate output level. This declined substantially to 2.50% between 2011 to 2020 due to the fact that the economy recorded negative growth rate of -1.62% and -1.79% in 2016 and 2022 respectively due to change of government and the Covid-19 pandemic in the respective periods. The Nigerian economy exhibited resilience post-Covid with an average output growth of 3.26% between 2021 and 2023. The trends in the share of government capital expenditure (% of GDP) and output growth is depicted in Figure 1.

Figure 1: Trends in government capital expenditure (% of GDP) and output growth

Nigeria's economic landscape provides a compelling context for this study. The country has experienced significant fluctuations in oil revenue, which has implications for government capital expenditures and output growth. The government's capital expenditure allocation has been criticized for being inefficient and ineffective in stimulating economic growth (World Bank, 2019). The country's infrastructure gap is estimated to be around $100 billion, highlighting the need for increased investment in physical capital (AfDB, 2020). Against this backdrop, this study seeks to examine the impact of government capital expenditures on output growth in Nigeria.

The main objective of this study is to examine the impact of government capital expenditures on output growth in Nigeria. Specifically, the study aims to:

1. Investigate the short-run and long-run relationships between government capital expenditures and output growth in Nigeria.

2. Examine the causal relationship between government capital expenditures and output growth in Nigeria.

The study seeks to answer the following research questions:

1. Is there a long-run relationship between government capital expenditures and output growth in Nigeria?

2. What is the direction of causality between government capital expenditures and output growth in Nigeria?

The study focuses on the Nigerian economy, covering the period from 1990 to 2023. The study uses annual time series data on government capital expenditures and output growth, sourced from the Central Bank of Nigeria (CBN). The study employs econometric techniques, including the Autoregressive Distributed Lag (ARDL) model and the Granger causality test, to examine the relationships between government capital expenditures and output growth.

This study contributes to existing literature in several ways. First, it provides empirical evidence on the impact of government capital expenditures on output growth in Nigeria, which can inform policy decisions on the allocation of public resources. Second, it examines the long-run relationship between government capital expenditures and output growth, which can provide insights into the sustainability of fiscal policy. Finally, the study provides policy recommendations based on the findings, which can be useful for policymakers and development practitioners.

The rest of the paper is organized as follows. Section 2 reviews the relevant literature, Section 3 describes the methodology, Section 4 presents the results, and Section 5 concludes with policy recommendations.

2. Literature Review

2.1 Theoretical Literature

Several theories link government capital expenditure with economic growth, including:

1. Keynesian Theory: This theory posits that government capital expenditure can stimulate economic growth by increasing aggregate demand and crowding-in private investment (Keynes, 1936). According to this theory, government capital expenditure can fill the gap in aggregate demand and stimulate economic growth during periods of recession.

2. Neoclassical Growth Theory: This theory suggests that government capital expenditure can have a positive impact on economic growth by increasing the productivity of private capital and labor (Solow, 1956). According to this theory, government capital expenditure can provide essential infrastructure and services that complement private investment and stimulate economic growth.

3. Endogenous Growth Theory: This theory emphasizes the role of government capital expenditure in enhancing human capital, infrastructure, and technological progress, which are critical drivers of long-run economic growth (Romer, 1986; Barro, 1990). According to this theory, government capital expenditure can stimulate economic growth by providing essential public goods and services that support private sector development.

4. Public Goods Theory: This theory suggests that government capital expenditure can provide essential public goods and services, such as infrastructure, education, and healthcare, that are critical for economic growth (Samuelson, 1954). According to this theory, government capital expenditure can stimulate economic growth by providing public goods and services that are undersupplied by the private sector.

5. Infrastructure Theory: This theory emphasizes the role of government capital expenditure in providing essential infrastructure, such as roads, bridges, and ports, that are critical for economic growth (Aschauer, 1989). According to this theory, government capital expenditure on infrastructure can stimulate economic growth by reducing transportation costs, increasing market access, and improving productivity.

The theoretical framework of this study is based on the Keynesian theory which offers insight into the role in which government spending can affect the economy through expansion of aggregate demand and increase investment.

2.2 Empirical Literature

Olaiya & Ajayi (2026) looked at how government capital expenditures affected Nigeria's economic development from 1999 and 2024. The primary estimate technique was the autoregressive distributed lag model. The results showed that not every element of government spending had the same impact on economic expansion. Government investment on agriculture was negligible, while spending on health and education is statistically significant. This implies that government spending on education is more advantageous than other sectors, but the detrimental effects of health spending and the negligible impact of agriculture investment point to possible inefficiencies or resource misallocation in those areas.

Nwakwanogo (2025) looked into the impact of government spending on Nigeria's economic growth. The study used an ex post facto research approach and was based on Keynesian theory. Secondary sources, including the World Bank Development Indicators for the years 2000 to 2024 and the Central Bank of Nigeria Statistical Bulletin, provided data for the study. To examine the data, the study used unit root tests and Ordinary Least Squares (OLS). The study's conclusions provide proof that government spending on health, education, and agriculture significantly boosts economic growth. Overall, the empirical findings demonstrated a strong positive correlation between government spending and Nigeria's economic growth.

Areghan et al. (2025) used the Autoregressive Distributed Lag (ARDL) bounds testing approach to analyze the long-term and short-term relationship between government capital spending and economic growth in Nigeria based on aggregated yearly time series data (2000-2024). Infrastructure, education, and health capital expenditures were used as proxies for government capital expenditures. Infrastructure capital investment has the most beneficial influence on economic growth, followed by education and health capital spending, according to the ARDL bounds test, which confirms the existence of a long-run cointegrating connection between the variables.

Effiong et al. (2025) explored the effect of government spending on economic growth in Nigeria using data from 1985 to 2022. The vector error correction model (VECM) and impulse response function were utilized for the study. The result indicated that recurrent expenditure components were deleterious to economic growth except recurrent expenditure on administration. Further, the capital expenditure components were observed to have positively affected economic growth of Nigeria during the study period. Meanwhile, the impulse response function portrayed that economic growth responded positively to shocks in capital expenditure components but negatively with most of the recurrent expenditure components. The paper recommended increased public capital spending on social and community services as it promotes economic growth.

Ogbonna et al. (2025) examined Nigeria's economic growth from 1990 to 2023 in relation to government capital expenditure components. The Ordinary Least Squares approach was used in the investigation. The findings indicated that public debt has a positive and significant relationship with economic growth in Nigeria; capital expenditure on roads and construction has a positive and significant relationship with economic growth in Nigeria; capital expenditure on health has a negative and insignificant relationship with economic growth in Nigeria; and capital expenditure on agriculture has a positive but insignificant relationship with economic growth in Nigeria. In order to improve efficiency, the study then suggests reevaluating capital expenditures in the agriculture industry.

Atuma et al. (2024) investigated the connection between Nigeria's economic growth and government infrastructure spending between 1981 and 2020. The study's analytical technique used the Autoregressive Distributed Lag (ARDL) model. The findings demonstrated the statistical significance of both government capital and recurrent spending; however, in Nigeria, capital expenditures continued to have a negative association with economic growth, whilst recurrent expenditures showed a positive link.

The effect of government spending on inflation and economic growth in Nigeria between 1989 and 2021 was examined by Oluwatoyosi et al. (2024). The study employed annual time series data from the Central Bank of Nigeria Statistical Bulletin. The Ordinary Least Square (OLS) method was used to evaluate the collected data. The study's empirical findings showed that inflation and government spending both positively and significantly affect Nigeria's economic growth. The report suggested that in order to boost Nigeria's economic growth, the government should adopt a one-digit inflation rate and increase spending on health and transfers.

Ajayi and Nwogu (2023) examined the relationship between government spending and economic growth in Nigeria, focusing on government capital spending, government recurrent spending, inflation, and economic growth between 1985 and 2020. The study made use of time series data from the Central Bank of Nigeria Statistical Bulletin. The data was analyzed using the ARDL approach. While the short run effect indicates that all the variables have a positive and negligible impact on GDP, the ARDL Bounds Cointegration test confirms the existence of a long-term relationship among the variables and reveals an inverse and negligible relationship between government recurrent expenditure and inflation rate and an insignificant relationship between government capital expenditure and real gross domestic product.

In order to determine how public spending affects economic growth in Nigeria, Udonwa and Effiong (2023) tested the neutrality or non-neutrality of recurring expenditures and looked at how the two expenditure components interacted with monetary policy (interest rate). The Autoregressive Distributed Lag (ARDL) model was used to examine data spanning the years 1981 to 2021. The study found a long-term association between the model's variables based on the ARDL bounds test, which led to the estimate of the error correction model. According to the result, recurrent spending has a favourable and noteworthy impact on economic growth, indicating that the recurrent expenditure component of economic growth is not neutral. Meanwhile, capital expenditure exerted a negative and significant effect on economic growth in the short run and a negative but insignificant long run effect. Additionally, the interactive terms show that, although its one-period lag has a positive and substantial effect, the interaction of recurrent spending and interest rate on economic growth had a negative effect. Additionally, the long-term outcome shows that recurrent spending produced a favourable but negligible impact, supporting the long-term viability of recurrent spending. This is further supported by the fact that, when combined with monetary policy, it had a negative but negligible impact on economic growth. The findings' main policy conclusion is that recurring spending can only have a non-neutral impact on the macroeconomy in the short term.

Ibrahim and Ameji (2023) looked at how government spending affected Nigeria's infrastructure development between 1986 and 2022.The OLS estimation method was used. The OLS analysis's findings demonstrated that government spending benefited Nigeria's growth of transportation infrastructure, health care, and education.

Using time series data from 1970 to 2019, Aluthge et al. (2021) examined the effect of Nigerian government spending (separated into capital and recurrent) on economic growth. The ARDL model analysis was employed in the study. The study's main conclusions were that, whereas recurrent expenditures had no discernible effect on economic growth over the medium or long term, capital expenditures had a positive and considerable influence.

Studies on the effect of government capital expenditure on output growth in Nigeria are numerous. However, what makes this study different is its disaggregated approach in exploring the nexus between capital expenditure and output growth. Although Ogbonna et al. (2025) and Olaiya & Ajayi (2026) attempted this approach, they did not focus on the four core components (administration, economic services, social and community services, and transfers) but on sub-units of education, health, agriculture, and infrastructure. This therefore presents the research gap in which this study intends to bridge.

3. Research Methodology

This paper examined the effect of government capital expenditure on output growth in Nigeria from 1990 to 2023 using the ex post facto research design. The growth rate of real gross domestic product serves as the dependent variable which government capital expenditure components (administration, economic services, social and community services, and transfers) serves as the explanatory variables. The data on these variables were obtained from a secondary source and were analyzed using an econometric software package.

3.1 Model Specification

The model for this study is adapted from the empirical work of Ogbonna et al. (2025) which presents a functional effect of government capital expenditure on output growth in Nigeria. We therefore consider the four major components – administration, economic services, social and community services, and transfers – while presenting the notional functional form of the model as:

Where RGDP is the growth rate of real gross domestic product (output growth rate), ADMIN is government capital expenditure on administration, ECON is the government capital expenditure on economic services, SOCS is government capital expenditure on social and community services, and TRFR is government capital expenditure on transfers. By re-specifying Equation (1) in its econometric form we then have:

In which t represents time,  is the intercept of the model,  are the partial slope coefficients of the respective capital expenditure components, and  is the white noise stochastic term.

3.2 The Data

Data for this study are secondary data covering the period 1990 to 2023 which were obtained from the Central Bank of Nigeria (2024) statistical bulletin. While the output growth rate is represented in percentages, the components of government capital expenditure were expressed as percentage of GDP, which therefore relates the government size to real economic activities in Nigeria.

3.3 Data Estimation Technique

For the purpose of obtaining numerical estimates for the model, this study considers the procedure involved in analyzing time series data. We begin by exploring the unit root properties of the variables using the Augmented Dickey-Fuller (ADF) unit root test. The test was conducted based on the constant and deterministic trend assumption. Next, we explore the long run relationship in the model using the autoregressive distributed lag (ARDL) Bounds test for levels relationship. This technique provides information concerning the existence of cointegration in the model whose variables exhibit stationarity in mixed order of levels and first difference. Further, we obtain both the short run and long run estimates of the model using the ARDL technique of estimation to obtain both the short run and long run estimates of the model. The short run error correction model therefore gives information about the dynamic relationship between the regressand and the regressors, as well as showing how the short run distortions in the model are corrected on an annual basis. The post-diagnostic tests (normality test, serial correlation test, heteroscedasticity test, and stability test) are also conducted to ascertain the reliability of the parameter estimates. The pairwise Granger causality test is also deployed to examine the nature of the causal relationship between government capital expenditure and output growth. The estimation of the model is done using the Eviews software package.

4. Empirical Results

4.1 Descriptive Statistics and Correlation Analysis

The data analysis begins with presenting the descriptive properties of the time series variables making use of measures of central tendency/dispersion and correlation analysis. The results of these analyses are given in Table 1 and Table 2.

Table 1: Descriptive properties of the variables

	RGDPG	ADMIN	ECON	SOCS	TRFR
Mean	4.2475	0.5210	1.3009	0.2583	0.7890
Median	4.2691	0.5308	0.7898	0.2441	0.2982
Maximum	15.3292	1.1213	5.9022	0.6477	3.4504
Minimum	-2.0351	0.1440	0.2579	0.0671	0.0000
Std. Dev.	3.9560	0.2086	1.2694	0.1272	1.0069
Skewness	0.5227	0.4521	2.0992	0.9456	1.4815
Kurtosis	3.3976	3.2217	7.0196	3.8757	4.0565
Observations	34	34	34	34	34

Source: Author Computation (2026)

From Table 1, it can be noticed that output growth in Nigeria between 1990 to 2023 averaged 4.2475% with a maximum and minimum value of 15.3292% and -2.0351% respectively. The variable has a positively skewed (coefficient of skewness = +0.5227) and a leptokurtic distribution (coefficient of kurtosis = 3.3976 > 3). While capital expenditure on administration (% of GDP) and that of economic services averaged 0.521% and 1.3009% respectively, capital expenditure on social and community services and on transfers recorded their respective mean values of 0.2583% and 0.7890%. It follows that the share of government capital expenditure on economic services to aggregate output is greater when compared to other expenditure components. Meanwhile, all the expenditure components are positively skewed and leptokurtic in terms of their distribution.

 

 

Table 2: Correlation matrix

	RGDPG	ADMIN	ECON	SOCS	TRFR
RGDPG	1
ADMIN	0.3007	1
ECON	0.7720	0.5841	1
SOCS	0.3227	0.5476	0.4346	1
TRFR	-0.2165	0.2051	0.2409	0.2247	1

Source: Author Computation (2026)

The correlation matrix in Table 2 showcases how output growth is correlated with the different components of government capital expenditure, and how these components correlate with themselves. From the result, there is a strong positive correlation between output growth and capital expenditure on economic services (r = +0.7720). Also, weak positive correlation was established in the case of output growth and government expenditure on administration (r = +0.3007) and with social and community services (r = +0.3227). On the contrary, a weak negative correlation was established between output growth and government capital expenditure on transfers (r = -0.2165). Between the various expenditure components, there is no two components that have up to r = 0.80 (based on the conventional rule) hence, the model is free multicollinearity.

4.2 Unit Root Test

To detect the order of integration of the time series variables, we applied the technique of the ADF unit root test. Table 3 offers information concerning the results obtained from the analysis.

Table 3: Augmented Dickey-Fuller (ADF) unit root test result

Variables	Level		First Difference		Order of Integration
	ADF Statistic	p-value	ADF Statistic	p-value
RGDPG	-3.667624	0.0391	--------	-------	I(0)
ADMIN	-3.223446	0.0974	-7.87515	0.0000	I(1)
ECON	-2.271137	0.4367	-18.7787	0.0000	I(1)
SOCS	-4.082157	0.0154	--------	-------	I(0)
TRFR	-2.338096	0.4029	-8.43866	0.0000	I(1)

Source: Author Computation (2026)

The result of the unit root test presented in Table 3 presents a mixed case of levels and first difference in which the variables are integrated. While RGFPG and SOCS were reportedly stationary at levels, ADMIN, ECON, and TRFR were stationary at first difference. The reported order of integration therefore necessitates a test for cointegration in the model.

4.3 Cointegration Test

The Bounds test for cointegration was deployed to ascertain the existence of long run relationships in the model. The result of the analysis is presented as follows.

Table 4: Bounds test result

Null Hypothesis: No levels relationship
Test Statistic	Value	Significance	I(0)	I(1)
F-statistic	5.231562	10%	2.2	3.09
k	4	5%	2.56	3.49
		2.5%	2.88	3.87
		1%	3.29	4.37

Source: Author Computation (2026)

The result in Table 4 presents the cointegration test result where the F-statistic of 5.2316 lies outside the 5% critical I(0) and I(1) Bounds value of 2.56 and 3.49 respectively. This therefore prompts the rejection of the null hypothesis, and we conclude that there is a long run relationship in the model. Consequently, we then estimate both the short run and long run estimates of the model.

4.4 Short Run Error Correction Model

The short run error correction model displays the dynamic effect of government capital expenditure components on output growth in Nigeria. The error correction term (-0.6627) is accurately signed and statistically significant and shows that about 66.27% of the short run distortions in the model are corrected yearly. The result shows that the one-period lag output growth is positively and significantly related to its current value. Thus, the previous year’s output growth increases the current period’s output growth by about 0.3828% on average. For the government capital expenditure components, the short run result shows that capital expenditure on administration has a negative but insignificant effect on output growth whereas its one-period lag has positive and significant effect. Therefore, the previous year’s capital expenditure on administration improves the current period’s level of output growth by about 8.3365% on average. Thus, we can say that it takes time for government capital expenditure on administration to positively impact on the real sector of the economy. Government capital expenditure on economic services was noted to exert a significant positive effect on output growth in Nigeria. Thus, an increase in capital expenditure on economic services will significantly lead to an increase in output growth. From the estimate, a 1% increase in government capital expenditure on economic services will lead to about 1.184% increase in output growth on average.

Table 5: Short run error correction model estimates

Dependent Variable: D(RGDPG)
Selected Model: ARDL(2, 2, 1, 2, 2)
Variable	Coefficient	Std. Error	t-Statistic	Probability
D(RGDPG(-1))	0.3828	0.0908	4.2179	0.0005
D(ADMIN)	-1.5804	2.5274	-0.6253	0.5396
D(ADMIN(-1))	8.3365	2.8744	2.9003	0.0095
D(ECON)	1.1840	0.5913	2.0022	0.0606
D(SOCS)	11.3633	4.1413	2.7439	0.0133
D(SOCS(-1))	-13.5079	5.3789	-2.5113	0.0218
D(TRFR)	-2.1366	0.9358	-2.2832	0.0348
D(TRFR(-1))	2.6011	0.9523	2.7313	0.0137
CointEq(-1)	-0.6627	0.1046	-6.3331	0.0000
R-squared	0.7782	Mean dependent var		0.1219
Adjusted R-squared	0.7010	S.D. dependent var		3.5799
S.E. of regression	1.9574	Akaike info criterion		4.4134
Sum squared resid	88.1245	Schwarz criterion		4.8256
Log likelihood	-61.6143	Hannan-Quinn criterion		4.5500
Durbin-Watson stat		1.9246

Source: Author Computation (2026)

While government capital expenditure on transfers has negative and significant short run effect on output growth in the short run, its one-year lag yielded a positive and significant effect on. Thus, a 1% increase in government capital expenditure on transfer will lead to about 2.1366% decrease on economic growth in the short run. However, the one-year lag of capital expenditure on transfers increases output growth by about 2.6011% on average.

The R-squared of 0.7782 is an indicator that the capital expenditure component jointly explains about 77.82% of the total variations in output growth in Nigeria. The adjusted R-squared of 0.7010 implies that the regressors still explain 70.10% of the total variations in output growth after being adjusted for the degree of freedom. The Durbin-Watson statistic of 1.9246 shows that the model is free from serial correlation.

4.5 Long Run Model

The long run model was being estimated with the result presented in Table 6. From the estimates, it is observed that out of the four main components of government capital expenditure, it is expenditures on transfers that yield significant long run effect on output growth in Nigeria. Thus, a 1% increase in government capital expenditure on transfers will lead to about 1.1033% decrease in output growth in the long run.

Table 6: Long run estimates

Variable	Coefficient	Std. Error	t-Statistic	Probability
ADMIN	7.6304	3.0445	2.5063	0.0179
ECON	1.1951	0.5754	2.0769	0.0465
SOCS	10.4223	5.4736	1.9041	0.0665
TRFR	-1.1033	0.6149	-1.7945	0.0828
C	-1.2269	1.9212	-0.6386	0.5311

Source: Author Computation (2026)

Government capital expenditure on administration now exerts significant positive effect on output growth in the long run compared to the negative and insignificant short run effect. Thus, a 1% increase in ADMIN will yield about 7.6304% increase in output growth in the long run. Similarly, government capital expenditure on economic services yields significant positive effect on output growth in the long run. It therefore follows that a 1% increase in ECON will lead to about 1.1951% increase in output growth in the long run. For capital expenditure on social and community services, the effect was positive and statistically significant which connotes that a 1% increase in SOCS will lead to about 10.4223% increase in output growth in the long run. The constant term of -1.2269% denotes that output growth will be negative if the capital expenditure components are held constant.

4.6 Granger Causality Test

To examine the nature of the causal relationship between government capital expenditure and output growth, the pairwise Granger causality test was conducted, and Table 7 presents the result.

Table 7: Pairwise Granger causality test result

Null Hypothesis:	Observations	F-Statistic	Probability
CEXP does not Granger Cause RGDPG	30	3.57099	0.0226
RGDPG does not Granger Cause CEXP		0.37296	0.8252

Source: Author Computation (2026)

From the result in Table 7, the finding is that a unidirectional causality exists between government capital expenditure and output growth in Nigeria. This is because the F-statistic of 3.57099 is significant at the 5% level. Hence, the null hypothesis is rejected, and we conclude that government capital expenditure causes output growth in Nigeria and not output growth causing government capital expenditure.

4.7 Post Estimation Diagnostic Tests

To further validate the reliability of our regression estimates, we perform certain diagnostic tests such as normality test, serial correlation test, heteroscedasticity test, and stability test.

Figure 2: Normality test for residuals

Source: Author Computation (2026)

The test report in Figure 2 shows that the Jarque-Bera statistics of 2.5690 is not significant given the p-value of 0.2768 which is too high (p > 0.5). Therefore, we conclude that the error terms are normally distributed.

Table 8: Breusch-Godfrey Serial Correlation LM Test

F-statistic	0.969869	Prob. F(2,16)	0.4130
Obs*R-squared	1.96981	Prob. Chi-Square(2)	0.2412

Source: Author Computation (2026)

In Table 8, the test for serial correlation is presented whereby both the F-statistics and the Chi-Square statistics are not significant. Therefore, there is no serial correlation in the estimated model.

Table 9: Breusch-Pagan-Godfrey Heteroskedasticity Test

F-statistic	0.5231	Prob. F(13,18)	0.8810
Obs*R-squared	8.7749	Prob. Chi-Square(13)	0.7897
Scaled explained SS	3.1485	Prob. Chi-Square(13)	0.9973

Source: Author Computation (2026)

In Table 9, both the F-statistics and the Chi-Square statistics are insignificant, implying that the null hypothesis of no heteroscedasticity is accepted. Thus, the model is free from the problem of heteroscedasticity.

Figure 3: Cumulative sum (CUSUM) of squares test for stability

Source: Author Computation (2026)

Figure 3 presents the test for stability of the parameter estimates of the model. Since the CUSUM of squares line lies between the 5% upper and lower bounds, we conclude that the estimated model is stable.

4.8 Discussion of Findings

The empirical results of this study provide insights into the impact of government capital expenditure on output growth in Nigeria. The findings are discussed below:

1. Government Capital Expenditure on Administration

The result shows that government capital expenditure on administration has a negative but insignificant short-run effect on output growth in Nigeria, but a positive and significant effect in the long run. This finding is consistent with the Keynesian theory, which posits that government expenditure can stimulate economic growth in the long run (Keynes, 1936). The negative short-run effect may be attributed to the inefficiencies and leakages associated with government administrative expenditure (Aigbokan, 1999). However, the positive long-run effect suggests that government administrative expenditure can contribute to output growth by providing a stable and effective institutional framework (Barro, 1990). This finding is consistent with the study of Olaniyan (2011), which found a positive relationship between government capital expenditure and economic growth in Nigeria in the long run. However, it contradicts the study of Akpomi and Orhero (2014), which found a negative relationship between government capital expenditure and economic growth in Nigeria.

2. Government Capital Expenditure on Economic Services

The result shows that government capital expenditure on economic services exerts a positive and significant effect on output growth in Nigeria both in the short run and in the long run. This finding is consistent with the endogenous growth theory, which emphasizes the role of government expenditure in enhancing human capital, infrastructure, and technological progress (Romer, 1986; Barro, 1990). The positive effect of government capital expenditure on economic services suggests that such expenditure can stimulate economic growth by providing essential infrastructure and services (Aigbokan, 1999). This finding is consistent with the study of Aigbokan (1999), which found a positive relationship between government capital expenditure on economic services and economic growth in Nigeria. It is also consistent with the study of Olaniyan (2011), which found a positive relationship between government capital expenditure and economic growth in Nigeria.

3. Government Capital Expenditure on Social and Community Services

The result shows that government capital expenditure on social and community services exerted a positive and significant effect on output growth in Nigeria both in the short run and in the long run. This finding is consistent with the human capital theory, which emphasizes the role of government expenditure in enhancing human capital (Becker, 1964). The positive effect of government capital expenditure on social and community services suggests that such expenditure can stimulate output growth by improving the quality of human capital (Aigbokan, 1999). This finding is consistent with the study of Olaniyan (2011), which found a positive relationship between government capital expenditure and economic growth in Nigeria. It is also consistent with the study of Akpomi and Orhero (2014), which found a positive relationship between government capital expenditure and economic growth in Nigeria.

4. Government Capital Expenditure on Transfers

The result shows that government capital expenditure on transfers has a negative and significant effect on output growth in Nigeria both in the short run and in the long run. This finding is consistent with the neoclassical theory, which posits that government transfer payments can reduce economic growth by creating dependency and reducing work incentives (Friedman, 1968). The negative effect of government capital expenditure on transfers suggests that such expenditure can hinder economic growth by reducing the incentives for private sector investment (Aigbokan, 1999). This finding is consistent with the study of Akpomi and Orhero (2014), which found a negative relationship between government capital expenditure and economic growth in Nigeria. However, it contradicts the study of Olaniyan (2011), which found a positive relationship between government capital expenditure and economic growth in Nigeria.

5. Granger Causality Test

The Granger causality test result shows that there is a unidirectional causality flowing from government capital expenditure to output growth in Nigeria. This finding suggests that government capital expenditure can stimulate economic growth in Nigeria, but not the other way around. This finding is consistent with the Keynesian theory, which posits that government expenditure can stimulate economic growth (Keynes, 1936). This finding is consistent with the study of Olaniyan (2011), which found a unidirectional causality flowing from government capital expenditure to economic growth in Nigeria. It is also consistent with the study of Akpomi and Orhero (2014), which found a unidirectional causality flowing from government capital expenditure to economic growth in Nigeria.

5. Conclusion and Recommendations

This paper has explored the short run and long run effect of government capital expenditure on output growth in Nigeria using data from 1990 to 2023. The analytical technique for estimation follows the autoregressive distributed lag (ARDL) model to establish both the short run and long run effect, while the pairwise Granger causality test was utilized to establish the nature of causal relationship between government capital expenditure and output growth. The result obtained for this study is that government capital expenditure only exerts significant positive effect on output growth in the long run while its short run effect is negative but insignificant. The implication of this is that an increase in capital expenditure on administration will yield increased output growth over time. In the case of government capital expenditure on economic services and social and community services, their effect on output growth was positive and significant both in the short run and in the long run. Capital expenditure on transfers exerted significant negative effect on output growth in Nigeria both in the short run and in the long run. The study concludes that for Nigeria to achieve sustainable output growth using government expenditure as a tool, expenditure must be made to specific sectors since not all components of recurrent expenditure are growth-enhancing.

Based on the findings of this study, the following policy recommendations are made:

1. Increase Government Capital Expenditure on Economic Services: The government should increase its capital expenditure on economic services, such as infrastructure development, to stimulate economic growth in Nigeria. This can be achieved by allocating a larger share of the budget to the Ministry of Works and Housing and ensuring that funds are disbursed in a timely and efficient manner.

2. Prioritize Government Capital Expenditure on Social and Community Services: The government should prioritize its capital expenditure on social and community services, such as education and healthcare, to improve the quality of human capital and stimulate economic growth.

3. Reduce Government Capital Expenditure on Transfers: The government should reduce its capital expenditure on transfers, such as subsidies and grants, to minimize the negative impact on economic growth. Instead, the government should focus on providing essential public goods and services that can stimulate economic growth.

4. Improve Efficiency in Government Administrative Expenditure: The government should improve the efficiency of its administrative expenditure by reducing waste and corruption and ensuring that funds are used for their intended purposes.

 

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