Public Sector Expenditure and Economic Growth In Nigeria

Abstract

This study investigates the impact of public sector expenditure on Nigeria’s economic growth from 1981 to 2020, focusing on four key sectors: agriculture, education, healthcare, and debt servicing. Utilizing time series data from the Central Bank of Nigeria (CBN) and employing a Vector Error Correction Model (VECM), the study seeks to determine both short- and long-term effects of public expenditure on Real Gross Domestic Product (RGDP). The research addresses gaps in previous studies by offering a sector-specific analysis, thus providing deeper insights into the dynamics of public spending and economic growth. The findings reveal mixed outcomes: agricultural and debt servicing expenditures exhibit a negative and insignificant impact on RGDP, suggesting inefficiencies in policy implementation and debt management practices. In contrast, educational and healthcare expenditures show a positive but statistically insignificant effect, indicating potential underinvestment or poor utilization of resources in these critical sectors. The results also indicate an 8.9% annual speed of adjustment towards long-term equilibrium, implying that short-run disequilibria are corrected gradually over time. These findings raise concerns about the efficiency of public sector expenditure in driving sustainable economic growth in Nigeria. The underperformance in agriculture and the burden of debt servicing suggest that public funds may not be optimally allocated or effectively utilized. Additionally, the limited impact of education and healthcare spending on economic growth calls for a re-evaluation of budgetary allocations and policy frameworks in these sectors. The study advocates increased budgetary allocations to the education and healthcare sectors, emphasizing the need for targeted investments to enhance human capital development and productivity. In addition, there is need to reform agricultural policies to improve efficiency through mechanization, value addition, and better subsidy management. The study also underscores the importance of prudent debt management strategies to reduce dependence on borrowing and ensure efficient utilization of borrowed funds, highlighting the need to strengthen governance and accountability mechanisms to improve public sector efficiency.