Modeling Nigerian Government Expenditure, Revenue and Economic Growth: Co-Integration, Error Correction Mechanism and Combined Estimators Analysis Approach

Abstract

Nigeria’s Economic growth has been one of the topical issues attracting several attentions in the recent time. This paper therefore seeks to model and investigate the impact of capital expenditure, recurrent expenditure and various sources of Government revenue on Nigeria’s economic growth using secondary data gathered from Central Bank of Nigeria’s publication from 1981 to 2011. The statistical and econometric tools used for the study include the unit root test, cointegration, error correction mechanism and combined estimators’ analysis. Results reveal that the variables are not stationary in their original form but do in their first difference. The long-run relationship of economic growth (Gross Domestic Product (GDP)) on capital expenditure, recurrent expenditure, oil revenue, non-oil revenue, federation account and federal retained revenue reveal the existence of co-integration and multicollinearity problem among the variables. The use of Principal Component Estimator to correct for multicollinearity reveals positive effect of capital expenditure, recurrent expenditure, oil revenue and federal retained revenue on economic growth. The short-run modeling exhibits both problem of both multicollinearity and autocorrelation which were corrected using the combined estimators. Resulting from the analysis is positive impact of capital expenditure, oil revenue, federation account and federal retained revenue on economic growth. Consequently, the study recommends a re-evaluation and re-assessment of direction of recurrent expenditure and non-oil revenue towards Nigerian development to achieve positive influence on economic growth.