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Impact of Recurrent and Capital Expenditure on Nigeria’s

Economic Growth
Modebe, N.J1, Regina G. Okafor2, J.U.J Onwumere3 and Imo G. Ibe4
1. Dept. of Banking and Finance, University of Nigeria Enugu Campus, Enugu, Nigeria
2. Dept. of Accountancy, University of Nigeria Enugu Campus, Enugu, Nigeria
3. Dept. of Banking and Finance, University of Nigeria Enugu Campus, Enugu, Nigeria
4. Dept of Accountancy, Renaissance University, Ugbawka, Enugu, Nigeria
Abstract
The need to better the lots of citizens through government expenditure has raised questions on the impact of
government expenditure on its impact on economic development and growth of nations. It is against this background
that this paper examines the impact of government expenditure (disaggregated into recurrent and capital expenditure)
on economic growth from 1987 to 2010. Three variable multiple regression model was adopted while recurrent
expenditure and capital expenditure were used as independent variable and gross domestic product growth rate as
dependent variable. The result emanating from this study reveals that while recurrent government expenditure had
positive and non-significant impact on economic growth, capital expenditure had negative and non-significant
impact on economic growth thus re-echoing the need for increase and encouragement of private sector investment
while have proven over the years as a more efficient utilization of resources compared to public sector.
Keywords: Recurrent Expenditure, Capital Expenditure, Economic Growth, Nigeria

1.0 Introduction
The need to better the lots of citizens through government expenditure has raised questions on the impact of
government expenditure on its impact on economic development and growth of nations. In Nigeria and other
developing economies, over the years, there has been a steady increase in government spending without an
appreciable increase in economic growth and development. These have led to several researches and interest on the
role of government spending in the long term growth of national economics by economists. The revival of interest in
growth theories has also revived interest among researchers in verifying and understanding the link between
government fiscal policies and economic growth.

In Nigeria for instance, despite the huge amount of public expenditures, there is still an insignificant level of
development witnessed. Public expenditure on all sectors of the Nigerian economy is expected to lead to economic
growth in the sense that capital and recurrent expenditure will boost the productive base of the economy which in
turn will lead to growth. The interest by economists in Nigeria and other jurisdictions on the role of government
expenditure is still inconclusive. Barro (1990) endogenize government spending in a growth model and analyze the
relationship between size of government and rates of growth and saving. He concluded that an increase in resources
devoted to non-productive government services is associated with lower per capita growth. Therefore, government
expenditure which enhances economic growth should be tailored towards productive services.

According to Barro and Grilli (1994), Government spending (or government expenditure) includes all government
consumption and investment but excludes transfer payments made by a state. Government expenditure can be for the
acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of
the community or it can be for acquisition of goods and services intended to create future benefits such as
infrastructure investment and the expenditures can represent transfers of money, such as social salaries and cost of
administration.

Therefore, Government expenditure (like expenditure by private sector firms) can be categorised into either current
expenditure or capital expenditure. Current expenditure is recurring spending or, in other words, spending on items
that are consumed and only last a limited period of time. They are items that are used up in the process of providing a
good or service. In the case of the government, current expenditure would include wages and salaries and
expenditure on consumables - stationery, drugs for health service, bandages and so on. By contrast, capital
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expenditure is spending on assets. It is the purchase of items that will last and will be used time and time again in the
provision of a good or service. In the case of the government, examples would be the building of a new hospital, the
purchase of new computer equipment or networks, building new roads and so on.

The breakdown between these two types of spending is very important. While capital expenditure has a lasting
impact on the economy and helps provide a more efficient, productive economy. Current expenditure, however,
doesn't have such a lasting impact. Once the money is spent, it is gone and the effect on the economy is simply a
short-term one. It is against the importance of these two categories of expenditure and the increasing quantum made
by the Nigeria government over the years that, this seminal paper examines the impact of government expenditure on
economic growth in Nigeria from 1987 to 2010.

The remainder of this paper is organized as follows: Section two contains the review of related literature; section
three; the methodology; section four; presentation and analysis of data; while in section five; the conclusion and
recommendations.

2.0 Review of Literature Review

The relationship between public expenditure and economic growth has continued to generate series of controversies
among scholars in economic literature. The nature of the impact is in conclusive and while some authors believed
that the impact of government expenditure on economic growth is negative or non significant (Akpan, 2005), others
believed that the impact is positive and significant (Korman and Brahmasrene, 2007).

The recent revival of interest in growth theory has also revived interest among researchers in verifying and
understanding the linkages between fiscal policies and economic growth. Over the past decade and a half, a
substantial volume of empirical research has been directed towards identifying the elements of public expenditure
that bear significant association with economic growth. This empirical literature varies in terms of data sets,
econometric techniques, and often produces conflicting results.

Explanations offered to account for these varied and conflicting results can broadly be divided into two categories.
According to the first, it is the differences in the set of conditioning variables and initial conditions across studies that
are responsible for the lack of consensus in the results (Levine and Renelt 1992). In contrast, the second category
consists of a handful of studies (Helms 1985; Mofidi and Stone 1990; Kneller et al. 1999) that suggest this variation
in the results, in part at least, reflects the wide spread tendency among researchers to ignore the implications of the
government budget constraint for their regressions. In particular, the latter view emphasizes the need to consider both
the sources and the uses of funds simultaneously for a meaningful evaluation of the effects of taxes or expenditures
on economic growth.

Aregbeyen (2007) established a positive and significant correlation between government capital and public
investment and economic growth, while he found that current and consumption expenditures were negatively
associated with it. Other studies also confirm either a negative or a positive correlation/relationship between fiscal
policy (with government expenditure, public investment or related variables used as proxies) and economic growth.

Laudau (1983) studied the effect of government (consumption) expenditure on economic growth for a sample of 96
nations. His result was that there is a negative effect of government expenditure on growth of real output. Kormain
and Brahmasrene (2007) studied the economy of Thailand. They made use of the Granger causality tests. Their
finding was that government expenditures and economic growth are not co-integrated but indicated a unidimensional
relationship. This is because, causality runs from government expenditure to growth, and also detected a significant
positive effect of government spending on economic growth. Gregorious and Ghosh (2007) made use of the
heterogeneous panel data to study the impact of government expenditure on economic growth. The result was that
countries with large government expenditure tend to experience higher growth. Donald and Shuanglin (1993) studied
the differential effects of different forms of expenditure on economic growth for 58 sampled countries. They came up
with the result that government expenditure on education and defense has positive impact on economic growth and
that of welfare was insignificant and negative.
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Barro (1990) believed that expenditure on investment and productive activities is expected to contribute positively to
economic growth, while government consumption spending is expected to be growth retarding. Government controls
the economy through the use of public expenditure. This instrument of government control promotes economic
growth in the sense that public investment contribute to capital accumulation.

Other importance of government expenditure includes the provision of those facilities that are not covered by the
market economy such as health economic growth. That is, human capital promotes high benefit associated with
economic growth, but the financial source for public expenditure which is the taxation reduces the benefits of the
taxpayers and as such reduces the benefits associated with economic growth. The beauty of public expenditure in
promoting economic growth lies with the way it is being spent. In empirical literature, while some authors believed
that there is no impact of public expenditures on economic growth (Gupta et al., 2002), others believed that the
impact is negative (Folster and Henrekson, 1999), while some believed that the relationship is insignificant.
Economic growth is an essential ingredient for sustainable development.

Akpan (2005) made use of disaggregated approach in order to determine the components of government expenditure
that enhances growth. He concluded that there was no significant relationship between most components of
government expenditure and economic growth in Nigeria. Kneller and Gemmell (1999) pointed out that composition
of government expenditure might exert more influence as compared to the level of government expenditure on
economic growth.

Devarajan et al. (1996) using a sample of 140 ECD countries found that expenditure on health, transport and
communication have positive impacts) on economic growth. Spending education and defense did not have a positive
impact on economic growth. The nature, size and direction of government spending would surely determine its
impact on the economy, which will directly or indirectly affect the size and the output of the economy. Government
spending and economic growth are directly related. It has been established in literature by some authors that there is
a link between economic growth and government spending; they believe that there is a nexus between government
spending and economic growth.

While we have expenditure that are productive according Barro and Sala-i-Matin (1992), there are others that are not
productive. Government spending has direct impact on the rate of economic advancement. Infrastructure is a key to
economic growth. A good infrastructural development will enhance productivity and bring about a low unit cost of
production, which will in turn increase competitiveness and effective participation in the international market.

In addition to producing conflicting views, the existing literature displays a disturbing trend. Most of the conclusions
drawn recently regarding the growth effects of public spending are based either on the experiences of a set of
developed countries or on the basis of large samples consisting of a mixture of developed and developing countries.
Accordingly, there remains little by way of understanding the process by which public expenditure policies shape the
prospect of economic growth for developing countries. This trend has continued despite the long standing view
among development experts that there exists not only a significant difference in the composition of public
expenditure between the developed and developing countries, but the difference is also profound in the way in which
public expenditures shape the outcome in these two set of countries. The only exceptions to the above trend are the
contributions by Landau (1986), Devarajan et al. (1996), and Miller and Russek (1997). Despite their commendable
objective, these studies, however, share one of the aforementioned weaknesses that are pervasive in the existing
literature. Hence, this paper examined the impact of government expenditure on economic growth through a
disaggregated (recurrent and capital expenditure) approach.

3.0 Methodology
3.1 Model Specification
This seminal paper adopted the ex-post facto research design in this study. Data were collated from the Central Bank
of Nigeria Statistical Bulletin while the three variable regression models was used to test the impact of government
expenditure on economic growth disaggregated into recurrent and capital expenditure. The choice of multiple
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regression models is based on the use of more than single independent variables in a regression model (see,
Onwumere, 2005).

The general form for a multiple regression analysis is given in the form below:
Y = β0 + β1X1+ β2X2 + µ…………………………………………………… (1)
where:
Y = dependent variable
β0 = equation constant
β1, β2 = coefficients of explanatory variables
X1 X2 = independent or explanatory variables
µ = error term
Given the above general multiple regression function and the proxies for recurrent and capital expenditure as well as
gross domestic product growth rate; the following acronyms suffice:

Gross Domestic Product Growth Rate = GDPGR

Recurrent Government Expenditure = RE
Capital Government Expenditure = CE

Adopting Levine (2000) modified standard growth regression equation in line with the objectives of this paper to
examine the impact of government expenditure disaggregated recurrent and capital expenditure on economic growth
in Nigeria, the equation is resolved below:

GDPGR f (RE, CE) = 0 …………………………………………………….. (2)

Equation 2 is interpreted as economic growth being a function of recurrent and capital expenditure. Rearranging
equation 2 in line with the model, the equation becomes:
GDPGR = β0 + β1RE + β2CE + µ………………………………………….. (3)

3.2 Description of Explanatory Variables

Dependent Variable: Economic Growth
GDP is proxied in this seminal paper for economic growth. It is the total aggregate value of goods and services
produced in a country over a given period (normally a year). The GNP which should have been more appropriate is
the total value of goods and services produced by all the nationals whether within and outside the country over a
given period in the economy. However, it is difficult to compute GNP or get realistic figures especially for Nigeria (a
developing country) because of the difficulty involved in generating values for the country’s citizens outside the
country. Thus, this paper used the GDP growth rate as the measure of economic growth in this study, hence:

GDPGRn = (GDPn2- GDPn1)/GDPn1...………………………………… (4)

where
GDPGRn = Gross Domestic Product Growth Rate
GDPn2 = Gross Domestic Product for the current year
GDPn1 = Gross Domestic Product for the previous year

Independent Variable
Recurrent Government Expenditure
Recurrent expenditure on goods and services is expenditure, which does not result in the creation or acquisition of
fixed assets (new or second-hand). It consists mainly of expenditure on wages, salaries and supplements, purchases
of goods and services and consumption of fixed capital (depreciation). In this seminal paper, total recurrent
government expenditure rate will be proxied by total recurrent government expenditure divided by gross domestic
product. The rate indicates a reflection of government recurrent expenditure that goes into enhancing economic
growth in Nigeria.

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Capital Government Expenditure

Capital expenditure is spending on assets. It is the purchase of items that will last and will be used time and time
again in the provision of a good or service. In the case of the government, examples would be the building of a new
hospital, the purchase of new computer equipment or networks, building new roads and so on. In this seminal paper,
total capital government expenditure rate will be proxied by total capital government expenditure divided by gross
domestic product. The rate indicates a reflection of government capital expenditure that goes into enhancing
economic growth in Nigeria.

4.0 Presentation and Analysis of Data

Table 4.1 presents nominal values of government recurrent and capital expenditure and the gross domestic product of
Nigeria from 1987 to 2010.
Table 4.1 Nominal Values of Recurrent, Capital and Gross Domestic Product (1987-2010)
Year Recurrent Expenditure (N,000) Capital Expenditure(N,000) Gross Domestic
Product(N,000)
1987 15,646.20 6,372.50 204,806.50
1988 19,409.40 8,340.10 219,875.60
1989 25,994.20 15,034.10 236,729.60
1990 36,219.60 24,048.60 267,550.00
1991 38,243.50 28,340.90 265,379.10
1992 53,034.10 39,763.30 271,365.50
1993 136,727.10 54,501.80 274,833.30
1994 89,974.90 70,918.30 275,450.60
1995 127,629.80 121,138.30 281,407.40
1996 124,491.30 212,975.70 293,745.40
1997 158,563.50 269,651.70 302,022.50
1998 178,097.80 309,015.60 310,890.10
1999 449,662.40 498,027.60 312,183.50
2000 461,600.00 239,450.90 329,178.70
2001 579,300.00 438,696.50 356,994.30
2002 696,800.00 321,378.10 433,203.50
2003 984,300.00 241,688.30 477,533.00
2004 1,032,700.00 351,300.00 527,576.00
2005 1,223,700.00 519,500.00 561,931.40
2006 1,290,201.90 552,385.80 595,821.60
2007 1,589,270.00 759,323.00 634,251.10
2008 2,117,362.00 1,123,458.00 674,889.00
2009 2,300,194.30 1,152,796.50 721,122.00
2010 3,310,343.38 883,874.50 775,400.00
Source: CBN Statistical Bulletin 2010
Table 4.2 presents the changes and percentage changes in Nigeria’s recurrent, capital expenditure and gross Domestic
Product from 1987 to 2010.

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Table 4.2 Changes and Percentage Changes of Recurrent, Capital Expenditure and Gross Domestic Product
(1987-2010)
Year Change in RE % Change Change in CE % Change Change in GDP % Change
1987 0 0 0 0 0 0
1988 3,763.20 24.05 1,967.60 30.88 15,069.10 7.36
1989 6,584.80 33.93 6,694.00 80.26 16,854.00 7.67
1990 10,225.40 39.34 9,014.50 59.96 30,820.40 13.02
1991 2,023.90 5.59 4,292.30 17.85 (2,170.90) -0.81
1992 14,790.60 38.67 11,422.40 40.30 5,986.40 2.26
1993 83,693.00 157.81 14,738.50 37.07 3,467.80 1.28
1994 -46,752.20 -34.19 16,416.50 30.12 617.30 0.22
1995 37,654.90 41.85 50,220.00 70.81 5,956.80 2.16
1996 -3,138.50 -2.46 91,837.40 75.81 12,338.00 4.38
1997 34,072.20 27.37 56,676.00 26.61 8,277.10 2.82
1998 19,534.30 12.32 39,363.90 14.60 8,867.60 2.94
1999 271,564.60 152.48 189,012.00 61.17 1,293.40 0.42
2000 11,937.60 2.65 -258,576.70 -51.92 16,995.20 5.44
2001 117,700.00 25.50 199,245.60 83.21 27,815.60 8.45
2002 117,500.00 20.28 -117,318.40 -26.74 76,209.20 21.35
2003 287,500.00 41.26 -79,689.80 -24.80 4,329.50 10.23
2004 48,400.00 4.92 109,611.70 45.35 50,043.00 10.48
2005 191,000.00 18.50 168,200.00 47.88 34,355.40 6.51
2006 66,501.90 5.43 32,885.80 6.33 33,890.20 6.03
2007 299,068.10 23.18 206,937.20 37.46 38,429.50 6.45
2008 528,092.00 33.23 364,135.00 47.96 40,637.90 6.41
2009 182,832.30 8.63 29,338.50 2.61 46,233.00 6.85
2010 1,010,149.08 43.92 -268,922.00 -23.33 54,278.00 7.53
Source: Authors Computation

Tables 4.1 and 4.2 are interpreted together, the table reveal that recurrent expenditure, capital expenditure and gross
domestic product of Nigeria from 1987 to 2010 increased steadily with few fluctuation in some years. Nigeria’s
government recurrent expenditure increased by 24.05% from 1987 to 1988 and increased by 33.93% in 1989 and a
further increase by 39.34% in 1990. However, the increase continued in 1991, though the rate of increase was 5.59%.
The increase picked up again in 1992 when recurrent expenditure increased by 38.67%. In 1993, it again increased
by 157.81%. However, in 1994, government recurrent expenditure fell for the first within the study period by 34.19%.
In 1995, it again increased by 41.85% but in 1996, it fell by 2.46%. From 1997 to 2010, government recurrent
expenditure showed a steady increase. However, the highest increase with these periods was in 1999 when the
increase was by 152.48%. This could be attributed to the Nigerian democratic election in that year.

As stated, government capital expenditure also increased from 1987 to 2010. However, in 2000, 2002, 2003 and
2010 capital expenditure fell by 51.92%, 26.74%, 24.80% and 23.33% from the previous year quantum values. Apart
from these years, the capital expenditure increased from year to year. The highest increase compared to the previous
year was observed in 1989 by there was an 80.26% increase. This was followed by 2001 when the increase was
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83.21% and in 1996 when it increased by 75.81%. Again within these periods, the years with the least increase in
capital expenditure was in 2009 with government capital expenditure increased by 2.61%, followed by 2006 with
an increase of 6.33% and 1998 (14.60%) in ascending order.

Gross domestic product grew from 1987 to 2010, with a single fall in 1991. Gross domestic product fell by 0.81%
from the previous year figure of N267, 550.00million to N265, 365.00million. The highest increase in gross domestic
product within the period was in 2002 when GDP increased by 21.35%, this was followed by 1990 when GDP
growth rate was 13.02%. As revealed from the table, gross domestic product has shown a steady increase from 2005
to 2010. GDP in Nigeria has been growing at an average of 6% through these years.

Table 4.3 Correlation Results

REGDP CEGDP GDPGR
REGDP 1.000000 - -
CEGDP 0.762874 1.000000 -
GDPGR 0.338384 0.112950 1.000000
Source: Author’s E-view Results

Table 4.3 presents the correlation matrix of the model proxies. From the table above, it was revealed that recurrent
government expenditure has positive relationship with economic growth in Nigeria (R= 0.763) within the period
under review. This indicates that a unit in economic growth is attributable to a 0.763 increase in recurrent
expenditure. Also, the correlation matrix results indicate that capital expenditure has positive relationship with
economic growth within the period under review. However, the level of increase is quite smaller. The table reveals
that a unit increase in economic growth is due to 0.113unit increase in capital expenditure.

Table 4.4 Regression Results

Dependent Variable: GDPGR
Method: Least Squares
Variable Coefficient Std. Error t-Statistic Prob.
REGDP 2.513062 1.284637 1.956243 0.0639
CEGDP -3.269529 2.903278 -1.126151 0.2728
C 4.832766 1.641347 2.944391 0.0077
R-squared 0.664934 Mean dependent var 5.786667
Adjusted R-squared 0.585404 S.D. dependent var 4.950280
S.E. of regression 4.734176 Akaike info criterion 6.063961
Sum squared resid 470.6610 Schwarz criterion 6.211218
Log likelihood -69.76753 F-statistic 2.073858
Durbin-Watson stat 1.413043 Prob(F-statistic) 0.150684
Authors’ E-view Computation

As revealed from table 4.4, the impact of recurrent government expenditure is positive and non-significant
(coefficient of RE = 2.51, t-value = 1.96). This indicates that recurrent government expenditure has positive but not
significant impact on the growth of the Nigerian economy. The probability value of 0.06 > 0.05 confirms
non-significance of the impact. Again as revealed from the table the impact of capital government expenditure was
negative and non-significant (coefficient of CE = -3.27, t-value = -1.17). This indicates that government capital
expenditure has negative non-significant impact on the growth of the Nigerian economy. The probability value of
0.27 > 0.05 again confirms non-significance of the impact. On the whole the coefficient of determination as revealed
by R-square (R2) indicates that 0.66 of the variations observed in the dependent variable gross domestic product
growth rate were explained by variations in the independent variable (recurrent and capital expenditure) The test of
goodness of fit of the model as indicated by R2 was properly adjusted by the Adjusted R-Square of 0.58. On the
whole, the overall probability (F-statistics) is 0.15 which is greater than 0.05 properly explains the non-significance
of government expenditure on economic growth in Nigeria with the period under review.
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5.0 Conclusion and Recommendations

Over the years, policymakers are divided as to whether government expansion helps or hinders economic growth.
Advocates of bigger government argue that government programs provide valuable “public goods” such as education
and infrastructure. They also claim that increases in government spending can bolster economic growth by putting
money into people’s pockets. Proponents of smaller government have an opposite view these group of person explain
that government is too big and that higher spending undermines economic growth by transferring additional
resources from the productive sector of the economy to government, which uses them less efficiently. They also warn
that an expanding public sector complicates efforts to implement pro-growth policies - such as fundamental tax
reform and personal retirement accounts - because critics can use the existence of budget deficits as a reason to
oppose policies that would strengthen the economy. So, which side is right? It is against this background that this
study examines the impact of government expenditure (disaggregated into recurrent and capital expenditure) on
economic growth in Nigeria for the period 1987 to 2010. The result emanating from this paper reveals that while
recurrent government expenditure had positive and non-significant impact on economic growth, capital expenditure
had negative and non-significant impact on economic growth.

In a growing economy, government spending can be curtailed, the government sector can revert to a lower level of
spending and personnel can be re-directed to the business sector. However, while budgetary expansion is easy in a
recession, cut-backs during economic highs are very difficult. The result of this study reveals that total government
expenditure had not impacted positively on economic growth thus begging the question of the need to encourage
private sector investment in Nigeria. The efficiency of the private sector particularly compared to the government
sector cannot be over emphasized. A public organization can continue its activity even if the services it provides are
no longer required. Its directors and the relevant minister will not be quick to relinquish power which is a function of
the jobs they control and the funds at their disposal. The result is superfluous services, wasting personnel and capital,
which could be directed to production that provides well-being and benefit to individuals in the economy.

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