GOVERNMENT EXPENDITURE SIZE AND ECONOMIC GROWTH IN NIGERIA: A THRESHOLD ANALYSIS
Abstract
This study examined the optimal size of government expenditure that maximizes economic growth in Nigeria from 1970 to 2023 using a threshold analysis which employed quadratic and Threshold Autoregressive (TAR) models. The study employed time series data of Nigeria which were subjected to various diagnostic tests and the results revealed that the variables were suitable for estimation. The empirical results of the quadratic model showed a positive relationship between government expenditure size and real GDP growth, while the excess expenditure of government, measured by the square of government expenditure, has a negative impact on real GDP growth, suggesting a nonlinear relationship between government expenditure size and real GDP growth in Nigeria. The result also showed a significant influence of broad money supply and gross fixed capital formation on real GDP growth. Empirical evidence of the quadratic and TAR models, revealed the optimal size of government expenditure that maximizes economic growth in Nigeria to be approximately 18 percent, confirming the existence of Armey’s curve in Nigeria. The Granger causality result indicated a bidirectional causality between government expenditure size and gross fixed capital formation, while a unidirectional causality existed between gross fixed capital formation and real GDP growth. Therefore, based on these findings, the federal government should ensure that an effective and efficient growth inducing fiscal policy management framework is put in place to ensure that government expenditure as a percentage of GDP is at the threshold value of 18 percent in order to promote economic growth in the economy.
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