Public finance instruments and output growth in Nigeria

Abstract

This study investigates the empirical relationship between the aggregated and disaggregated components of fiscal policy variables and output growth in Nigeria using the vector error correction mechanism for the period of 1981 to 2021. This formulation was an improvement over previous empirical studies of the impact of public finance instruments on output growth in Nigeria. Our findings suggest that fiscal policy instruments (total expenditure, capital expenditure, recurrent expenditure, total revenue, primary fiscal balance, domestic debt, external debt, oil tax revenue, and non-oil tax revenue) exert significant impacts on output growth and most of the empirical results obtained support the hypothesised relationships between public finance instruments and output growth in Nigeria. However, aggregate federal government expenditure exerts a significant negative impact on output growth, while on the disaggregated scale, capital expenditure exerts a significant positive influence on output growth whereas recurrent expenditure exerts a significant negative impact on output growth. Given these findings, we recommend that the government of Nigeria, through its fiscal authorities, should adopt growth-enhancing fiscal policies that would engender macroeconomic stability and will be potent in refocusing recurrent expenditure towards ensuring productivity growth.