PUBLIC EXPENDITURE AND ECONOMIC GROWTH: JUSTIFICATION OF KEYNES HYPOTHESIS USING NIGERIAN DATA

Abstract

Keynes advocated for an increase in the size of government spending, as the surest and easiest way an economy can overcome recession. Government spending is an exogenous variable and should be used as a policy tool or instrument for growth.This study attempts to test this postulation made by Keynes on public expenditure being an exogenous variable in the growth-public expenditure model, and as a growth driver, ascertaining its applicability to the Nigerian situation. Secondary Data was sourced and analyzed using a Vector Error Correction Model. Pre-estimation test was done to determine the stationarity and co-integration status of the variables. The VEC result showed that there is a no long run causality between government expenditure and economy growth, thus refuting the applicability of this Keynesian hypothesis in Nigeria. However, the short run test for causality affirmed that capital expenditure caused growth in the short run while recurrent expenditure does not cause growth in both the long and short-run. The study concluded that Keynes postulation of public expenditure being used as a tool for economic growth is not justified for Nigeria in the long-run but can be accepted in the short-run. It was therefore recommended that for the economy to experience rising growth over time which would spur them into economic development, government must increase the participation level of the private sector, and reduce its participation in economic activities to the barest minimum. Government should also channel its expenditure into ensuring peace and security of lives and properties, and provision of public goods.

Keywords: Growth Driver; Keynes hypothesis; Nigeria; Public spending; Vector Error Correction Model.