Economic Analysis of Public Expenditure Growth and Optimal Size of Public Sector in Nigeria

ABSTRACT Public expenditure1 is not only used for stimulation of aggregate demand, it is also a useful tool for redistribution of wealth and provision of public goods. Consequently, the size and object of government expenditure becomes a leading policy issue of general concern in most national and international gathering. To proffer the much needed professional guidance on such occasion at the local level, this study therefore carried out economic analysis of public expenditure growth and optimal size of public sector in Nigeria, with federal government as the case study. The Ordinary Least Square econometric technique was adopted to guide the study using Eviews 8 econometric software for data analysis. Annual time series data (1961- 2014) from Central Bank of Nigeria Statistical Bulletin 2009 and 2014 was used alongside 2014 World Development Indicators from the World Bank. Having performed necessary preand post diagnostic tests, the results show that average annual government expenditure growth was 1.91%. Again, tax revenue from oil sector was found to be the most influential determinant of public expenditure with 32.66% contribution to its growth. Other influential determinants were tax revenue from non-oil sector and population growth rate which accounted for 24.29% and 22.49% respectively. It was also found that one of the core objectives of minimizing the widely decried government wastefulness has not been materialized as dummy for Fiscal Responsibility Act of 2007 could not influence growth rate of public expenditure in Nigeria. Lastly, evidence of non-linear relationship between government expenditure and economic growth was found in Nigeria as predicted by Armey Curve. As a result, approximately 26.5% was found to be the optimal size of public sector in Nigeria. It was concluded that above annual growth rate of government expenditure is not harmful for economic growth; Nigeria remains oil dependent state in terms of government spending; and that government expenditure still operates along growth part of the non-linear curve. Among its recommendations was possible increase in government spending on sectors with high multiplier effect, further diversification of revenue base away from oil and promotion of transparency and accountability in government business.