Journal of Social Policy and Society, VOL. 4 NO. 1, 2009, 66 – 74. ISSN 2006 – 1080. The Growth Effect of Public Expenditures in Nigeria: Evidence from Granger Causality. BigBen Chukwuma Ogbonna* Department of Economics Ebonyi State University Abakaliki bigbenogbonna@yahoo.com Abstract This paper has employed the econometric methods that have gained considerable currency in recent times to examine Wagner’s Law on the association between public expenditure and GDP for Nigeria. Wagner’s law and the Keynesian theory present two opposing perceptions in terms of the association between public expenditure and growth in gross domestic product. While according to Wagner’s approach, causality runs from growth in Gross Domestic Product to public expenditure, the Keynesian approach assumes that causality runs from public expenditure to growth in Gross Domestic Product in times of recessions. Using the co-integration and Granger Causality tests, we consider Wagner’s model and Keyne’s theory for the case of Nigeria to verify whether the data based on the period of 1980-2006 supports any of the concepts. The results show that while causality flows from government current expenditure to growth in gross domestic output without feedback, unidirectional causality flows from GDP growth to government capital expenditure. In effect, we empirically find causality in both directions, indicating that both Wagner’s Law and Keynes hypothesis is valid for Nigeria. Evidence from this study suggests that in the period of recession, government should strive to cut down on its capital spending, increase the level of its current expenditure and then play host to such economic policies designed to spur private investments. Keywords: Public Expenditure, Economic Growth, Co integration, Granger causality, Nigeria 1. Introduction In some countries, data based on public expenditure as a fraction of national output show a decreasing proportion. Nigeria is one of such countries. Her public expenditures, recurrent and capital expenditures aggregated together as a percentage of gross domestic product, has been on the decrease for the past four decades. For the period of 1980-2006, for instance, the ratios of total public expenditure to Gross Domestic Product (GDP) were 44%, 30%, 23%, and 18% for 1980, 1990, 2000, and 2006 respectively (CBN,2006). This phenomenon reflects the result of the efforts put in place within this period aimed at restructuring Nigerian economy from the public sector driven to private sector driven economy through various commercialization and privatision programmes of both federal and the state governments. This scenario does not dispute the fact that in absolute terms public expenditure has kept a rising profile in Nigeria. The scenario of rising public expenditure has been subject for researchers to find out what is responsible and the effect of public expenditure growth on the economy. Wagner (1883) introduced a model that public expenditures are endogenous to economic development. This in effect suggests that growth in the economy also causes public sector expenditures to expand. Another This paper was formally presented at an International Conference: “Contemporary Challengers in Research and Sustainable Development of the Third World”, 5 th – 8 th May, 2009. The conference was organised by International Research and Development Institute, Uyo Nigeria at the Conference Centre, University of Lagos, Nigeria. I thank my fellow discussions for their valuable contributions which have been properly reflected in this version of the paper.