Fiscal Policy Instruments and Economic Growth in Nigeria: A Vecm Analysis of Government Capital Expenditure and Vat

Abstract

This study examines the impact of fiscal policy instruments on economic growth in Nigeria over the period 1980–2024. The research focuses on government capital expenditure (GCE) and value added tax (VAT) as key fiscal tools influencing real gross domestic product (RGDP), which serves as a proxy for economic growth. Anchored on the Keynesian fiscal policy framework, the study adopts an ex-post facto research design and utilizes annual time series data sourced from the Central Bank of Nigeria and the National Bureau of Statistics. To capture both short-run dynamics and long-run equilibrium relationships, the Vector Error Correction Model (VECM) was employed. Prior to estimation, the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests were conducted to determine stationarity, while the Johansen cointegration test confirmed the existence of a long-run relationship among the variables. The results indicate that all variables are integrated of order one, I(1), and are cointegrated. Empirical findings reveal that, in the short run, government capital expenditure and value added tax exert negative and statistically insignificant effects on economic growth. However, the error correction term is negative and statistically significant, indicating a gradual adjustment toward long-run equilibrium. In the long run, government capital expenditure exhibits a positive but weak influence on economic growth, while VAT remains insignificant. The study concludes that fiscal policy instruments have limited short-run effectiveness but remain important for long-run growth. It recommends improved efficiency in public expenditure, strengthened tax administration, and diversification of revenue sources to enhance sustainable economic growth in Nigeria.