Application of Autoregressive Distributed Lag Model to Evaluate the Effect of Government Expenditure and Revenue on Nigeria Gross Domestic Products

Abstract

Gross Domestic Product (GDP) is a monetary metric that measures the market value of all final goods and services produced within a country or group of countries over a specific time period. GDP is commonly used by governments to assess a nation’s economic health.  This study analyzed the impact of government expenditures (capital and recurrent) and revenues from company income tax, value-added tax (VAT), and petroleum profit tax on Nigeria's GDP. It also provided recommendations for fostering economic growth amid current economic challenges. The research employed the Autoregressive Distributed Lag (ARDL) modeling technique to evaluate the short-run dynamics and long-run relationships affecting Nigeria's economic growth over the period 1982–2022, using annual secondary data sourced from the World Bank's development indicators report (last updated January 2019). Key methods included the Augmented Dickey-Fuller (ADF) test to assess the stationarity of variables, the ARDL Bound test to identify cointegrating relationships, and the Breusch-Godfrey Serial Correlation test to check for serial correlation. The empirical findings from the ARDL error correction model indicated a significant long-run relationship between recurrent expenditures, revenues from VAT, and petroleum profit tax on Nigeria’s real GDP. The negative coefficient of the error correction term (Coint Eq(-1)* = -0.323717, p-value = 0.0129) confirmed a long-term co-integrating relationship among the variables with a substantial impact on GDP.  The Breusch-Godfrey test results (p-value = 0.9300) revealed no serial correlation in the selected ARDL (4) model. Additionally, the upward trend observed in Figure 4.1 highlighted growth within the study period. The study recommended strengthening policy frameworks to ensure efficient management and oversight of revenue from company income tax, VAT, and petroleum profit tax. It also emphasized the need for greater control over recurrent expenditures, given their significant impact on Nigeria’s GDP. Future research was advised to utilize quarterly or monthly data with ARDL modeling as more granular data becomes available.