Investigating the Crowding Out Effect of Government Expenditure on Private Investment

This study investigates the crowding out effect of government expenditure on private investment in Nigeria using annual data spanning from 1981-2015. The research is shaped by the high level of competition that investors are exposed to in the economy. Competitiveness is also supported by government plans to reduce investment burden by increasing expenditure in all strategic sectors of the economy. The present paper adds to the existing literature by investigating the effect of disaggregated government expenditure on private investment in Nigeria. The estimation techniques of the study include pre-and post-estimation, including descriptive statistics, correlation matrix, a unit root test and econometric estimation using the Auto Regressive Distributed Lag (ARDL) method. Government capital expenditures are estimated marginally, while recurrent expenditures are estimated in terms of elasticity, as the variables (recurrent expenditures) show a strict long tail to the right. It was observed in general that the effect of government expenditure on private investment depends on the components of the expenditure. Some were found to crowd out private investment while some crowd in private investment. This implies that not all government expenditure is channeled in such a way that it attracts private investment in the economy. It is therefore recommended that the policymakers should take into consideration the existence of private investors in expenditure plans.

Abstract licence: CC BY

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