Effect of Local Governments’ Finances on Economic Growth of Nigeria: An Empirical Exploration

Abstract

It is expected that local government as the closest tier of government to the people should promote grassroots development while at the same time contribute to national economic growth and development. The extent to which this is realized particularly in a developing country like Nigeria has not been given the empirical attention it deserves in past studies. Therefore, in this study, we examined the effect of local government finances (comprising total revenue, capital and recurrent expenditure) on economic growth in Nigeria for the period, 1993 to 2021. Dynamic Least Squares, Fully Modified Least Squares, Canonical Cointegrating Regression, and Granger causality techniques were applied to the annual time series data sourced from Central Bank of Nigeria’s statistical bulletin. Empirical findings of this study confirm the existence of a long-run relationship between local government finances and economic growth in Nigeria. Furthermore, local governments’ recurrent and capital expenditures were found to have positive but non-significant effect on economic growth unlike local governments’ total revenue which has negative and non-significant effect on economic growth of Nigeria. This study found no causal relationship between local government finances and economic growth. However, there is a unidirectional causality running from revenue to recurrent expenditure at the local government level. Likewise, capital expenditure has a unidirectional causality with recurrent expenditure. It can therefore be concluded that local government finances have no significant effect on economic growth of Nigeria in the study period. This study recommends that local government finances should be re-engineered towards growth-inducing projects, programmes and investments.