Public Spending and Private Sector Investment in Nigeria: An Investigation of the Crowding-in (or Crowding-out) Effect Amidst Deteriorating Fiscal Balance

The renewed interest in the role of the private sector as a powerhouse for enhancing economic development provides the impetus for this study. Specifically, this study investigates the effects of public spending on private sector investment amidst rising fiscal deficit, with the view of establishing the crowding effects of such spending. Employing the autoregressive distributed lag model on quarterly data from 2011Q1 to 2020Q2, this study found that despite the rising level of fiscal deficit in Nigeria, public spending (recurrent and capital expenditure) and public borrowing are the strong determinants of private sector investment. The results show that public expenditure has a significant effect on private investment in Nigeria. However, the recurrent expenditure which constitutes the largest percentage of the total public spending moves in the opposite direction and has a negative significant effect on private investment. This suggests that fewer resources are made available for capital expenditure. The study, therefore, recommends the need for the government to reduce recurrent expenditure and increase spending on capital items. This involves the concentration of efforts on the provision and expansion of the existing infrastructure.