The Impact of Government Sectorial Capital Expenditure on Unemployment and Inflation in Nigeria

1. Introduction

Public spending may not be prioritized towards sectors that have the greatest impact on economic growth and development, leading to suboptimal outcomes (Guseh, 1997; Abu-Qarn and Abu-Bader, 2003; & Egbetunde and Fasanya, 2013). Government projects can suffer from inadequate planning and weak implementation, often resulting in budget excesses and time delays, which can further strain government finances. There may be a lack of accountability and sincerity on how public funds are managed, leading to a lack of trust in government institutions and undermining economic stability. The foregoing of Inefficient public spending can lead to budget deficits, inflation, unemployment and a deterioration of the country's external balance and as such resources that could have been used for productive investments are wasted, leading to lower economic growth and development. Moreover, wasteful government expenditure can trigger social unrest and political instability, as citizens lose confidence in the state’s capacity to meet their needs (Usman et al., 2011).

However, public expenditure usually has a significant effect on various macroeconomic variables especially that of rate of inflation, balance of payment, economic expansion and un/employment rate. Tchamyou (2020) stated that the public expenditure on education sector is a like a driver of Nigerian economic growth as it feed other sector through the right skill and training. By looking at the importance of those spending on education for economic growth, Tchamyou (2020) argues and categorically posits that educational sector investment is vital and apt for developing human capital, which have long term salient impact on economic expansion and development in turn. As viewed by the Tchamyou’ study, educational sector spending by the government likely has a positive significant to Nigerian economic progress and development. It likely suggests that increasing investment in education can lead to higher degree of human capital development, which at the long run granger causes expansion in the economic system. The reveal from the work calls for serious policy implications and cautions. They suggest that policymakers in Nigeria should prioritize investment in education as it intensively promotes growth and expansion of the economy. This could involve increasing funding for education, improving the quality of education.

Government expenditure can have a crucial influence on the degree of inflation position, although the relationship is complex and can be affected through a number of differs variables. For instance, through expansionary policy (increase in expenditure) by the government, more money is being injected in the economy, which necessitates an output shift in the level of aggregate demand. If the system is working at or near full rate, this demand rise can lead to demand-pull inflation, where prices rise due to excess demand. Government expenditure can also affect the cost of production for businesses. For instance, a change (increase) in public expenditure on infrastructural stock (projects) may increase the demand for inputs like labor and raw materials, pushing up their prices. This cost-push effect can contribute to inflation. The effect of public expenditure on inflation can also be a function of quality spending. If government spending is directed towards productive investments that enhance long-term economic capacity, the inflationary impact may be mitigated. However, if spending is wasteful or inefficient, it may exacerbate inflationary pressures.

Céspedes, Chang, and Velasco (2021) found that fiscal planning has an important influence on management of the economy, particularly in emerging markets where macroeconomic stability can be challenging to maintain. Inflation expectations are important because they can influence the effectiveness of fiscal policy. High inflation expectations can result to a higher cost of borrowing by the government, making it more challenging to manage debt levels and implement effective fiscal policy.

Public spending on public goods like development and expansion of infrastructure, education, healthcare, as well as public administration, can directly create jobs. For example, hiring workers for infrastructure projects or increasing the number of teachers in schools can boost employment. Government spending can also indirectly create jobs through its impact on economic activity. Increased government expenditure can stimulate the rate of aggregate demand for commodities, resulting to a rise in production levels and, consequently, more job opportunities in the private sector. Government expenditure, particularly on welfare plans like unemployment benefits or social security, can increase the disposable income of households. This may stimulate consumer expenditure, resulting in greater demand for commodities and, in turn, high employment rates. In some cases, government expenditure can "crowd in" private investment and consumption, leading to higher economic growth and employment. For instance, infrastructural expansion through public expenditure can improve the business environment, encouraging private firms to invest and expand, creating more jobs. Government expenditure often have a multiplier impact on employment, where the initial rise in government budget results to a more significant rise in overall economic performance and employment. The effect of the multiplier size is a function of various factors, like the state of the economy and the marginal propensity to consume.

López-Laborda, Rodrigo and Sanz-Arcega (2020) explain that government expenditure on unemployment varies across different quartiles of the rate of unemployment. For example, the impact of public spending on reducing unemployment may be more significant during periods of high unemployment than during periods of low unemployment. The effectiveness of government expenditure in unemployment reduction may lies on the prevailing level of employment, highlighting the importance of targeted policies that meet the unique demands of various groups within the labor market.

Available evidence on empirical works on public expenditure and macroeconomic performance showed that the area of consideration is widely open for further discussion as previous findings vary. For instance, (Cooray, 2009; Nwaka and Onifade, 2015; Yasin, 2011; Okoro, 2013; Gunalp and Gur, 2002; Alexiou, 2009 & Oteng-Abayie, 2011) advocated that a rise in public expenditure, if well-manage and invested at right time and sector raises the macroeconomic performance through direct or indirect effect. On the contrary (Guseh, 1997; Qarn, 2003 & Egbetunde and Fasanya, 2013) stated that public overall spending has a contradictory influence on macroeconomic variables. Usman et al. (2011) indicated that government expenditure has no effect on macroeconomic variables. The results and findings variations could be widely and majorly perceived by various considerations such as peculiarity and level of the fiscal discipline and reform that countries individually implemented within some measured time period as well as the methodological approach and choice adopted by the researchers. In Africa, particularly Nigeria, successive governments had neglected the important function of government spending on infrastructure in stimulating the macroeconomic variables and it has had an indirect effect on growth. From the foregoing, this study aim to examine the following research objectives;

1. determine the impact of public capital expenditure on unemployment rate in Nigeria,

2. ascertain the impact public capital spending on price stability (inflation rate) in Nigeria.

2.1 Relevant Theories

2.1.1 Public Expenditure and Employment Rate

Public expenditure do have a significant implications for labor market outcomes, as government spending on goods, services, and infrastructure projects can create jobs directly and indirectly. The link on public expenditure and the employment generation effect is divers and can depends or hinges on several determinants, such as the structure of government expenditure, the efficiency of spending, and the overall economic environment. Government expenditure on nation-building projects, such as road construction, building schools, and hospitals, can results to jobs creation directly. These projects require labor for construction, maintenance, and operation, which can help reduce unemployment and increase the employment rate. Public expenditure can also have indirect effects on employment through multiplier effects. For example, a rise in government expenditure may result in an increased consumer demand for commodities, thereby stimulate production and create additional jobs in related industries. Public expenditure can also impact the employment rate through government hiring. Increase in government spending on public services, like education, can result to increase hiring of teachers, doctors, and other public sector workers, contributing to higher employment rates.

Empirical evidence on the link between public expenditure and employment outcomes remains inconclusive. While certain studies highlight that increased government spending—particularly when directed toward infrastructure, education, and other labor-intensive sectors—can stimulate job creation and reduce unemployment, other findings suggest the relationship is less straightforward. In some cases, higher public expenditure may have only a marginal impact on employment or may even crowd out private sector job opportunities if resources are misallocated. This variation underscores the aim of the composition, efficiency, and context in which government spending occurs when assessing its influence on the employment rate, while others find a negative or insignificant relationship. The nature of the relationship can depend on several keys, such as the quality of spending, the efficiency of this sector management, and the overall economic conditions. For example, Mousa and Youssef (2015) confirmed that public expenditure is positively associated with employment in Egypt, suggesting that government spending can help reduce unemployment. Similarly, a study by Barro (2020) found that an upward shift in government expenditure proportionate to national output is associated with lower unemployment rates. The link between public expenditure and the employment rate is complex and context-dependent. Government spending can serve as a tool for reducing unemployment as well as increasing the employment rate, the overall effectiveness of fiscal expenditure multi-faceted like the quality of spending, the efficiency of public sector management, and the overall economic condition.

2.1.2 Public Expenditure and Inflation Rate

Government spending can influence the rate of inflation, but the nature of this relationship is neither straightforward nor uniform. Its effects are shaped by several factors such as the categories of expenditure, the balance between productive and non-productive spending, the efficiency with which resources are utilized, and the prevailing macroeconomic conditions. In some cases, well-targeted and efficient spending may support growth without fueling significant inflation, whereas poorly managed or excessive expenditure can heighten inflationary pressures. One way in which public expenditure can contribute to inflation is through demand-pull inflation. Government spending increases often translate into greater demand within the economy, which can generate inflationary tendencies. In situations where the economy is running close to full utilization of resources, this increase in demand can result in inflationary pressures. Public expenditure can also contribute to inflation through cost-push inflation. An illustration is when the state allocates more funds to infrastructure projects, which could bring about higher demand for labor and materials, which can push up production costs and necessitates to price increase. The overall impact of public expenditure on inflation depends on the fiscal policy stance of the government. Expansionary fiscal strategies, which encompass increased institutional spending and/or reduced taxes, may drive economic growth but also has the potential to trigger inflation if it is not accompanied by measures to control aggregate demand.

Research examining the connection between government spending and inflation has produced inconclusive findings. While certain studies point to a positive association—indicating that higher levels of public expenditure can contribute to rising inflation—other evidence shows that the relationship is more nuanced and may depend on the composition and efficiency of spending as well as broader macroeconomic conditions, particularly in less growing economies where fiscal policy may be less effective at controlling inflation. However, other studies find that the relationship is more nuanced and is influenced by the structural and macroeconomic environment. For example, Felix (2017) observed that a rise in public expenditure relative to GDP is linked to higher inflation in developing nations, indicating that fiscal policy can exert inflationary pressure. Phillips (2019), however, noted that spending influence on inflation largely depends on the robustness of institutional frameworks and the capacity of fiscal policy to uphold price stability. The causal link between public spending and inflation is therefore dynamics, as outcomes are influenced by several factors, including how effectively resources are allocated, the composition of spending, the level of fiscal discipline, and broader macroeconomic conditions. This makes the link between public expenditure and inflation highly complex and context-dependent. While public expenditure can contribute to inflationary pressures, its impact depends on how it is financed, the efficiency of fiscal tools in addressing inflation, combined with overall economic circumstances.

2.2 Basic Theories

The Keynesian theory of government intervention, introduced by John Maynard Keynes, emphasizes that active government participation in the economy can mitigate fluctuations and support full employment. Central to this perspective is the belief that variations in aggregate demand are the main drivers of economic cycles. During recessions or downturns, a fall in aggregate demand results in reduced output and rising unemployment, while in periods of expansion, higher demand can generate inflationary pressures. Keynes proposed that governments could stabilize the economy by adjusting fiscal policies—namely public expenditure and taxation—to influence overall demand. Thus, in times of slowdown, increasing government spending or lowering taxes can stimulate growth, whereas during periods of rapid expansion, reducing expenditure or raising taxes can help prevent overheating. Keynesian economics advocates the application of government spending and tax measures, known as fiscal policy, to maintain economic stability. Keynes argued that fiscal policy should be applied in a counter-cyclical manner, where the government boosts spending or lowers taxes during times of recession and decrease its spending and/or increase taxes during times of economic expansion. Keynesian economics also emphasizes the multiplier impact, which indicates that a rise in public spending can trigger an even greater expansion in overall economic activity. This occurs because the additional income generated by government spending leads to increased consumption, resulting in a continued rise in both demand and economic output. Keynesian economics rejects the idea of a long-run link between inflation and unemployment, viewed as the Phillips curve. Keynes, however, contended that measures designed to lower unemployment, like expansionary fiscal policies, could be implemented without necessarily leading to runaway inflation.

The theory or the foundation for state intervention in economic activities is grounded in several key assumptions about the nature of markets and the role of government. The theory assumes that markets do not always allocate resources efficiently and can sometimes fail to achieve optimal outcomes. Public goods (products that cannot exclude people from using them and whose consumption by one individual does not reduce availability for others), and imperfect competition (including monopolies or oligopolies). The theory assumes that there are certain goods and services provided for the public, including defense and essential infrastructure, and basic research that are best supplied by the government because everyone can access them. The theory assumes that governments have an important role in tackling disparities in income and wealth, through policies such as graduated taxation, welfare initiatives, and labor market regulations. The theory assumes that governments have a role in stabilizing the economy and mitigating the effects of economic fluctuations, such as recessions and inflation. This can involve the use of the fiscal tools and the implementation of fiscal measures (spending and taxation) together with monetary tools to manage the economy. The theory assumes that governments act in the public interest and are motivated to promote the well-being of society as a whole. This assumption is premised on the understanding that democratic governments are accountable to the electorate and will implement policies that reflect the preferences of the majority.

2.3 Empirical Review

Chukwuemeka (2022) investigated the relationship between public expenditure and inflation in Nigeria using annual time-series data from 1981 to 2021 obtained from the Central Bank of Nigeria’s statistical bulletin. The study employed the ARDL bounds testing procedure for co-integration, along with the Autoregressive Distributed Lag (ARDL) model and the Error Correction Model (ECM). Short-run results showed that a one-period lag of capital expenditure had a negative but statistically insignificant effect on inflation. The ECM coefficient indicated an adjustment speed of 19.7%, reflecting the rate at which disequilibrium from the previous year corrected in the current period. In the long run, capital expenditure did not significantly influence inflation, while recurrent expenditure had a positive and significant impact. Debt servicing was also positively related to inflation, though not statistically significant. The study recommended reducing government borrowing and ensuring that public funds are directed toward productive investments capable of driving economic transformation. Similarly, Akobi, Umeora, and Atueyi (2021) examined the effect of government expenditure on inflation in Nigeria for the period 1981–2019. Focusing on disaggregated expenditures in agriculture, education, health, and telecommunications, with data sourced from the Central Bank of Nigeria (CBN), the study applied multivariate regression within the Johansen co-integration and Error Correction Model (ECM) framework. The findings revealed that spending on education, though positive, was statistically insignificant in explaining inflation, while expenditures on agriculture and education also showed positive but insignificant effects. In contrast, government spending on health and telecommunications had positive and significant impacts on inflation. The authors recommended increasing budgetary allocations to the health and education sectors to strengthen human capital development and enhance productivity, thereby supporting long-term economic stability. Aluthge, Jibir, and Abdu (2021) examined the effect of Nigerian government expenditure—disaggregated into capital and recurrent components—on economic growth, using annual time series data from 1970 to 2019. The study applied the Autoregressive Distributed Lag (ARDL) model while incorporating structural breaks in both the unit root and co-integration tests to enhance robustness. The findings revealed that capital expenditure exerted a positive and significant influence on economic growth in both the short and long run. Conversely, recurrent expenditure showed no significant impact on growth in either period. Based on these results, the authors recommended increasing the proportion of capital spending, particularly on projects that directly improve citizens’ welfare, as channeling resources toward productive investments could stimulate stronger and more sustainable economic growth in Nigeria. Onuoha and Okorie (2020) investigated the long-run relationship between disaggregated government expenditure and inflation in selected African countries from 1990 to 2019. Using a panel co-integration framework, the study employed Fully Modified OLS (FMOLS) and Dynamic OLS (DOLS) estimators, following the methodologies of Pedroni (1996, 2001) and Kao and Chiang (2001). The results confirmed a long-run equilibrium among the variables. Panel DOLS estimates indicated that a 1% increase in infrastructure (capital) and defense spending raised inflation by approximately 0.56% and 0.27%, respectively. Conversely, education expenditure had a positive but insignificant effect on inflation, while health spending exerted a negative but statistically insignificant impact. Based on these findings, the authors recommended that African governments redirect infrastructure expenditure more strategically toward investment and production to help stabilize prices. Similarly, Chinedu, Daniel, and Ezekwe (2018) analyzed the influence of sectoral allocations of government expenditure on inflation in Nigeria between 1980 and 2017. Applying Unit Root, Johansen Co-integration, and Error Correction tests, alongside the Durbin-Watson statistic, the study assessed the relationships across sectors. The results showed that sectoral spending had a generally positive effect on inflation, with three of the five expenditure categories exhibiting a long-run association with real GDP. These findings align with Wagner’s Law, which posits that economic growth is accompanied by increased government spending. Specifically, expenditure on agriculture and defense had statistically significant effects on Nigeria’s economic performance, whereas spending on transportation and communication, health, and education proved insignificant. The study recommended strengthening anti-corruption measures by empowering relevant agencies to fast-track prosecution and punishment of individuals who misappropriate public funds. Dikeogu (2018) examined the impact of public expenditure on inflation in Nigeria between 1980 and 2017, drawing data from various editions of the Central Bank of Nigeria’s (CBN) statistical bulletin. The study focused on government capital expenditure (GCE) and recurrent expenditure (GRE) as the primary explanatory variables, with money supply (MSS) and exchange rate (EXR) serving as controls. Employing the Autoregressive Distributed Lag (ARDL) model, the findings revealed that capital expenditure exerted a negative effect on inflation, indicating that higher investment in capital projects was associated with reduced price levels. Recurrent expenditure also showed a negative, though statistically insignificant, effect on inflation. Money supply displayed a mixed influence, alternating between positive and negative impacts, while the exchange rate demonstrated a positive but insignificant effect. Based on these results, the study recommended channeling government expenditure toward infrastructural development as a strategy to promote investment, enhance production, and curb inflationary pressures. In a related study, Edeme, Emecheta, and Omeje (2017) investigated the relationship between public health expenditure and inflation in Nigeria from 1986 to 2015. To measure health outcomes, the study employed indicators such as life expectancy at birth and infant mortality rates. The results confirmed the existence of a long-run equilibrium relationship between health spending, health outcomes, and inflation. More specifically, sustained increases in public health expenditure were associated with higher inflation levels. The study also found that urban population growth and HIV prevalence significantly influenced health outcomes, whereas per capita income had no meaningful effect. These findings highlight the dual role of public health expenditure—contributing to improved health conditions while simultaneously generating inflationary pressures. The authors recommended that policymakers incorporate these insights into fiscal and health policy frameworks to balance developmental objectives with macroeconomic stability Obasikene (2017) analyzed the effect of government health expenditure on inflation in Nigeria over the period 1986–2014. Employing multiple regression analysis through the Ordinary Least Squares (OLS) method, the study modeled inflation as the dependent variable, with capital expenditure, recurrent expenditure, and money supply as the explanatory variables. The results indicated that capital expenditure, recurrent expenditure, and broad money supply were all negatively associated with inflation. Furthermore, capital expenditure had a significant positive effect on Nigeria’s economic growth, whereas recurrent expenditure showed a positive but statistically insignificant impact. Based on these findings, the study recommended strengthening anti-corruption agencies such as the Independent Corrupt Practices and Other Related Offences Commission (ICPC) and the Economic and Financial Crimes Commission (EFCC) to improve transparency in public finance. It also advocated for the adoption of a medium-term expenditure framework to ensure predictable and sustainable government spending across all levels of governance. Similarly, Kairo, Mang, Okeke, and Aondo (2017) examined the relationship between government expenditure and inflation in Nigeria using data covering the period 1990–2014. Applying the Autoregressive Distributed Lag (ARDL) model, impulse response functions, and the bounds testing approach, their analysis sought to establish the long-run dynamics between government expenditure (GOVEXP) and the Human Development Index (HDI). The findings revealed that public expenditure exerted a positive, though largely insignificant, effect on inflation in both the short and long run. This outcome suggests that despite increased government expenditure, Nigeria’s per capita income has remained relatively low in global rankings. The study recommended that fiscal resources be directed more toward human development initiatives, such as advanced technology-driven educational institutions and efficient healthcare systems, rather than excessive administrative spending.

Ndubuisi and Okoli (2023) examined how government social spending influences unemployment in Nigeria, with particular attention to expenditures on health, education, and community services. Using secondary data spanning 1981–2016 and applying the OLS regression technique, the study explored the effectiveness of such spending in reducing unemployment. The results revealed mixed outcomes, as certain variables (REXPH, REXPE, CEXPEH) did not perform as expected. Specifically, recurrent health expenditure (REXPH) showed no significant effect on unemployment, whereas capital health expenditure (CEXPEH) was found to have a meaningful influence. This indicates that the type of expenditure—recurrent versus capital—plays a critical role in shaping unemployment outcomes. Overall, the findings suggest that both health and education spending, whether recurrent or capital, exert a statistically significant impact on unemployment in Nigeria. However, the impact is not in the expected direction, indicating that these expenditures have not effectively reduced unemployment in Nigeria. The study concludes that government expenditures on health have not been effectively utilized to reduce unemployment in Nigeria. This implies improving the efficiency and effectiveness of spending in these areas to achieve the intended outcomes, such as reducing unemployment rates. Policymakers may need to reconsider the allocation of social expenditures and the strategies used to implement them to better address the issue of unemployment in Nigeria. The study highlights the importance of not just increasing social expenditures but also ensuring their effective utilization to achieve desired outcomes, such as reducing unemployment and improving human capital. Oseni and Oyelade (2023) investigated the effect of capital expenditure on unemployment in Nigeria between 1981 and 2020, drawing data from the Central Bank of Nigeria’s Statistical Bulletin and the World Bank’s World Development Indicators. The study employed a range of diagnostic tests—including descriptive statistics, correlation analysis, unit root testing, the Johansen co-integration approach, and the Error Correction Model (ECM). In the ECM framework, unemployment served as the dependent variable, while explanatory factors included capital expenditure, tax revenue, labor force, employee compensation, gross capital formation, GDP, and imports of goods and services. The unit root and co-integration tests confirmed the existence of a long-run equilibrium relationship among the variables. Of the seven explanatory variables, four were found to be statistically significant. Importantly, both capital expenditure and gross capital formation displayed negative and significant effects on unemployment, indicating that higher investment in these areas helps reduce joblessness. The study recommended that the Nigerian government expand capital expenditure to foster job creation, enhance labor productivity, and reduce unemployment, with allocations channeled into productive sectors to maximize developmental impact Mukarramah et al. (2020) examined the impact of capital expenditure, the Human Development Index (HDI), and labor absorption on poverty reduction through economic growth in Aceh Province over the period 2014–2018. Using regression analysis, the study treated capital expenditure, HDI, and labor absorption as explanatory variables, with economic growth as the dependent variable. The results indicated that, collectively, these factors significantly influenced growth in the region. While capital expenditure had a positive but statistically insignificant effect on growth, both HDI and labor absorption showed significant positive impacts. These findings underscore the critical roles of education, healthcare, and employment creation in driving economic expansion and alleviating poverty in Aceh. Accordingly, the study recommended that policymakers prioritize increasing capital spending, strengthening human development, and enhancing labor absorption to promote sustainable growth and poverty reduction in the province Singh and Shastri (2020) explored the interconnection between government spending on education, secondary-level educational attainment, and unemployment in India over the period 1987–2017.The study employed the Autoregressive Distributed Lag (ARDL) bounds testing approach proposed by Pesaran et al. (2001) to investigate the long-run relationships among the variables, while causal dynamics were analyzed using a block exogeneity test within a Vector Error Correction Model (VECM). The findings showed that secondary school enrollment, captured through the gross enrollment ratio, exerted a negative effect on unemployment in both the short and long run. This indicates that improvements in secondary education attainment are linked to reductions in unemployment rates. Interestingly, public expenditure on education was found to have little effect on either educational attainment or unemployment, suggesting that factors beyond financial investment shape educational outcomes and labor market performance. Overall, the study underscores the intricate relationship between education funding, learning achievements, and employment, emphasizing the need for more targeted policies and deeper research to address unemployment in India. Shadi (2020) researched on the link between expenditure and unemployment in Jordan over the period 1990 to 2019. Using the ARDL co-integration approach, the study reported several important findings. In the long run, spending was shown to have an indirect and statistically significant effect on unemployment, indicating that higher government spending as a share of GDP contributes to lowering unemployment rates. Specifically, a 1% rise in government spending relative to GDP was estimated to decline the unemployment rate by 0.43% points within the same year. This outcome suggests that fiscal policy, through increased government expenditure, can serve as an effective mechanism for addressing unemployment in Jordan. In contrast, the short-run analysis revealed that spending exerts a positive and significant influence on unemployment, pointing to possible short-term adjustment effects before longer-term benefits materialize. This could be due to various factors such as time lags in the implementation of government spending programs or initial disruptions caused by increased government spending. The study provides important insights into the role of government spending in influencing unemployment rates in Jordan and highlights the potential benefits of using government spending as a policy tool to reduce unemployment. Fosu (2019) highlights the growing trend of expenditures in most African countries. However, despite this increase, the impact on key socio-economic elements such as health, unemployment, etc. remains unclear. Economic indicators suggest that government budgets in the region may appear promising on paper but have limited actual economic impact (Andrews, 2010; Peterson, 2010). This raises the question of whether government spending truly affects economic indicators in Sub-Saharan Africa. Unemployment is a significant challenge across Africa. In light of the persistent rise in unemployment, this study investigates the relationship between public expenditure and unemployment in 34 African countries over the period from 1990–2017. The analysis seeks to determine whether higher public spending reduces, exacerbates, or has no impact on unemployment, with government expenditure categorized into investment and consumption spending. Using annual panel data, the study applies pooled OLS. The findings show that both government consumption and investment expenditures significantly influence unemployment in the region. Specifically, higher government consumption spending is associated with rising unemployment, whereas increased government investment expenditure reduces unemployment, ceteris paribus. This implies that investment-oriented spending generates more employment opportunities in Sub-Saharan Africa. Moreover, FDI is found to contribute positively to job creation in the region. Governments in Sub-Saharan Africa place greater emphasis on investment expenditure to address unemployment challenges, as these have a greater potential to generate employment compared to consumption expenditures. Igor and Danijela (2018) investigated the influence of macroeconomic, demographic, institutional, and educational factors on youth unemployment in Europe, with particular attention to the role of Active Labour Market Policies (ALMPs). Using dynamic panel data estimation with the Generalized Method of Moments (GMM) on data from 27 EU member states and Norway covering 2005–2014, the study found that macroeconomic variables significantly shaped youth unemployment rates, overall unemployment, and the proportion of young people aged 15–24 not in employment, education, or training (NEET). The results also showed varying levels of significance for other determinants, including ALMP-related factors. Notably, public expenditure on ALMPs as a share of GDP had a statistically significant positive effect on unemployment rates, suggesting that higher spending relative to GDP was associated with rising unemployment. However, when measured by the number of ALMP participants and expenditure per unemployed person, the policies exhibited opposite effects, indicating that ALMPs may be more effective when targeted broadly rather than exclusively at youth. Overall, the study underscored the complex interplay between macroeconomic conditions, policy design, and youth unemployment in Europe, emphasizing that the success of ALMPs depends on both the scale and the way they are implemented. Ezirim et al. (2017) delved into the link between government spending and unemployment in Nigeria. The study examined how different categories of public expenditure influence unemployment trends in the country and assessed whether government spending serves as a tool for reducing joblessness or contributes to its persistence, against the backdrop of high and persistent unemployment rates in Sub-Saharan Africa, coupled with increasing public spending. The study aimed to empirically determine the connection between these variables, using Nigeria as a case study. The results of the study revealed an inverse and statistically significant relationship between government capital expenditure and unemployment, both in the short run and the long run. This finding suggests that higher levels of capital expenditure by the government are linked with lower unemployment rates, indicating that capital expenditure has a direct effect on employment generation in Nigeria. On the other hand, recurrent expenditure, which includes overhead costs, was found to have a negative but not statistically importance with unemployment in both the short run and the long run. This implies that while recurrent expenditure does not directly cause unemployment, it also does not significantly contribute to employment generation. In essence, increasing recurrent expenditure alone is unlikely to drive significant improvements in employment levels. The study concludes that increasing the ratio of capital expenditure to recurrent expenditure has the potential to lead to a substantial reduction in unemployment in Nigeria. This finding suggests that a shift in government spending towards capital projects, which have a greater impact on job creation, could help alleviate the issue of unemployment in Nigeria and, by extension, the entire Sub-Saharan African region.

3. Empirical Model Specification

The public expenditure is classified in this study to include government expenditure on education, electricity power, health care, road infrastructure, and agriculture; The macroeconomic variables examined included inflation rate (INFR) and the unemployment rate (UNEMR). The functional form of the model is specified as follows:

INFR = f (GCIED, GCIRO, GCIAGR, GCIHEC, and GCIEL) 1

UNEMR = f (GCIED, GCIRO, GCIAGR, GCIHEC, and GCIEL) 2

Mathematically, the model is further specified as thus

INFR = b₀ + b₁GCIED + b₂GCIRO + b₃GCIAGR + b₄GCIHEC + b₅GCIEL 3

UNEMR = b₀ + b₁GCIED + b₂GCIRO + b₃GCIAGR + b₄GCIHEC + b₅GCIEL 4

Model 3 and 4, transformed into Econometric form as follows:

INFR _t = b₀ + b₁GCIED _t + b₂GCIRO _t + b₃GCIAGR _t + b₄GCIHEC _t + b₅GCIEL _t + U _t 5

UNEMR _t = b₀ + b₁GCIED _t + b₂GCIRO _t + b₃GCIAGR _t + b₄GCIHEC _t + b₅GCIEL _t + U _t 6

Transforming equations 5 and 6 to their natural log form, we have:

INFR _t = b₀ + b_{1 log} GCIED _t + b _2log GCIRO _t + b_{3 log} GCIAGR _t + b_{4 log} GCIHEC _t + b_{5 log} GCIEL _t + U _t 7

UNEMR _t = b₀ + b_{1 log} GCIED _t + b_{2 log} GCIRO _t + b_{3 log} GCIAGR _t + b_{4 log} GCIHEC _t + b_{5 log} GCIEL _t + U _t 8

where the variables acronyms are defined as follows:

INFR = Inflation Rate;

UNEMR = Unemployment Degree;

GCIED = Government Capital Expenditure on Education;

GCIRO = Government Capital Expenditure on Road;

GCIAGR = Government Capital Expenditure on Agriculture;

GCIHEC = Government Capital Expenditure on Health-care;

GCIEL = Government Capital Expenditure on Electricity; U = random or error term;

bo = the intercepts ; and b1 to b5 are the coefficients of the independent variables GCIED, GCIRO, GCIAGR, GCIHEC, and GCIEL respectively. They were expected to be positive ((i.e. b > 0).

4.1 Data Analysis

4.1.1. Descriptive Test

Source: E-views 10 Software

4.1.2. Unit Root

Source: E-views 10 Software

Source: E-views 10 Software

Tables 4.4, Panels A and B, present the results of the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, respectively. The ADF test (Dickey & Fuller, 1979) and the PP test (Phillips & Perron, 1988) determine stationarity based on whether the absolute value of the test statistic exceeds the critical value at a chosen significance level. In this study, a 5% significance level was applied to assess the null hypothesis (H₀) of non-stationarity.

The results indicate that unemployment rate (UNEMR), and government capital expenditures in agriculture (GCIAGR), health (GCIHEC), and education (GCIED) are non-stationary at their levels but become stationary after first differencing, suggesting they are integrated of order one, I(1). Conversely, inflation rate (INFR), and government capital expenditures on roads (GCIRO) and electricity (GCIEL) are stationary at levels, with absolute test statistics exceeding the critical values at 5%, indicating integration of order zero, I(0). Both ADF and PP tests confirm that none of the variables are integrated of order two, I(2). Given the presence of variables with mixed orders of integration, conducting a co-integration test is appropriate to examine potential long-run relationships among the variables.

4.1.3 Test of Co-integration

Co-integration analysis is crucial for examining the long-term relationships among the model’s variables. Since the unit root tests revealed a mix of integration orders, I(0) and I(1), the Bounds testing approach is suitable for assessing whether a stable long-run relationship exists. This method evaluates the existence of a sustained association among the variables. The results of the Bounds co-integration test are presented in Table 4.5.

Source: E-views 10 Software

According to Pesaran, Smith, and Shin (2001), the Bounds test for co-integration can detect long-run relationships among variables with mixed orders of integration. A computed F-statistic exceeding the upper critical bound at a given significance level indicates the presence of co-integration. If the F-statistic lies between the lower and upper bounds, the result is inconclusive, whereas a value below the lower bound suggests no co-integration. As shown in Table 4.3, the F-statistics for the INFR (11.079973), and UNEMR (4.805012) models all exceed the 5% upper critical bound of 3.38, confirming the existence of long-run relationships in these models. Given the mixed integration orders of the variables, the Bounds testing method is suitable for examining these long-term associations. Accordingly, the Autoregressive Distributed Lag (ARDL) approach was employed to estimate both the short-run and long-run impacts of the independent variables on the macroeconomic dependent variables, with results reported in both dynamic and static forms.

Source: E-views 10 Software

Panel A of Table 4.4 presents the long-run estimates for the inflation rate model. The constant term is 19.3, indicating that if all explanatory variables were set to zero, inflation would increase by 19.3%. This positive and statistically significant constant suggests that, in the absence of external controls, inflation tends to rise naturally. Government capital expenditure on roads has a positive but statistically insignificant effect on inflation, with a 1% increase in road investment associated with a 0.09% rise in inflation. Conversely, agricultural investment has a negative and statistically significant effect, where a 1% increase in spending reduces inflation by 1.95%, emphasizing its importance in long-term inflation management. Spending on education shows a negative but statistically insignificant relationship, with a 1% increase in education investment linked to a 2.45% reduction in inflation. Similarly, health sector investment exhibits a negative but insignificant effect, where a one-unit reduction in health expenditure leads to a 2.66% increase in inflation, possibly reflecting inefficiencies or short-term adverse impacts from reduced funding. Notably, electricity investment has a positive and statistically significant effect on inflation, with a coefficient of 2.41. This implies that a 1% increase in electricity-related capital expenditure results in a 2.41% rise in inflation, potentially due to supply-side cost pressures or delayed benefits from the investment.

Panel B of Table 4.4 presents the short-run results with a maximum lag of 2, based on the models selection criteria. Capital expenditure on roads is positive but statistically insignificant at both level and first lag, with a negative sign at the first lag. Agricultural investment is consistently negative and statistically insignificant at level, first, and second differences. Education expenditure is negative at level but turns positive at both the first and second lags. It is statistically significant across all periods, indicating a robust influence on inflation in the short term. Health sector investment has a negative and significant impact at level but becomes insignificant at the first and second lags. Investment in electricity is positive across all periods (level and first lag), but is statistically significant only at the first lag, and remains insignificant at level and second lag. The negative error correction term indicates the presence of a long-term relationship among the variables. With an adjustment speed of roughly 59%, approximately 59% of deviations from the long-run equilibrium are corrected in each period. The Durbin-Watson statistic of 2.2 suggests the absence of first-order autocorrelation, confirming the model’s reliability. Overall, the model is statistically significant, as reflected by an F-statistic of 3.234 and a p-value of 0.044. The R-squared value reveals that about 86% of the variation in the inflation rate is accounted for by the independent variables, while the remaining 14% is attributable to random or unexplained factors, indicating strong explanatory power of the model.

Source: E-views 10 Software

The constant value is 1.09, indicating that if all independent series are zero, the unemployment rate would increase by 1.09%. This positive and statistically significant constant suggests that unemployment has an inherent tendency to rise without policy intervention. Public expenditure on roads exhibits an indirect but statistically not significant connection with unemployment. The result shows that a 1% upward shift in road infrastructure investment results to a 1.33% increase in the unemployment rate—an unexpected result, though not statistically reliable. Government capital investment in agriculture is positively related to unemployment and statistically significant, indicating that an increase in agricultural spending correlates with a rise in unemployment. Specifically, a 1% rise in agricultural capital investment is linked with a 5.32% increase in the unemployment rate. This counterintuitive result may suggest inefficiencies or poor targeting in the agricultural investment programs during the analysis period. The coefficient for government capital investment in education is positive, indicating a negative effect on employment, although it is statistically insignificant. It implies that a 1% increase in education-related spending is linked to a 2.38% increase in unemployment, but the result lacks statistical backing. Conversely, government capital investment in health has a negative and statistically useful with unemployment. A one-unit reduction in health investment results in a 3.38% increase in unemployment, highlighting the critical role of health sector spending in employment outcomes. Government investment in electricity shows a strong negative coefficient (-6.34), meaning a 1% rise in electricity capital investment leads to a 6.34% increase in unemployment. While statistically significant, the direction of this relationship is unexpected and may indicate structural issues in the sector or short-term displacement effects.

Panel B of Table 4.9 displays the short-run results, with a maximum lag of 1, as determined by the lag selection criteria. Expenditure on roads has an indirect and significant effect at level, but turns positive and becomes insignificant at the first lag. Agricultural investment is positive but insignificant at level; however, it becomes negative and statistically significant at the first difference. Education investment is positive and significant at both level and first lag, suggesting a consistent short-term influence on unemployment. Health sector spending has a negative and significant impact at level but becomes positive and statistically insignificant at the first lag

The negative error correction term indicates the existence of a long-term relationship among the variables. With an adjustment speed of roughly 59%, deviations from the long-run equilibrium are corrected by 59% in each period. The Durbin-Watson statistic of 2.17 suggests no first-order autocorrelation, confirming the model’s reliability. The model is highly significant overall, as reflected by an F-statistic of 213.275 and a p-value of 0.00000. The R-squared value shows that approximately 78% of the variation in the unemployment rate is explained by the independent variables, while the remaining 22% is due to random or unexplained factors, highlighting the model’s strong explanatory power.

5. Conclusion

The analysis of the effects of government capital expenditure across key sectors—namely Agriculture, Education, Health-Care, Road Infrastructure, and Electricity—reveals varying impacts on Nigeria’s macroeconomic indicators. Regarding inflation, long-run results indicate that only government capital spending on agriculture and electricity significantly influences the inflation rate. In the short run, all variables except spending on education and health are insignificant at the current period. At the first lag, capital projects in education and electricity contribute to changes in inflation, while at the second lag, only government capital expenditure on education remains significant. Finally, in the long-run unemployment model, government capital spending on agriculture, health, and electricity significantly impacted unemployment. In the dynamic short-run, only capital expenditure on roads, education, and electricity are significant at level period, while at the first lag, expenditure on agriculture and education drives changes in the unemployment rate.

Policy Recommendations

1. To curb inflation effectively, public investment must be reoriented towards sectors that directly enhance productive capacity, particularly agriculture and health. While infrastructure and energy investments are crucial, their implementation must be managed to minimize short-term inflationary pressures. A phased and productivity-focused investment strategy, backed by strong governance, is essential to achieve inflationary pressure control without compromising long-term development goals.

2. To reduce unemployment sustainably, more funding is advocated for agricultural, road, education and electricity infrastructural projects. Policymakers should reassess sectoral spending priorities, focusing on employment elasticity of public investments. Combine infrastructure and social sector spending with labor market policies, like job training, entrepreneurship support, and public-private partnerships for workforce integration.