Differential Effects of Capital and Recurrent Expenditure on Household Welfare in Nigeria (1986-2025)

This paper examines the differential effects of capital and recurrent government expenditure on multidimensional household well-being in Nigeria over the period 1986-2025. A composite household well-being index is constructed using principal component analysis (PCA) of health, education, and living-standard indicators. Guided by Keynesian and Endogenous Growth theories and motivated by Nigeria’s oil-revenue-dependent fiscal structure, the study employs the autoregressive distributed lag (ARDL) framework to examine the short- and long-run effects of capital and recurrent expenditure separately. Although the conventional ARDL F-bounds test produces inconclusive evidence of cointegration, the error-correction term (ECT) t-bounds approach provides evidence of a long-run relationship in both models. The results reveal important differences in the dynamic adjustment process. Capital expenditure has a significant negative short-run effect on household well-being. Still, the associated model exhibits a substantially faster adjustment toward long-run equilibrium, correcting approximately 12.5% of disequilibrium per year compared with 8.8% for recurrent expenditure. This adjustment-speed differential constitutes the study’s principal empirical contribution. However, the long-run coefficient estimates are sensitive to model specification. A Fully Modified Ordinary Least Squares (FMOLS) robustness test, which jointly incorporates both expenditure categories, shows a significant positive association between recurrent expenditure and household well-being. In contrast, the coefficient on capital expenditure is statistically insignificant. A Wald test further confirms a significant difference between the two expenditure coefficients. Taken together, the findings suggest that expenditure composition matters not only through the magnitude of its welfare effects but also through the speed at which household well-being adjusts toward long-run equilibrium. The study therefore highlights the importance of improving the efficiency, implementation, and targeting of public expenditure, particularly capital spending, rather than assuming that increases in either expenditure category automatically translate into improved household well-being.

Capital expenditure; Recurrent expenditure; Household welfare; Nigeria

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