IMPACT OF TAX ON GOVERNMENT CAPITAL EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study examined the impact of tax on government capital expenditure and economic growth in Nigeria. Taxation remains one of the most important sources of government revenue, and the extent to which it translates into capital expenditure, and ultimately into economic growth, continues to attract debate among Nigerian researchers. A recent study found that both oil and non-oil tax revenue had a positive and statistically significant effect on capital expenditure in Nigeria (Ajagun, Kehinde, & Jinadu, 2025), while another found a significant positive relationship between the broader tax system and economic growth, although the effect of petroleum profit tax specifically was found to be statistically insignificant (Fasua & Osagie, 2024). Other studies present a more cautious picture: one found that tax revenue had a negative effect on economic growth even as government recurrent expenditure had a positive one, complicating the assumed positive chain from tax to capital spending to growth (Ashakah, 2023). This study was guided by five objectives: to examine the effect of tax revenue on government capital expenditure in Nigeria, to determine the impact of tax revenue on economic growth in Nigeria, to examine the relationship between government capital expenditure and economic growth in Nigeria, to assess the extent to which tax administration influences the effective utilisation of capital expenditure, and to proffer recommendations for improving tax revenue mobilisation for capital expenditure and economic growth. An ex-post facto research design was adopted, using secondary data from the Central Bank of Nigeria, Federal Inland Revenue Service, and National Bureau of Statistics, analysed using regression techniques. The findings are expected to provide policy-relevant insight into how tax policy can be better aligned with capital spending and growth objectives in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is one of the oldest and most important sources of government revenue, providing the funds through which governments finance both recurrent obligations and capital projects such as infrastructure, education, and healthcare. In Nigeria, where reliance on oil revenue has historically exposed government finances to volatility in global oil prices, the role of tax revenue, both oil and non-oil, in funding capital expenditure and driving economic growth has taken on renewed importance in recent policy discussions.

Recent empirical evidence from Nigeria offers useful, if occasionally conflicting, insight into this relationship. A 2025 study examining tax revenue and capital expenditure directly found that both oil tax revenue and non-oil tax revenue had a positive and statistically significant effect on capital expenditure in Nigeria, recommending that government adopt smarter tax policies that prioritise channelling revenue toward economic development (Ajagun, Kehinde, & Jinadu, 2025). Separately, a study of the broader tax system found a significant positive relationship between taxation and economic growth in Nigeria, although this was not uniform across all tax types, with petroleum profit tax specifically found to have a statistically insignificant effect compared to value-added tax and company income tax (Fasua & Osagie, 2024).

At the same time, other recent research complicates a straightforward positive narrative. A 2023 study of the relationship between government expenditure, tax revenue, and economic growth in Nigeria found that government capital expenditure and tax revenue both had a negative effect on economic growth over the period studied, while government recurrent expenditure had a positive effect, contrary to conventional expectations (Ashakah, 2023). In contrast, a 2024 study focused specifically on government capital expenditure found that it contributed positively and substantially to economic growth in Nigeria (Damilola, Akinjare, Omankhanlen, & Isibor, 2024). These divergent findings suggest that the tax-capital expenditure-growth relationship in Nigeria may be sensitive to the time period studied, the specific tax types and expenditure categories considered, and the efficiency with which capital expenditure is executed. It is against this backdrop of mixed evidence that the present study examines the impact of tax on government capital expenditure and economic growth in Nigeria.

1.2 Statement of the Problem

Nigeria continues to rely heavily on tax revenue to fund government capital expenditure, yet the translation of this revenue into growth-enhancing capital projects remains inconsistent. While recent evidence shows a positive relationship between tax revenue and capital expenditure (Ajagun, Kehinde, & Jinadu, 2025) and between the tax system and economic growth more broadly (Fasua & Osagie, 2024), other studies have found that tax revenue and even capital expenditure itself can have a negative relationship with economic growth (Ashakah, 2023), while still others report a strongly positive contribution of capital expenditure to growth (Damilola et al., 2024).

This inconsistency in the empirical literature raises important, unresolved questions about the actual pathway through which tax revenue in Nigeria translates, or fails to translate, into effective capital expenditure and, ultimately, economic growth. Without a clearer, updated understanding of this relationship, policy makers risk continuing to rely on tax policy reforms whose growth impact is uncertain. It is this gap that the present study seeks to address.

1.3 Objectives of the Study

The general objective of this study is to examine the impact of tax on government capital expenditure and economic growth in Nigeria. Specifically, the study seeks to:

1. Examine the effect of tax revenue on government capital expenditure in Nigeria.
2. Determine the impact of tax revenue on economic growth in Nigeria.
3. Examine the relationship between government capital expenditure and economic growth in Nigeria.
4. Assess the extent to which tax administration influences the effective utilisation of capital expenditure in Nigeria.
5. Proffer recommendations for improving tax revenue mobilisation for capital expenditure and economic growth in Nigeria.

1.4 Research Questions

1. What effect does tax revenue have on government capital expenditure in Nigeria?
2. What impact does tax revenue have on economic growth in Nigeria?
3. What is the relationship between government capital expenditure and economic growth in Nigeria?
4. To what extent does tax administration influence the effective utilisation of capital expenditure in Nigeria?
5. What measures can improve tax revenue mobilisation for capital expenditure and economic growth in Nigeria?

1.5 Research Hypotheses

Ho1: Tax revenue has no significant effect on government capital expenditure in Nigeria.

Ho2: Government capital expenditure has no significant impact on economic growth in Nigeria.

1.6 Significance of the Study

This study will benefit fiscal policy makers and revenue agencies such as the Federal Inland Revenue Service, by providing updated empirical evidence on the tax-capital expenditure-growth relationship. It will benefit economists and financial analysts assessing Nigeria's fiscal policy direction, and will serve as a reference for future researchers examining taxation, public expenditure, and economic growth in Nigeria.

1.7 Scope of the Study

This study is limited to examining the impact of tax revenue on government capital expenditure and economic growth in Nigeria, using secondary macroeconomic data covering recent years for which official statistics are available.

1.8 Limitations of the Study

The study is limited by its reliance on secondary data, which is subject to the reporting and measurement conventions of the issuing agencies. Time constraints also limited the scope of primary data collection that could have supplemented the macroeconomic analysis.

1.9 Definition of Terms

Tax Revenue: Income collected by government from individuals and corporate entities through various forms of taxation, including oil and non-oil taxes. Capital Expenditure: Government spending directed toward acquiring, upgrading, or maintaining long-term physical assets such as infrastructure. Economic Growth: A sustained increase in a country's output of goods and services, typically measured by growth in Gross Domestic Product. Fiscal Policy: Government policy relating to taxation and spending decisions intended to influence economic conditions.

REFERENCES

Ajagun, O. P., Kehinde, J. S., & Jinadu, M. J. (2025). Tax revenue influences and capital expenditure in Nigeria. International Journal of Research and Innovation in Applied Science, 10(2), 336–349.

Ashakah, F. O. (2023). Government expenditure, tax revenue and economic growth: Empirical evidence from Nigeria. Jalingo Journal of Social and Management Science, 5(1), 263–276.

Damilola, A. M., Akinjare, V. A., Omankhanlen, A. E., & Isibor, A. A. (2024). Government capital expenditure and economic growth in Nigeria. Journal of Business and African Economy.

Fasua, H. K., & Osagie, J. (2024). Effect of tax system on economic growth in Nigeria. Journal of Academic Research in Economics, 16(2), 357–374.