Crowding Out Hypothesis: Does The Federal Government Expenditure Crowd Out State And Local Government Expenditures In Nigeria?

The study examined the crowding out hypothesis with the objective of ascertaining whether federal government expenditure crowds out state and local government expenditures in Nigeria. Annual data covering the period 1999-2017 were collected from secondary sources. The study estimated simple regression models using the ordinary least squares (OLS) method. However, before model estimation was carried out, stationarity test of the time series variables was first reported. Findings from the unit root test revealed that time series variables were integrated of different orders. Findings from the estimated regression models showed that federal government expenditure crowds out state and local government expenditures during the period investigated. Based on these findings, it was recommended thatthe vertical fiscal imbalance in Nigeria therefore needs be addressed with proper institutions so that all tiers of government face hard budget constraints within which to decide allocations. States and local governments should be granted more autonomy to raise their own revenues in order to reduce their dependence on federal transfers and ensure that expenditure decentralization is matched to a larger extent with revenue decentralization.