The study examined the relationship between government expenditure and capital market development in Nigeria for the period of 1981-2018 in order to assess the effect of government spending on the development of the capital market. The study employed Autoregressive Distributed Lag Model (ARDL-ECM) approach to determine the nature of the relationship among the variables. The variables used were: market capitalisation (MCAP), Government Capital Expenditure (GCE), Government Recurrent Expenditure (CRE) and Oil Revenue (ORV). Unit Root test was performed on these variables and the result revealed that MCAP, GCE were GRE are stationary after first difference I (1) while ORV was stationary at level I (0). The study found out that there is long run relationship among the variables. The coefficient of ECM is negative (-0.968645) and significant. This implies that 97 percent disequilibrium in the previous period was corrected to restore equilibrium in the current year. The study found out that government capital expenditure has negative significant impact on the capital market. However, both government recurrent expenditure and oil revenue have positive significant impact on capital market in Nigeria. The study recommended that government should increase her recurrent expenditure in order to boost spending in the economy, thereby increasing capital market activities. Government to also massively invest in capital projects with the aim of promoting capital market activities and enhance the monitoring mechanism to ensure that funds are utilised for projects they are meant for. Finally, government should ensure that oil revenues are invested in the economy to enhance capital market performance towards enabling firms to access funds from such investment.

Key words: Capital Expenditure, Recurrent Expenditure, Capital Market, Nigeria