AN EMPIRICAL ANALYSIS OF THE EFFECT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH OF NIGERIA
ABSTRACT
This study seeks to empirically examine the effect of government expenditure on economic growth of Nigeria from the period 1980-2014. The objective was set to find out if government expenditure significantly affects economic growth in Nigeria; determine the causality direction between government expenditure and economic growth in Nigeria; show the trend of government expenditure over the years and ascertain if government focuses more on current spending or capital spending and its effect on growth. The variable included in this model are based on data collected from a period of (1980-2014) through which the impact of government expenditure and other variables like money supply, inflation and foreign debt was explained. The necessary information needed to explore this economic phenomenon can be illustrated in a functional relationship. To evaluate the regression result in this research model, itwas on the basis of the economic a priori expectation of the parameters and statistical test. A secondary data was employed in this study. The data was gotten from major sources like the Central bank of Nigeria statistical bulletin, CBN annual report, Economic journals and textbooks. From the empirical result, it was found out that government expenditure has a positive impact on the economic from the period covered (1980- 2014). Therefore government was advised to encourage the federal government expenditure through various policy measures like granting of subsidies, increasing sectorial allocation to the sector, expenditure on education, health infrastructures, industries and other project to facilitate the productive base of the economy. On the other hand, it was seen that inflation rate, foreign debt, have no significant impact on economic growth. This showed that government have not provided all the needed measures to check price stability, excess money supply, low industrialization, subsistence agriculture and other sources of inflation rate, foreign debt in the country. To proffer solutions to the problem, policies were recommended to tackle the setbacks to economic growth.
TABLE OF CONTENTS
Cover Page - - - - - - - i
Title Page - - - - - - - ii
Certification - - - - - - - iii
Dedication - - - - - - - iv
Acknowledgements - - - - - - v
Table of Contents - - - - - - vi-vii
Abstract - - - - - - - - viii
CHAPTER ONE: Introduction
1.1 Background of the study - - - - 1
1.2 Statement of the problem - - - - 5
1.3 Objectives of the study - - - - - 7
1.4 Research Hypothesis - - - - - 7
1.5 Scope of the study - - - - - 8
CHAPTER TWO: Literature Review
2.0 Introduction - - - - - - 9
2.1 Conceptual/Theoritical Literature - - - 9
2.2 Empirical Review - - - - - 13
2.3 Theories of Government Expenditure - - - 21
CHAPTER THREE: Research Methodology
3.1 Theoritical Framework - - - - - 24
3.1.1 Nature and Sources of Data - - - - 24
3.2 Model Specification - - - - - 25
3.3 Method of Estimation - - - - - 25
3.4 Economic Apriori Expectation - - - - 26
3.5 Sources of Data - - - - - - 27
CHAPTER FOUR: Data Presentationand Analysis of Result
4.1 Introduction - - - - - - 28
4.1.1 Data Presentation - - - - - - 28
4.1.2 Unit Root Test for Stationarity - - - - 29
4.1.3 Cointegration Test - - - - - 30
CHAPTER FIVE: Summary, Conclusion and Recommendations
5.1 Summary - - - - - - - 33
5.2 Conclusion - - - - - - - 33
5.3 Recommendations - - - - - 34
References - - - - - - - 35
Appendix - - - - - - - 38-47
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Finance is a function in business (private/public) that acquires funds for the organization and manages those funds within the organization. These activities include preparing of budgets; doing cash flow analysis; and planning for the expenditure of funds assets (Musgrave, et. al. 1989).
Public finance on the other hand refers to all activities of government in generating and allocating (spending) revenue towards ensuring efficiency of the state and the general well-being of the people, that is, financial operation of public treasury and its implication. Dalton (1968) affirmed that public finance is concerned with income and expenditure measures of the public budget authorities together with the adjustment of one to the other. The management of public finance would bring about control and co-ordination of the funds to achieve viability of projects and programmes in the public sector (Shirras, 1969).
In most economies today, government intervenes in fundamental roles of allocation, stabilization, distribution and regulation, especially where or when market proves inefficient or fails in resource allocation. Government also intervenes, particularly in developing economies to achieve macroeconomics objective such as economic growth and development, full employment, price stability and poverty reduction. (Asian Economic and Social Society Publication (AESS), 2011).
It is a fact that no society thoughout history has ever attained a high level of economic affluence without a government. Where government do not exist anarchy reigned and little wealth accumulated by productive economy activity. After government took hold, the rule of law and the establishment of private property right often contributed and it has similarly impacted on their societies as well. Economic growth represents the expansion of a country’s GDP or outputs. Growth means an increase in economic activities (Hymann, 1993).
Todaro (1995) Citing Kuznets defined a country’s economic growth as a long term rise in capacity to supply increasing diverse economic goods to is population, this growth capacity based on advancing technology and the institutional and ideological adjustment that is demand. The experience of the old Soviet Union is revealing as well the comparison of east and West Germany during the cold war era or of north and South Korea today.
In the Nigeria context, the public sectors consist of the federal government, state government and local government. For example, Wagner’s Law predicts that the development of an industrial economy would be accompanied by an increased share of public expenditure in gross national product (GDP). This is not an exception in Nigeria, as a developing nation, trying to expand its industrial base – manufacturing, agriculture, mining, extractive industry etc. The scope of government expenditure has obeyed this law since the economic base and government expenditure has been expanding over the years. Furthermore, Wagner’s law suggests that a welfare state evolves from free market capitalism due to the population voting themselves ever increasing social services. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden, which Nigeria is taking a cue from. As progressive nations industrialize, the share of the public sector in the national economy grows continually. The increase in state expenditure is indeed due to three reasons as identified by Adolf Wagner (German economist, 1835 – 1917), namely:
• Social activities of the State,
• Administrative and Protective Actions and
• Welfare functions.
The material below is an apparently much more generous interpretation of Wagner’s original premise.
• Socio-political, i.e., the state social functions expand over time; retirement insurance, natural disaster aid (either internal or external), environmental protection programmes.
• Economic: advance in science and technology, given room to an increase of state assignment into the sciences, technology and various investment projects.
• Historical: the state resorts to government loans for covering contingencies and thus the sum of government debts and interests amounts grow. What this is means is that it is an increase in debt service expenditure.
This principle applies to Nigeria as it increases her economic and capital bases socially and politically. As explained, there are two broad parts of government expenditures, namely: the recurrent and capital expenditures.
a. Recurrent expenditure-the financial outlay daily running of government business, Final consumption of government expenditure.For that of Federal Government, it is divided into three main parts which are personnel emoluments, other charges and special.
Personnel emoluments are wages and salaries of government workers the allowances accruing to them. Other charges are maintenance expenditure, travel, stationery, and consolidated charges Consolidated charges include emolument for judges and settlements government debts. Special expenditure - to acquire durable equipment, machines, motor vehicles, furniture etc. At times they are more of capital than running costs. Capital expenditure-investment outlays that increase the asset of government. It depends not only on the size of revenue but on the amount used annually by government.
Generally, government expenditure has been on the increase with increase in the Gross Domestic Product (GDP). That is the marginal propensity to spend in the public sector is high (the increase in current expenditure as a percentage of the increase in the GDP).This is as the need of the society increases. As government revenue increased, government decided on the provision of a number of social services as a means of spreading oil wealth such as free education etc. As a matter of necessity, government can embark on the provision of public capital goods. Hence overhead capital like roads etc. with heavy operating and maintenance expenditure Relatively, cost of public services is higher than private owing bureaucracy in government administration resulting in red-tape in the system.
During the first nation rolling plan (1989-1991), government aimed at effort to combat inflation, hence large budgetary deficits were to be avoided. Government expenditures were to be made more cost effective and kept at level that were consistent with the nations resources realistic growth target and general economic stability. The major instruments by which the government can ensure an effective growth in economic activities are;
i. Expenditure that induce the firm or workers to produce certain goods and services.
ii. Taxes that reduce private consumption or investment and thereby free resource for public expenditure.
iii. Regulation and controls that direct people performance and so on.
These objectives are summarized as;
a. Provision of infrastructural facilities such as good roads, light, water, transport and communication facilities etc. in both urban and rural area with the view to adequate support to the productive sector and enhancing private sector participation on the various sectors of the economy.
b. Streamlining public expenditure to give priority to the completion of the initial ongoing viable project.
Direct expenditure is that incurred in an establishment of economically viable commercial enterprises such as iron and steel complex, oil and gas refineries etc.
Government expenditure in addition to raising the level of economic growth also influences the pattern of production and the component of output. Generally government expenditure is classified into two which are by current expenditure which involves all expenditure by government for maintenance of existing or new institutions and services, they are salaries, wages of public offers and fringe benefits and expenses for servicing activities which involves administration, defense and other social services like education, health and pension schemes. The other one is capital expenditure this are the cost of bringing into existence new institutions, services and project. It is simply all government expenses on building road, factories, schools, and equipment requirement for providing social and economic services.
1.2 Statement of Problem
The size of government expenditure and its effects on long-run economic growth and vice versa has been as issued of sustained interest for decades. Policy makers are divided as to whether government expansion helps or hinders economic growth. Advocates of bigger government argue that government programs provide value “pubic goods” such as education and infrastructure they also claim that increases in government spending can boost economic growth by putting money into people’s pocket. Proponents of smaller government have the opposite view. They explain that government is too big and that higher spending undermines economic growth by transferring additional from the productive sector of the economy to government, which uses them less efficiently. They also warn that expanding public expenditure leads to complication in implementing pre-growth policies, Such as fundamental tax reform and personal retirement accounts. This is because critics can use the existence of budget deficit as a reason to opposite policies that would strengthen the growth of the economy.
A major concern about the Keynesian school of thought is that; if government interference is an effective remedy for recession and has no side effect, why do so many oppose the policy of budgetary expansion? Firstly, a large public sector diminishes the business sector in personal and the sources of investment. It may be maintained that in time of recession, much of the workforce is not employed at all, and therefore, employment in the public sector does not come at the expense of the public sector. Furthermore, in any growing economy, Government spending can be curtailed, the government can revert to a lower level of spending and personnel can be redirected to the business sector. However, while budgetary expansion is easy in recession, cut-backs during economic high are very difficult. No minister or director of a public institution relinquishes authority and budget easily. The result is an inflated and inefficient public sector even after the recession is over, and also a lower rate of growth in the private sector than its potential would indicate.
The relationship between public expenditure and growth is important especially for developing countries (Nigeria inclusive), most of which have experienced increasing level of public expenditure over time. There is evidence that, unlike in the case if developed countries, consumption is not negatively related with economic growth. This study shall empirical investigate this relationship in the case of Nigeria, with a view of explaining the reason behind the observed causality between them.
1.3 Objectives of the Study
The main objective of the study is to empirically ascertain the effect of government expenditure on economic growth. Specifically it seeks to;
1. Find out if government expenditure significantly affects economic growth in Nigeria.
2. Determine the causality direction between government expenditure and economic growth in Nigeria.
3. Show the trend of government expenditure over the years.
4. Ascertain if government focuses more on current spending or capital spending and its effect on growth.
1.4 Statement of Hypothesis
The hypothesis for this study is stated thus;
1. H0: Government capital expenditure and Government recurrent expenditure has no significant impact on the Nigerian economy.
2. H0: There is no direction of causality between economic growth and government expenditure.
3. H0: Total government expenditure has no significant effect on growth and government expenditure.
1.5 Scope of the Study
For the purpose of this study, Nigeria government expenditure will be critically examined. The study will span from 1980 – 2014. Government expenditure will be splitted into recurement and capital expenditure.
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