ABSTRACT
The study examined effect of government expenditure on economic growth of Nigeria rom year 2000 to 2018 to determine the relationship between the variables during the democratic dispensation. It employed ex post facto research design and extracted data from CBN statistical bulletin. It extracted government expenditure on education, health and agriculture as the independent variables while percent change in real gross domestic product was used as economic growth. The study hypothesized that government expenditure on education, health and agriculture each has no significant effect on economic growth of Nigeria. The Dickey-Fuller unit root approach was employed to determine whether the variables are stationary and confirmed that they are stationary at first difference. The study adopted Johansen co-integration test to determine the long run relationship while the error correction method was employed to test the hypotheses. The results established that government expenditure on education and health individually has negative significant relationship with economic growth at lag length one while the expenditure on agriculture has positive relationship with economic growth in the short run at lag length two. It also found that government expenditure on education, health and agriculture each has significant effect on percentage change in real gross domestic product. The study therefore concludes that government expenditure has significant effect on economic growth of Nigeria and recommends that government should ensure that expenditure on education is also directed towards those areas such vocational and technical education that will immediately impact on economic growth, government expenditure on health should be to improve health facilities so as to avoid capital flight and expenditure on agriculture should be towards improving the agricultural processing to enhance value chain.
TABLE OF
CONTENTS
Tittle Page i
Declaration ii
Certification iii
Dedication
iv
Acknowledgements v
Table of Contents vi
List of Tables ix
Abstract
CHAPTER ONE: INTRODUCTION
1.1 Background of Study
1
1.2 Statement of Problem
3
1.3 Objective of the Study
6
1.4 Research Question
6
1.5 Research Hypothesis
6
1.6 Significance of the Study
7
1.7 Scope and Limitation of the Study
7
CHAPTER TWO: REVIEW OF RELATED
LITERATURE
2.1 Conceptual Framework
9
2.1.1 Concept of Government Expenditure 9
2.1.2 Component of Federal Government
Spending 9
2.1.3 Education in Nigeria 13
2.1.4 Concept of Economic Growth 15
2.2 Theoretical Literature Review
20
2.2.1 Musgrave Theory of Public Expenditure
Growth
20
2.2.2 The Keynesian Theory
21
2.2.3 Neo Classical Growth Theory-The Growth
Accounting Theory
22
2.3
Empirical Review 25
2.4
Summary of Review of Related Literature
32
2.5
Identified Gap in Empirical Literature
33
CHAPTER THREE: METHODOLOGY
3.1 Research Design
35
3.2 Area of the Study
35
3.3 Method of Data Collection
35
3.4 Data analysis Techniques 33
3.5 Model Specification
35
3.6
Description of Data 36
CHAPTER FOUR: DATA PRESENTATION AND
ANALYSIS
4.1 Data Presentation
38
4.2 Stationary Test
39
4.3 Effect of Government Education Expenditure
on Economic Growth 40
4.3.1 Test on Hypothesis 1
43
4.4 Effect of Government Expenditure on Health
Economic Growth
44
4.3.1 Test on Hypothesis 2 47
4.4
Effect of Government Agriculture Expenditure Economic Growth 47
4.4.1
Test on Hypothesis 3 50
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATION
5.1 Summary of Findings
51
5.2 Conclusion
52
5.3 Recommendation
53
Reference
55
Appendix
58
LIST OF TABLES
4.1 Data on Government Expenditure and
Economic Growth 39
4.2 Augmented Dickey-Fuller Unit Root Test
of the Variable 40
4.3 Johansen Co-Integrated Test for LOGGEE
and PCRGDP 44
4.4 Vector Error Correction Regression of
LOGGEE and PCRGDP 45
4.5 Johansen Co-Integration Test of LOGGEE
and PCRGDP 46
4.6 Vector Error Correction Regression of
LOGGEE and PCRGDP 48
4.7 Johansen Co-Integration Test of LOGGEE
and PCRGDP 50
4.8 Vector Error Correction Regression of
LOGGEE and PCRGDP 51
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The impact of government expenditure cuts across every
sectors of the economy, in other words government expenditure has a direct
relationship with economic growth and development. Hence, the Gross Domestic
Product (GDP) and Gross National Product (GNI) have witnessed up surged in
recent times. The objective of government budget expenditure is
the achievement of rapid and sustainable economic development. The achievement
of economic development leads to greater economic prosperity. Increasing
overall prosperity improves the lives of those able to partake in the system.
People are better able to provide for their needs and fulfil their wants,
without the use of force. This rising prosperity is empirically linked to
higher overall levels of human happiness and betterment. Conversely, without
economic development, economies stagnate and nations are unable to provide for
the well-being of their citizens. Economic failure historically causes a loss
of trust and social upheaval, frequent and ugly triggers of social conflicts.
It behoves one to recognize this and do what is possible to remedy it (Zipfel,
2004). With this,
the government spreads its expenditure tentacle in order to meet up with the
demand or ever increasing expenditure of its citizenries (Shuaib, Mohammed
& Igbinosun, 2015).
The neo-classical economists
and the new-Keynesians have different views about the role of government in
economic activities. According to the neo-classical economists, reducing the
role of private sector by crowding out effect is important because it reduces
the inflation in the economy; increase in public debt, increases the interest
rate which reduces inflation in the economy as well as output. The new-
Keynesians present the multiplier effect in response and argue that the increase
in government expenditure will increase demand and thus increase economic
growth. The vision of ensuring sustainable economic development and reduction
of mass poverty is enshrined, in one way or another, in the government’s
development strategy documents of virtually all developing economies. In this
respect, economic growth, which is the annual rate of increase in a nation’s
real GDP, is taken as main objective for overcoming persistent poverty and
offering hope for the possible improvement of society (Naftaly, Symon,
Aquilars, & James, 2014).
The motive to improve the
quality of lives of citizens through the numerous expenses of government has
motivated the study of the impact of government expenditure on the economic
development of Nigeria. Across the world over, government spending has been on
the increase without a corresponding increase in the economic development of
these nations especially in developing nations. This situation has also
stimulated research in the area of government spending and economic growth and
development.
Education has been
identified as the most vital instruments in the process of economic growth and
development. However, one issue that has not been adequately addressed is its
provision in the required quantity and quality. For instance, while secondary
school gross enrolment ratio in 2007 stood at 101 percent for high income
countries, the value was 38 percent for low income countries (LDCs). Even at
that, Nigeria‘s value stood at 32 percent which was six percent lower than the
average for LDCs (World Development Indicators 7 2011). The nature of
education, the prevailing economic system and government priorityare factors
that could influence its level in any economy.
1.2 STATEMENT OF THE PROBLEM
The relationship between government budget expenditure
and economic development has continued to generate a series of controversies.
While some researchers conclude that the effect of government expenditure on
economic growth is negative and insignificant (Romer, 1990), (Akpan, 2005)
& Abdullahi (2010) others
indicate that the effect is positive and significant (Korman &
Bratimaserene, 2007), Lawal & Wahab (2011),
Chude & Chude (2013) & (Gregorious & Ghosh, 2007). There are some
components of government expenditures that are productive while some are
unproductive.
Government budget expenditures on health and education
raise the productivity of labour and increase the growth of national output.
Education is one of the important factors that determine the quality of labour.
Government expenditure on health could lead to economic development in the
sense that human capital is essential to growth. Good investment in the form of
national defence is a necessity for safeguarding and protecting the nation from
outside aggression, while agriculture, in the form of food security, is a
necessity for human existence, but the financial source for public expenditure
which is taxation, reduces the benefits of the taxpayers and as such reduces
the benefits associated with economic growth (Naftaly, Symon, Aquilars, & James, 2014).
Consequently, due to lack of sufficient revenue, there
is a need to categorise productive and non-productive government expenditure
for Nigeria in order to reduce the non-productive expenditure. Recent literature on endogenous
growth theory predicts that fiscal policy changes can affect the long-term
growth rate by influencing the determinants of growth (physical and human
capital, technological changes, employment and savings)
More so, Umo (2012)
submitted that the revolution in the economics of human capital has highlighted
the centrality of education. When broadly viewed, educational sector contains
cognitive skills, knowledge, technology, socio-political networking skills,
health and migration which today underpin economic growth. The world is now
evolving a „new economy „in which knowledge provided by education plays a
critical role. Growth in intangible (knowledge) asset now accounts for 90% of
total assets in industrialized economies. Resource-based growths are showing
serious limitations with the explosive progress in science and technology. It
is clear that without a good dose of investment in quality education, it would
be difficult to sustain growth with employment essential for poverty reduction.
In
addition, education of the right quality and quantity is expected to catalyze
skill sets, technology and innovation in the service of development and in the
process of reducing poverty. But it has failed to do so in Nigeria because of
constraints facing the educational sector. For instance, the attention given to
educational sector by the governments (federal, state and local) is relatively
low in terms of investment in educational sector. Nigeria has one of the lowest
expenditure commitments to education in Africa and by implication in the world.
The country spent under 1% of her GDP on education in the 1980s and most of the
1990 while her educational expenditure-budget ratio averaged about 9.5% between
1997 and 2015. Compare this to Ghana’s 4% of GDP and 24% of the budget or
Malaysia’s 5% of GDP and 20% of the budget (Umo, 2016).
Supporting
the above, Abayomi, (2012), Ojewumi & Oladimeji (2016) submitted that
Nigeria spent an insignificant proportion of financial resources on education.
Education budget as a percentage of total national budgets were 8.43% in 2012
and 8.67% in 2013 which is below United Nations Educational, Scientific and
Cultural Organization’s UNESCO’s recommendation of 26 per cent of the country’s
annual budget allocate to educational sector and those of other developing
countries including South Africa, Ghana, Cote d‟Ivoire, Kenya and Morocco which
had 25.8%, 31%, 30%, 23% and 17.7% respectively for their annual budget for
education (Ojewumi & Oladimeji 2016).
Furthermore,
a lot of empirical studies have been carried out on the relationship between
government education expenditure and economic growth in Nigeria. But the
results are conflicting. For instance, while the studies of Lawal & Wahab
(2011), Chude& Chude (2013) as well as Sefa, Siew and Mehmet (2015)
indicated that expenditure on education has a positive relationship with
economic growth and development in Nigeria. The study of Abu and Abdullahi
(2010) revealed that government expenditure on education has negative effect on
economic development.
Finally,
In Nigeria, average public education expenditure to total government
expenditure between 1970 and 2010 is 5.72 per cent. It ranged between 0.51 and
10.8 per cent during the period under review (CBN Statistical Bulletin, 2008).
On the contrary, average economic growth rate for the period (1970 – 9 2010)
was 0.6 percent. This ranged between -15.4 per cent (in 1981) and 30.5 per cent
(in 2004) during the period under review. At this growth rate, it would take
more than a century for Nigeria to double its 1970 per capita income. The
statistics presented above indicates that the government expenditure in
education has not produced the desired level of human capital and economic
growth in Nigeria. Therefore, there is need to examine the impact of the government budget
expenditures on economic development in Nigeria.
1.3 OBJECTIVES OF STUDY
The broad objective of the research work is to determine the
impact of the government expenditure on economic growth in Nigeria. However,
the specific objectives are to:
i.
examine the impact of government educational expenditure on percentage
change in Real Domestic Product
ii.
determine the impact of government health expenditure on percentage
change in Real Domestic Product
iii.
ascertain the impact of government
agricultural expenditure on percentage change in Real Domestic Product
1.4 RESEARCH QUESTIONS
As
a follow-up to the objectives of this study, the following are the research
questions for this study. There are:
i.
To what extent does
government educational expenditure affect percentage change in Real Domestic
Product?
ii.
What impact does
government health expenditure have on percentage change in Real Domestic
Product?
iii.
What is the impact of
government agricultural expenditure on percentage change in Real Domestic
Product?
1.5
RESEARCH HYPOTHESES
The
following hypotheses are formulated in this study. There are:
H01: Government educational expenditure does not
have positive and significant impact on
percentage change in Real Domestic Product
H02: Government health expenditure does not have
positive and significant impact on percentage change in Real Domestic Product
H03: There is no impact of government agricultural
expenditure on percentage change in Real Domestic Product
1.6
SIGNIFICANCE OF THE STUDY
This
study will be significant in the following groups in the society:
Policy Makers:
This research will be of immense benefit to policy makers in Nigeria. The
priority areas needed to be emphasized in government attempts to enhance
economic growth and development will be exposed. Also attention will be drawn
to the impact of previous attempt by government and its agencies to ensure
economic growth. Therefore the policy implications of this study will assist
them in proper planning.
General Public: Another
group that will benefit from this research is interested members of the public.
Interest on how government expenditures have impacted positively or negative on
the general public will be analyzed. This will enable members of the public to
hold the representative accountable.
Researchers:
The study will contribute to the existing body of knowledge. The
recommendations of this study will go a long way in adding to existing body of
literature available in this area of finance.
1.7 SCOPE OF THE
STUDY
The
study covers the period 2000-2018 due to the current democratic depensation.
The main objective of the study is to analyze the impact of government
expenditure on economic growth. The focus is on how some of the components of
government expenditures have affected economic growth in Nigeria. The study
will be analysed using ordinary least square method (OLS) techniques with the
aid of E-view statistical packages (version 8).
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