ABSTRACT
This study examined the relationship between government expenditure and economic growth in Nigeria using a co-integration and granger causality test for the period 1981-2018. A time-series data was obtained from the Central Bank of Nigeria for the analysis. The outcome of the ADF unit root test indicated that all variables included in the model were non-stationary at their levels but integrated of order one, I (1). From the long-run analysis, the results revealed a positive and significant linear relationship between the two categories of government expenditure and Economic growth (measured by real GDP), The result of the Pairwise Granger Causality test in a Vector Error Correction Model indicated a unidirectional (one-way) causality, running from economic growth to capital expenditure and recurrent expenditure to economic growth, while bi-directional causality runs from capital expenditure to recurrent expenditure and vice versa. Therefore, the study recommended the need to stimulate economic growth by allocating appropriate proportion to capital expenditure of government in the national budget.
Keywords: GDP, TCE,TRE
TABLE OF CONTENTS
DECLARATION i
CERTIFICATION ii
DEDICATION iii
ACKNOWLEDGMENT iv
ABSTRACT viii
CHAPTER ONE
1.0 INTRODUCTION 1
1.1 BACKGROUND OF THE STUDY 1
1.2 STATEMENT OF PROBLEM 6
1.3 AIM AND OBJECTIVES OF THE STUDY 7
1.4 RESEARCH QUESTION 7
1.5 RESEARCH HYPOTHESIS 8
1.6 JUSTIFICATION OF THE STUDY 9
1.7 SCOPE AND LIMITATIONS OF THE STUDY 9
1.8 ORGANIZATION OF THE STUDY 10
CHAPTER TWO
2.0 THEORETICAL FRAMEWORK & EMPIRICAL LITERATURE REVIEW 11
2.1 CONCEPTUAL FRAMEWORKS 11
2.1.1 ECONOMIC GROWTH MODEL 13
2.1.2 REVIEW OF NIGERIAN’S ECONOMY 14
2.1.3 ECONOMIC GROWTH IN THE HISTORICAL PERSPECTIVE 15
2.1.4 CAUSES OF GROWTH OF GOVERNMENT EXPENDITURE 17
2.2 THEORETICAL LITERATURE 19
2.2.1 THEORIES OF GOVERNMENT EXPENDITURE 21
2.2.1.1 PUBLIC EXPENDITURE GROWTH 21
2.2.1.2 MAXIMUM SOCIAL ADVANTAGE 23
2.2.1.3 MUSGRAVE THEORY OF PUBLIC EXPENDITURE GROWTH 23
2.2.2 THEORIES OF ECONOMIC GROWTH 24
2.2.2.1 KEYNESIAN MACRO ECONOMICS THEORY 24
2.2.2.2 NEO-CLASSICAL THEORY OF GROWTH 27
2.2.2.3 ENDOGENOUS GROWTH THEORY 28
2.2.5 THE SOLOW’S THEORY 29
2.3 EMPIRICAL LITERATURE REVIEW 31
CHAPTER THREE
3.0 METHODOLOGY 37
3.1 RESEARCH METHODOLOGY 37
3.2 DATA AND SOURCES 37
3.3 MODEL SPECIFICATION 37
3.4 ESTIMATION TECHNIQUE 39
3.4.1 UNIT ROOT TEST 39
3.4.2 THE COINTEGRATION TEST 39
3.4.3 GRANGER CAUSALITY TEST 40
CHAPTER FOUR
4.0 DATA PRESNTAION AND ANALYSIS 41
4.1 INTRODUCTION 41
4.2 UNIT ROOT TEST RESULTS 41
4.3 CO INTEGRATION TEST RESULTS 43
4.4 GRANGER CAUSALITY RESULTS 45
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION & RECOMENDATIONS 57
5.1 SUMMARY 57
5.2 CONCLUSION 57
5.3 RECOMMENDATIONS 58
REFRENCES 59
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Government world over are interested in achieving reasonable economic growth. In order to achieve this, government basically and broadly employ two tools - Monetary policy and fiscal policy. Whereas, monetary policy is fundamentally concerned with the management of interest rates and the total supply of money in circulation; fiscal policy is concerned with the broad term that describes government tax and spending policies. While the earlier generally is carried out by Central Bank of most nations, fiscal policy decisions are determined by the executive and legislative arms of government. Government revenue is financial resources deploy for the smooth functioning of government. Revenue is one of the economic variable that is promoting economic group so the government revenue is majorly estimated for taxes where a financial burden is imposed on residents and enterprises in a nation. On the other hand, government expenditure refers to expenses incurred by the government for the maintenance of itself and provision of public goods, services and works needed to foster or promote economic growth and improve the welfare of people in the society. Government expenditure is estimated on the basis of spending incurred for the benefit of residents of a nation. Large proportion of government expenditure includes social security, education and infrastructure investment. Government expenditure could be capital recurrent. Defines capital expenditure as expenditure creature could be some lags between when it is incurred and when it takes effect on the economy. Simply describe capital expenditure as expenditure on the creation or acquisition of fixed assets (new or second-hand). On the contrary, recurrent expenditure refers to expenditure on purchase of goods and services, wages and salaries, operations as well as current grants and subsidies (usually classified as transfer payments). Regardless of the classification, government expenditure has direct practical and theoretica9l connection with fiscal policy (Ugbede, Onalo,. Mohd lizam and Ahmad kaseri 2016)
Economic growth refers to increase in a countries potential GDP, although this differs depending on how national product has been measured. Economic growth must be sustained for a developing economy to break the circle of poverty; countries usually pursue fiscal policy to achieve accelerated economic growth. Over the past decades, the public sector spending been increasing in geometric term through government various activities and interactions with its ministries, department and agencies (Niloyetal 2003). Although, the general view is that public expenditure either recurrent or capital expenditure, notably on social and economic infrastructure can be growth enhancing. Hence, financing expenditure provides essential infrastructural facilities. The size and structure of public expenditure will determine the pattern and form of growth in output of the economy. The structure of Nigerian public expenditure can broadly be categorized into capital and recurrent expenditure. The recurrent expenditure are government expenses on administration such as wages, salaries, interest on loans maintenance etc. whereas expenses on capital projects like roads, airports, education, telecommunication, electricity generation etc. are referred to as capital expenditure. One of the main purposes of government spending is to provide infrastructural facilities (Taiwo, and Abayomi 2011)
N. I Akpan (2019). The provision of social and physical infrastructure through public investment and expenditure on some goods and services theoretically, can increase productivity in the private sector when there is an efficient allocation of resources. Other benefits of government intervention include the correction of market failure and the preservation of property rights through legislation as well as the provision of security services. Conversely, from an accounting perspective, an increase in government consumption is achieved at the expense of capital formation or private consumption. Some development economists of the structuralism school proof that some categories of government expenditure are necessary to overcome constraints to economic growth (Chenery and Syrquin, 1975)
Nurudeen and Usman (2010) added that in Nigeria, government expenditure has continued to rise due to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods like roads, communication, power, education and health. Besides, there is increasing needs to provide both internal and external security for the people and the nation. Available statistics, according to show that total government expenditure (capital and recurrent) and its components have continued expenditure (capital and recurrent) and its components have continued to rise in the last three decades. For instance, government total recurrent expenditure increased from N3, 819.20 Million in 1977 to N4, 805.20 million in 1980 and further to N36, 219.60 million in 1990. Recurrent expenditure was N461, 600 million and N1, 589270.00 million in 2000 and 2007 respectively. In the same manner, composition of government recurrent expenditure shows that expenditure on defense, internal security, education, health, agriculture, construction and transport and communication increased during the period under review. Moreover, government capital expenditure rose from N5, 004.60 million in 1977 to N10, 163.40 million in 1980 and further to N24, 048.60 million in 1990. The value of capital expenditure stood at N239, 450.90 million and N759, 323.00 million in 2000 and 2007 respectively, while in 2008 N785 billion and in 2009 N 283.65 billion also in 2010 N 3,163.19 and in 2012 N4,846.70 at last in 2020 stood at N26,818.95.
Furthermore, the various component of capital expenditure (that is, defense, agriculture, transported and communication, education and health) also show a rising trend between 1980 and 2007). The effect of government spending on economic growth is still an unresolved issue theoretically as well as empirically. Although the theoretical positions on the subject are quite diverse, the conventional wisdom is that a large government spending is a source of economic instability or stagnation Empirical research, however, does not conductively support the conventional sdom. A few studies report positive and significant relation between government spending and economic growth while several others find significantly negative or no relation between an increase in government spending and growth in real output.
Many researchers have attempted to examine the effect of government expenditure on economic growth. Such as Ranjan and Sharma (2008), Ahsan et al. (1989), Ram (1986), Holmes and Hutton (1990), Singh and Sahni (1984) concluded that public expenditure expansion has a positive significant effect on national growth. On the contrary, Barth et al (1990) and Laudau (1983, 1986) found that public expenditure expansion has negative effect on national income growth for both developed and less developed countries. Fajingbesin and Odusola (1999) empirical investigated the relationship between government expenditure and economic growth in Nigeria. Their econometric results indicated that real government capital expenditure have significant positive influence on real output.
Arising from the above, Ezeabasili (2013) has it that public sector management in Nigeria since independence has failed to deliver the much expected macroeconomic stability and growth. A critical look at the trend of economic variables in this regards reveals that Nigeria is still grappling with fluctuating economic imbalances evidenced by inconsistent growth rates, high level of inflation, unemployment, illiteracy and poverty amongst others. Available statistics show that government expenditure (capital and recurrent) and its components have been on the increase in the last three decades. For instance, government recurrent expenditure increased from N4, 805.20 in 1980 to N36, 219.60 in 1990 and further to N1,589,270.00 in 2007 and N3,689,080.21 in 2013. On the other hand, government capital expenditure rose from N10, 163.40 in 1980 to N24, 048.60 in 1990. Capital expenditure stood at N239, 450.90 and N759, 323.00 in 2000 and 2007 respectively, and N1,108,386.40 in 2013. However, the rising government expenditure is yet to translate to commensurate growth and development and improvement in the performance of key macroeconomic indicators. It is disturbing to note that government expenditure seems to have not replicated same level of economic growth in Nigeria, for instance between 1980 and 1990, while the GDP growth rate was decreasing (57.15 percent down to 2.87 percent), government expenditure growth rate was increasing (23.2 percent to 41.24 percent). Thus, there was an inverse relationship between the two periods. However, it is found that the growth rate of government expenditure in 2000 and 2010 was 15.53 percent and 2.15 percent respectively, while GDP growth rate witnessed 8.79 percent and 1.54 percent in the same period respectively. Thus, government expenditure growth rate was greater than GDP growth in the same period. The business day Newspaper of Tuesday 14 February, 2012, reported that the percentage of Nigerian living in abject poverty rose to 60.9 percent in 2012 as compared to 54.7 percent in 2004 as Nigeria ranks among the poorest countries in the world (Okoro, 2013)
This section highlights some basic theories that have been used to support the effect of public expenditure on economic growth. Generally economic growth deals with long-run growth trend of the economy or potential growth path (Bronson 2002). The Keynesian sees demand as a pre-requisite for growth. Therefore, their analysis concludes that aggregate demand management policies can and should be used to improve economic performance. On the other hand, Harrod-dommar model points out some dynamics of growth. For instance, to determine equilibrium growth rate in the economy, the balance between supply and demand for a countries output should be maintained. Whilst acknowledgement the fact that the study is not the first of its kind using Nigerian data, however, it shall go a little further than earlier works to correctly capture all known composition of public expenditure during the years under review to assess the impact of public expenditure on economic growth.
1.2 Statement of Problem
In the last several decades, the federal government of Nigeria annual expenditure has metamorphosed from the few millions naira to billions naira and then multiplying to trillions naira on the national budget of the country. This is not surprising as the economy is experiencing surplus or favorable balance of payment. In addition, there are infrastructures that need rehabilitations and upgrading coupled with the increase in needs of social amenities to raise welfare of average citizen of the economy. Despite these needs and favorable balance of payments as well as the increase in capital expenditures, still Nigeria is lacking in so many of the basic infrastructures and social overhead capital. This clearly is a signing that something is definitely wrong either with the way government execute its budget or with the ways and manners it has always been framed in the first place Unfortunately, the rising government expenditure is yet to be translated into meaningful economic growth and development, since Nigeria is still ranked among the poorest counties in the world. Worst still, many Nigerians have continued to wallow in abject poverty as more than 50 percent live on less than US$ 2per day. Affix to this, is the dilapidated infrastructure (especially road and power supply) which have led to the collapse of many industries, resulting in massive unemployment of the teaming youths in the country (Nurudeen and Usman, 2010) Moreover, macroeconomic indicators like balance of payments, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of years.
1.3 Aim and Objectives of the Study
The overall objective of the study is to examine the impact of government expenditure on economic growth in Nigeria. While the specific objectives include:
i. To determine if there is a significant relationship between government recurrent expenditure and economic growth in Nigeria;
ii. To examine if there is a significant relationship between government capital expenditure and economic growth in Nigeria;
iii. To verify if there is significant long run relationship between overall government expenditure and economic growth in Nigeria.
1.4 Research Question
Research questions are purposely raised so as to find answers and solutions to some problems by way of carrying out empirical investigation and analysis. The research questions will guide the researcher in achieving the objectives of study and to find solutions to the problem under investigation. Thus, on the basis of this, the following research questions were raised:
i. Is there any significant relationship between government recurrent expenditure and economic growth in Nigeria?
ii. Is there any significant relationship between government recurrent expenditure and economic growth in Nigeria?
iii. Is there a significant long run relationship between overall government expenditure and economic growth in Nigeria?
1.5 Research Hypothesis
From the objectives and research questions of this study, the following tentative statements (hypothesis) are framed and they will be tested using the empirical data to be obtained:
Hypothesis I
H0: There is no significant relationship between government recurrent expenditure and economic growth in Nigeria.
H1: There is a significant relationship between government recurrent expenditure and economic growth in Nigeria.
Hypothesis II
H0: There is no significant relationship between government capital expenditure and economic growth in Nigeria.
H1: There is a significant relationship between government capital expenditure and economic growth in Nigeria.
Hypothesis III
H0: there is no significant long run relationship between overall government expenditure and economic growth in Nigeria.
H1: there is a significant long run relationship between overall government expenditure and economic growth in Nigeria.
1.6 Justification of the Study
It is expected that this study would consolidate existing literature on the issues surrounding the relationship between government expenditure and economic growth in Nigeria and thus adding to the existing empirical evidences from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory agencies in policy simulation and implementation with respect to the selected variables examined in the study.The remit of the study would be of benefits to education analysis, and institution in examining the effectiveness of government expenditure and economic growth. It would also be useful in stimulations public discus given the death of empirical researchers in this area from emerging economies like Nigeria. Finally, it would also add to the available knowledge and believes on public sector economy while also providing a platform for other academicians and researchers alike to further their studies.
1.7 Scope and Limitations of the study
This study is undertaken to examine the impact of government expenditure on economic growth. The study uses annual time series data covering the periods of thirty three years from 1981 to 2018 in assessing the impact of government expenditure on the growth path of the Nigerian economy. It is hoped that this with help to achieve the stated objectives of the study mentioned so far. One of the Limitations of this study arises from lack of agreement on the causes of economic growth. Economists are not yet certain about the relative importance of elements which influence economic growth. Without such knowledge, it is difficult to make a meaningful conclusion on the impact of government expenditure on economic growth. Another limitation of the study is that it does not especially consider the quality of government spending, which is probably the most important factor the calibers of the civil service and conduction in which they function have impact on creative and effluent use of public resources. Unproductive public spending can take various forms, including spending on wages and salaries from the problem of inconsistency of data as represented by different institutions and even by different department in the same in states.
Note that the data used for the study covers only the aforementioned periods of 1981- 2020, and as such, the study does not make any inference or conclusion before or after this period.
1.8 Organization of the Study
This research consists of five chapters. Chapter one includes the background of the study, statement of the research problem, objective of the study, research questions, research hypothesis, justification of the study, scope and limitation. Hence, chapter two contains the related literature and theoretical framework, Chapter three covers the methodology, while chapter four entails the interpretation of data analysis. Finally, chapter five comprises of summary, conclusion and recommendations.
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