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
Presentation and 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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