GOVERNMENT EXPENDITURE AND GROWTH OF THE NIGERIAN ECONOMY
ABSTRACT
This study examined the Impact of Government Expenditure on Economic Growth in Nigeria. Secondary time series panel data was collected for the period 1980 to 2020 from the Statistical Bulletin of the Central Bank of Nigeria (CBN). The study employed Ordinary Least Squares (OLS) technique and Regression analysis was adopted to analyze the effect of government spending on economic growth of the Nigerian Economy. The method of data analysis used for the study is the ordinary Least Squares (OLS) method, the augmented dickey fuller Unit root test, the co-integration test and over parameterized and parsimonious error correction model.. The results of the analysis showed that both Inflation rate and Interest rate have no significant effect on Gross Domestic Product on the economic growth in Nigeria. Based on the findings, the study recommended that government should put in place measure to control inflation and also formulate and implement financial policies that enhance investment-friendly rate of interest and take into consideration those other factors which negatively affect investment in the country in order to maintain sustainable economic growth.
TABLE OF CONTENTS
Cover page i
Title page ii
Certification iii
Dedication iv
Acknowledgements v
Abstract viii
CHAPTER ONE: INTRODUCTION
1.1 Background to the study - - - - - - 1
1.2 Statement of the Problem - - - - - - 5
1.3 Research Question - - - - - - - 6
1.4 Objectives of the study - - - - - - 6
1.5 Research Hypothesis - - - - - - - 7
1.5 Scope of the study - - - - - - - - 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual/Theoretical Literature - - - - - 8
2.2.Empirical Literature - - - - - - - 11
2.3 Theories of Government Expenditure - - - - 17
CHAPTER THREE: RESEARCH METHOD
3.0 Introduction - - - - - - - - 20
3.1 Nature and Sources of Data - - - - - - 20
3.2 Model Specification - - - - - - - 20
3.3 Estimation Technique - - - - - - - 21
3.4 Method of Data Analyses - - - - - - 22
3.5 A Prior Expectation - - - - - - - 22
CHAPTER FOUR: DATA PRESENTATION AND INTERPRETATION AND ANALYSIS
4.1 Data Presentation - - - - - - - 23
4.2 Interpretation of the Regression Model - - - - 25
4.3 Data Interpretation - - - - - - - 26
4.4 Hypothesis Testing - - - - - - - 28
4.5 Discussion of Findings - - - - - - 35
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings - - - - - - - 30
5.2 Conclusion - - - - - - - 30
5.3 Policy Implication - - - - - - - 31
5.4 Recommendations - - - - - - - 32
References - - - - - - - - - 33
Appendix - - - - - - - - - 36-45
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 throughout 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 Research questions
The following research questions will guide the study
1. What effect does government recurrent expenditure have on economic growth?
2. How has government capital expenditure impacted on Nigeria economic growth?
3. What effect does government aggregate expenditure have on economic growth in Nigeria?
1.4Objectives of the Study
This research work intends to comprehensively consider the relationship between government expenditure and the Nigerian economic growth as the main objective. The specific objectives are to:
1. To analyze the trend analysis between of government capital expenditure on economic growth in Nigeria
2. To examine the effect of government recurrent expenditure on the economic growth of Nigeria.
3. To observe the trend analysis between government recurrent expenditure and economic growth in Nigeria
4. To evaluate the impact of government recurrent expenditure on economic growth.
5. To examine the effect of aggregate government expenditure on economic growth.
1.5 Research hypotheses
The following hypotheses will be tested:
Ho: Government recurrent expenditure has no significant effect on economic growth
Ho: Government Capital expenditure has no significant effect on economic growth in Nigeria.
Ho: Government aggregate expenditure has no impact on economic growth in Nigeria.
1.5 Scope of the Study
This study will principally focus on the impact of government expenditure on the economic growth of Nigeria covering a period of 1980-2020. The study covers a period of 40 years and it is the relief of the research that this period will be adequate enough to capture the impact of government expenditure on economic growth.
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