Adolph Wagner (1835-1917) was a German economist,
politician, and public finance scholar. He put forward his law of increasing
public expenditures in 1893 known as wagner’s hypothesis (WH) or Wagner’s law
(WL). Adolph Wagner was perhaps the first to offer a direct economic account of
the increasing public expenditures. Musgrave and Musgrave (1988) noted that he
anticipated the trends to be realized fifty to hundred years later that
development of modern industrial society would give rise to increase political
pressure for social progress and a continuous increase in public sector.
Wagner’s law was derived from the historical experiences
of the early stages of industrialization in Europe
and Germany
in particular. Wagner identified three main factors for increased government
spending. First, administrative and protective role of government will increase
as a country’s economy develops. Secondly, with the expansion of economy,
government expenditures on “culture and welfare” would rise, particularly on
education and health. Finally the technological progress of the industrialized
nations requires government to undertake certain economic services for which
private sector is shy (khan, 1990).
Wagner’s law since its emergence has been the subject of
intensive and extensive investigations. In particular, after the Second World
War (1939-1945), when public consumption declined in favour of the private
activities development. In other words, Wagner’s law states that government
expenditure grows because there is an increasing demand for public goods and
for the control of externalities caused by growth and development of the
economy. In effect, the law also suggests that causality runs from national
income to public expenditure, indicating that public expenditure is considered
endogenous to the growth of national income.
In contrast, Keynesian hypothesis emphasizes that economic
growth occurs as a result of rising public expenditure and is considered as an
independent exogenous variable to influence the economic growth. The direction
of causality runs from public expenditure to national income (Keynes, 1963).
Therefore, the Keynesian and the Wagnerian approaches represent two alternative
points of views towards the causality between government expenditure and
aggregate income.
Thus the growth of public expenditure as a proportion of
Gross National product (GNP) has received considerable attention from
economists around the world, Nigeria
inclusively.
The public expenditure of Nigeria has been growing
tremendously since the 1970’s both in relative and absolute terms particularly
due to super abundance of “petro-naira” that boost the economic growth of the
nation. According to Aregbenyen (2006) “federal government expenditure in Nigeria
increased at an average of 28.35 percent every 5years between 1970 and 2003.
The role of the public sector in Nigeria
development has undergone a fundamental transformation since the nation
achieved independence on October
1, 1960. It is a known fact that Nigeria practiced a “mixed economy
where public sector and private sector coexist and presumably cooperate. However
while the balance was in favour of the public sector, during the first two
decades after independence, there has been a tilt towards the dominance of the private
sector. However, the explosion of international oil price transformed the macro
economic situation, dramatically expanding government revenues and enabling
government to become the key investor in the economy. The public enterprise
expanded to include enterprises spinning various sub-sectors and accounting for
some of government expenditure (Ukwu: 2006). It was estimated that in the
1970’s, there were over 1500 public enterprises of various types, of which the
federal government has 600 and the states and Local government have the rest.
The economic important of public enterprises was reflected in the fact that in
1977 federal public corporations alone accounted for 17percent of modern sector
employment or 28percent of public sector employment. And in the Federal budget
for 1982 named public enterprises accounted for 25percent of Federal government
recurrent expenditure, 80percent of recurrent grants and subvention and a full
50percent of the capital programme (Ukwu: 1989).
The background of the study is that both government
expenditure and National income have averagely maintained positive trend in the
last three and half decades. This is such that in some occasion government
expenditure is found to be growing at a faster rate than National income.
Against this background, we therefore expect the validity of either Wagner’s
law (that during industrialization process, as real income per capital of a
nation increases, the shares of governments in total expenditure increases), or
Keynesian hypothesis (that government expenditure is an exogenous variable and
policy instrument for achieving economic growth) or both.
In the 20th century and especially since the
end of the Second World War (1939-1945) there has been a tendency for the size
of government expenditure to increase in both developed and developing
countries. It is also confirmed that the gross national product (GNP) or the
gross domestic product (GDP) has also been increasing in most of these
countries. However, what has emerged from virtually all studies is that
government expenditures tend to rise at a faster rate than the GNP or GDP in
both more Developed countries (LDCS), (Iyoha; 2004).
In Nigeria,
a key aspect of the economic analysis of the public sector is the study of the
size of government expenditure especially in relations to national income or
GDP. Public expenditure and national income have been increased steadily since
1970, But there was a down turn in middle 1980’s when the collapse of
international prices of crude oil severely reduced both government revenue and
national income.
Extensive empirical analysis of Wagner’s law has produced
mixed results in Nigeria
as in other countries of the world. Some studies supports Wagner’s law i.e
Aregbeyen (2006) using Johansen co-integration and standard causality tests,
supported that Wagner’s law holds in Nigeria, another supporter of this is
Aigbokham (1996), while other studies such as ; Essien (1997) found that the
variable (public spending and real income) were not co integrated and hence
could not establish a long run relationship, Babatunde (2008) also did not find
any evidence in support of the law in Nigeria.
As a result of the controversies over the validity of
Wagner’s law in the Nigerian economy. This research work is aimed at re-estimating
and re-evaluating the Wagner’s hypothesis for Nigeria, using a more robust
estimation method. While researching on this topic, researchers have made use
of different scope; Bigben Chukwuma Ogbonna made use of the period (1950-2008),
M. Adetunji babatunde made use of the period (1970-2006). This study fills the
gap by making use of a more recent scope (1981-2013).
Ø Is there any significant effect of national income
aggregates (such as GDP) on public expenditure?
Ø Is there a long run relationship between national income
and public expenditure in Nigeria?
Ø Is the causality between the two variables bidirectional?
This study is aimed at verifying and discussing
empirically the validity of Wagner’s law (the tendency for government
activities to expand in relations to economic progress) in the Nigerian
economy.
The specific objectives of this study include;
Ø To investigate if there is any significant effect of
national income aggregates (i.e GDP) on public expenditure.
Ø To ascertain if there is a long run relationship between
National income and public expenditure in Nigeria.
Ø To investigate if there exists a bidirectional causality
between the two variables.
Generally,
there are at least two reasons for re-estimating Wagner’s law for Nigeria. First,
we attempt to reach some insights in order to develop better theories of public
expenditure growth in the case of Nigeria. Second, so that we can
eliminate earlier studies methodological shortcomings in terms of Wagner’s law.
This research work is considered significant in the
following ways:
Ø The finding of this study will be relevant to policy
makers as it is going to enrich their insights in order to develop better
theories of public expenditure growth for Nigeria.
Ø The findings of this study will also be useful to the
governments in developing planning, as it will reveal the direction of causal
arrow between national income and government expenditure.
Ø Finally, this study will serve as a reference material
(point) for further researches or studies.
The following
hypothesis will guide this research work;
Ø Ho: B1=0; There is no significant
effect of national income aggregates on public expenditure.
Ø Ho: B1
0; There is a significant effect of national
income aggregates on public expenditure.
Ø Ho: B1=0; There is no long-run relationship
between national income aggregates and public expenditures.
Ø Ho: B1
0; There is a long-run relationship between national income
aggregates and public expenditures.
Ø Ho: B1=0; There is no bidirectional causality
between the two variables.
Ø Ho: B1
0; There is a bidirectional causality between the two
variables.
The following posed a
constroint to this study:
Ø Finance: money as we know is a scarce commodity.
Consequently, financial limitation is one of the problems encountered in the
course of this study.
Ø Time constraint: The time set for this study is too short
as it is expected that the complete work should be submitted within a semester
which is too short to carry out a normal research work.
Ø Poor data: poor data and information of this country
hampered the smooth outcome of this research, as some data needed for this
research were either incomplete or inconsistent.
To make this
work more understandable and clear, the key economic terminologies that feature
in this study are defined below.
Wagner’s Law: Wagner’s law is an economic proposition advanced by Adolph
Wagner in 1983, which states. “In the course of economic growth, government
expenditures expand a even faster than national income”.
Government
Expenditure: Government expenditure is
the part of total spending in a country over a given period that is financed by
the government. It is used to measure the extent to which a government involves
in economic activities as well as the size of a given government.
Economic Growth: Economic growth is the quantitative and qualitative
increase in output and improvement in the productive capacity of an economy,
over a given period of time.
National Income: National income is the total income of the residents of a
country measured at factor cost after deducting capital consumption (GDP) this
equals gross national product (GNP). In the study, we follow Halicioglu (2003)
in using GDP as measure of National income in Nigeria.
This study is harmonized into five (5) chapters. Chapter
one is the introduction which include the background of the study, statement of
problems, significance of the study, objectives of the study, hypothesis of the
study, limitation and scope of the study, definition of terms, organization of
the study and chapter references. Chapter two is the literature review which
encompasses theoretical literature and empirical literature on Wagner’s law and
chapter references. Chapter three is the methodology which consists of research
design, model specification, and method of estimation, method of verification
of hypothesis, required data and sources as well as chapter references. Chapter
four contains the presentation and analysis of results, evaluation of parameter,
verification of hypothesis, discussion, as well as chapter references. While
the last chapter five incorporates the summary of finding, recommendations and
conclusion as well as references and appendix.
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