Impact of government expenditure on economic growth of Nigeria

CHAPTER ONE

INTRODUCTION

1.1   Background of the study

Over the past decades, the role of government expenditure in developed and developing countries are marked by a difference. The role of government is significantly in harnessing resources for development. Government through its expenditure affects the economy and regulates major’s macro-economic variables such as full employment, price stability inflation balance of payment, equilibrium, economic growth and exchange rate regulation inclusive.

The relationship between government expenditure and economic growth has continued to generate series of debates among scholars such as whether government expansion helps or hinders. Government performs functions, such as social infrastructures, shelter and security functions; it consists of the creation of certain rule of law and enforcement of property, and the nation from external aggression. Under the provisions of public goods such as roads, education, health and power. Some scholars argue that increase in government expenditure on socio-economic and physical infrastructures encourage economic growth.

Deger (1885) opined that the development by the federal government of Nigeria on a yearly basis often allocates fund to the various sectors of the economy. The period 1981-1985 recorded the highest average decline rate. Landau (1986), extends the analysis to include human and physical capital, political, international conditions as well as three year lag on government spending on GDP.

Barro (1991) further notes that for a broad group of 98 countries that grow in real per capital GDP was positively related to initial human capital and negatively related to share of government consumption in GDP. Cashin (1995) incorporates the impact of distortionary taxes on growth through the use of endogenous growth model encompassing public investment and transfers. The positive impact of transfers on growth represents new findings in panel estimations.

Most studies that utilize government consumption as a ratio and a negative correlation with a growth while those that utilize the rate of growth in government spending and a positive correlation with a growth. The research agenda therefore needs to depart from the neoclassical models of Solow (1956) and Swan (1956) that linked long run growth to exogenous technical change. The recent generation of endogenous growth models such Easterly and Rebelo (1993) Barro (1990); Barro and Salamartin (1992) over a convenient framework for the inclusion of fiscal policy. Government capital expenditure rose from N 5,004.60 million in 1980 to N 10, 163.40 million in 1990 and further to N24, 048.60 million. The value of capital expenditure stood at N239, 450.90 million and N759, 323 million year 2000 and 2007 respectively. Furthermore, the various components of capital expenditure (such as Defence, Agriculture, Transport and Communication, Education and Health), also shows a rising between 1977 and 2007.

Other scholars believed that the impact of government expenditure is positive and significant (saacl and kalachi, 2009). Some of the scholars are of the view that public expenditure, notably on physical infrastructure and human capital, can be growth enhance; although the financing of such expenditure can be growth retarding in the short run (Noko, 2012).

According to Nurudeen and Usman (2010), available statistics shows that total government expenditure (Capital and Recurrent expenditure) and its components have continued to rise in last three decades. Nurudeen and Usman (2010) added that in Nigeria, government expenditure has continued to rise from N5, 464.70 million in 1985 to N11, 322.254 million in 2011 due to huge receipts from production and sales of crude oil and the increased demand for public (Utilities) goods such as power, education, communication etc.

Barro (1990) believed that expenditure on investment and productive activities are to contribute positively to economic growth while government consumption spending is expected to be growth retarding. Government controls the economy through the use of public expenditure. These instruments of government control promote economic growth in the sense that public investment contribute to capital accumulation. Other importance of government expenditure includes the provision of those facilities that are not covered by the market economy such as health economic growth.

Besides, there is increasing needs to provide both internal and external security for the people and the nation. Although the Nigeria Gross Domestic Product (GDP) is growing but not with the same percentage as government expenditure. The output of goods and services produced by labour and property increased at an annual rate of 0.1 percent from 2010 to 2013 in the first quarter, the increase in real GDP in (2013) primarily reflected positively in contribution from Personal Consumption Expenditures (PCE) that was partly offset by negative contributions export, private inventory investment, dentinal fixed investment, residential fixed investment, state and local government spending. Imports which are subtracted in the calculation of GDP, decreased.

1.2 Statement of the Problem

Policy makers often argue that government spending provides available “public goods” such as education and infrastructure. They also claimed that increase in government spending can boost economic growth by enhancing people’s living standard and increase their income. Although the primary motive for every government spending is to achieve economic growth and development, and this brought about the improvement in agricultural productivities. Indices have shown that, Nigeria has often failed in the area of regulating the economy especially in fiscal policy. The government embarks on so many unworthy projects, thereby increasing its expenditure reasonably, without corresponding to the increase in economic growth at some proportion.

An analysis of Nigeria government expenditure (capital and recurrent) will reveal this clearly. Take for instance, the total spending of the federal government in (1990) is N24, 048.60 million, it grew to N121, 138.30 million from 2010, N6, 722.634 million to (2013). Nigeria often witness deficit budget due to her reckless spending at times.

Although, the Nigeria’s Gross Domestic Product (GDP) is growing but not with the same percentage as government expenditure. From all indications, it is seen that for the past decades, that general government expenditure has been increased steadily, yet the result on Gross Domestic Product GDP has been growing a slow pace. Hence, this study will analyse the trend in public expenditure and its relationship or its impact on economic growth.

1.3 Research Question

The problem as mentioned above generate the following questions

  1. Is there any causal relationship between government expenditure and economic growth of Nigeria?
  2. Have government expenditure significantly impact on economic growth of Nigeria?
  3. Does there exist any long run relationship between government and economic growth of Nigeria?

1.4 Objective of the Study

This study aim at achieving the following objective;

  1. To examine the role of government expenditure and its impact on economic growth.
  2. To determine the causal relationship between government expenditure and economic growth of Nigeria.
  • To determine the long run relationship between government expenditure and economic growth of Nigeria.

1.5 Hypothesis of the Study

The following hypothesis will be tested in the course of this research work.

H0: Government expenditure does not have any significant impact on the economic growth of Nigeria.

H0: There is no causal relationship between government expenditure and economic growth of Nigeria.

H0: There is no long run relationship between government expenditure and economic growth of Nigeria.

1.6 Significance of the Study

This research work on the impact of government expenditure of economic growth of Nigeria will be of great impact to the public in general. Monetary authorities such as the Ministry of Finance, the Budget Planning Board, Policy Makers, Policy Implementing Executives and anyone who has interest on government finance and how it impact the economic. The work will also be of great impact on economic students and researchers in this field.

1.7 Scope and Limitations of the Study

This research aim at ascertaining the impact of government expenditure on economic growth in Nigeria between the periods of 1981 – 2012, an analysis of government expenditure at this periods, and its consequent impact on the economy.

However, the following constitute the constraint faced by the researcher in the course of undertaking this research work. Data constraint, unavailability of data inconsistency of data figure from different source. Time is another constraint to this research work.

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