PROJECT TOPIC- IMPACT OF GOVERNMENT
SPENDING ON ECONOMIC GROWTH OF NIGERIA SINCE 1983-2014
1.1 Background of the study
The direction and extent of relationship between government spending and economic growth has continued to be a debate among scholars. It is obviously presumed that Government performs two basic functions- protection (and security) and provisions of certain public goods. The Protective function entails creation of rule of law and enforcement of property rights which helps to minimize risks of criminality, protect life and property, and the nation from external attacks; while defence, roads, education, health, and power, etc are goods provided by government (Abu and Abullahi 2010).
Many scholars have supported the fact that increases in government spending on socio-economic and physical infrastructures encourage economic growth. For instance, studies conducted by Abu and Abullahi, 2010, Al-Yousif, 2000, Abdullah, 2000 and Cooray, 2009 all concluded that expansion of government spending induce economic growth positively. Their studies simply suggest that government spending on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power, etc, reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth (Abu, 2010).
It has been the desire of nations from all over the world to improve the welfare of their people and give them the power not only to afford the basic necessities of life, but also to empower them to be economically useful to their nations. It is the quest to achieve these that nations are stimulated to increase their Gross Domestic Products (GDP), achieve balance of payment equilibrium, achieve price stability, and increase business activities. Thus, economies are working towards achieving economic growth. Beyond this, they are working towards achieving economic development which does not only involve economic growth, but also transformational changes that accelerate the pace of growth. Though, these are goals, not all nations have been able to achieve them. This is why nations are still classified into the categories of underdeveloped, developing, emerging and developed. Irrespective of each nation’s category, each has to work towards survival and sustainability by pursuing the goal of economic growth and development (Abu and Abullahi 2010).
If the goal of economic growth and development will be achieved, appropriate measures will have to be taken. Various economists have come up with various theories and postulations in this regard. Adam Smith postulated a laissez-faire system such that the government should not intervene to allow the market system free access to pursue surplus value, which according to him, will lead to the wealth of nations (McCreadie, 2009). Classicalists and neo-classicalists still hold this view. On the contrary, Keynes (1936) came up with a postulation that faulted Adam Smith’s postulation. In his view, the government cannot hands-off out-rightly, as the market has failure tendencies that are costly. He therefore postulated that the government should be involved by increasing government spending to stimulate aggregate demand, which will culminate in economic growth. These two postulations have governed the process of economic development till date; and the strength of each has been tested overtime (McCreadie, 2009).
Over the past decades, the role of government spending 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 macro-economic variables such as full employment, price stability inflation balance of payment, equilibrium, economic growth and exchange rate regulation inclusive Cashin (1995).
The relationship between government spending 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 spending 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 (Cashin, 1995).
Other scholars believed that the impact of government spending 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 spending (Capital and Recurrent expenditure) and its components have continued to rise in last three decades. Nurudeen and Usman (2010) added that in Nigeria, government spending 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 spending includes the provision of those facilities that are not covered by the market economy such as health economic growth (Nurudeen and Usman, 2010).
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 spending. 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.
PROJECT TOPIC- IMPACT OF SPENDING GOVERNMENT ON ECONOMIC GROWTH OF NIGERIA SINCE 1983-2014
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 spending (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 spending. From all indications, it is seen that for the past decades, that general government spending has been increased steadily, yet the result on Gross Domestic Product GDP has been growing a slow pace. Hence, this study is geared towards ascertaining the impact of government spending on economic growth of Nigeria.
1.3 Research Questions
The problem as stated above gave rise to the following research questions
- Is there any causal relationship between government spending and economic growth of Nigeria?
- Has government spending significant impact on economic growth of Nigeria?
- Does there exist any long run relationship between government and economic growth in Nigeria?
1.4 Objective of the Study
This study aim at achieving the following objective;
- To examine the role of government spending on economic growth.
- To determine the causal relationship between government spending and economic growth in Nigeria.
- To determine the long run relationship between government spending and economic growth in Nigeria.