IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE : INTRODUCTION

 

1.1 BACKGROUND OF THE STUDY

Government Expenditure and Economic Growth have a strong relationship which has been argued about for a long time now. In 1936, Keynes argued that the solution to economic depression is achieved by persuading the firms to invest through reduction of interest rates and government capital investment which includes infrastructure.

 

Many scholars have the belief that an increase in government expenditure increases the growth of an economy, meanwhile other scholars believe otherwise. The neo classical school of thoughts argue that increasing government expenditure could decrease the aggregate production of an economy. Their argument is; in order for the government to  increase their expenditure, they definitely need financial resources which are generated through increment of Tax or Borrowing from abroad. Increment of tax may lead to a decrease in income and aggregate demand because higher taxes discourage additional work. Furthermore, increasing Tax leads to increase in costs of production and decreases investment. If the government decides to increase their borrowing in order to increase their expenditure on the other hand, this reduces private investment due to competition and overcrowding. In 2006, a scholar named Sachs argued that countries with high tax rates and low social service spending are better off when it comes to economic performance when compared with countries with low tax rates and low social service spending (this only applies to developed countries).

 

In more detailed facts, the federal government of Nigeria (FGN) spends over 52% of its total government revenues and the remaining 48% are shared among federal states and local government areas (LGAs) according to the revenue mobilization allocation and fiscal commission (RMFC) IN 2011. The government revenue that is generated from oil revenue and non oil revenue, borrowing from internal and external sources increased significantly and this affected the level of government expenditure in Nigeria over the years. The central bank of Nigeria (CBN) referenced that the total expenditure increased from 716.1 million naira to 4.8 billion naira between 1970 – 1980. As of 2010 it increased up to 3.3 trillion naira. The government capital expenditure increased from 187.8 million naira to 10.2 billion naira between 1970 – 1980 and further to 1.8 trillion in 2010.

 

According to the national bureau of statistics (NBS), the GDP (Gross Domestic Product) per capita of nigeria became larger by 132% between 1960 – 1969 and the growth rate peaked at 283% between 19701979. Between 1979 -1983, there was a fiscal imbalance with negative consequences on balance of payment due to high levels of inflation and unemployment rates which led to the need of restructuring  the economy due to the severeness of the problem. In order to manage this issue, the government introduced a comprehensive economic reform programme in 1986 with the aim of achieving structural adjustment and economic liberalization. This program was adopted Between 1988 – 1997 according to CBN and NBS which in turn indicated  a positive GDP growth of 4% and a real GDP growth of 7% on aggregate basis by the year 2010. The discrepancy between the massive increase in government total spending and the performance of the Nigerian economy over the years raises a critical question on its role in promoting economic growth and development. Some authors argue that the relationship between government expenditure and economic growth in Nigeria is weak while other authors believe otherwise. The question that arises is what is the relative contribution of capital expenditure and recurrent expenditure on economic growth in Nigeria ? This paper aims to investigate the impact of government expenditure on economic growth in Nigeria over the years.

 

1.2 STATEMENT OF THE PROBLEM

Series of debates about the relationship between government expenditure and economic growth among scholars continue to emerge. The government performs two major functions “protection in terms of security” and “provision of certain public goods and services”. The protection function consists of generation of rules governed by laws and enforcement of property rights. With the aid of these rules and enforcement of property rights, individuals with criminal intent become highly discouraged, life, properties and external threats are highly protected. Other few public goods and services that benefit from this function include, defence, health, education, power, roads and communication. Some scholars including Keynes(1936), Sachs(2006), Ram(1986), Ranjha and Sharma(2008), Barro(1990) argue that increase in government expenditure on socio economic and physical structures encourages economic growth. Take for instance, an increase in government expenditure on health and education leads to an increase in labour productivity and growth of national output. Also, government spending on infrastructure such as roads, power, communication etc leads to reduction of production cost, increase in private sector investment and firm’s profit which in turn boost economic growth . In conclusion, these scholars believe expansion of government expenditure affects economic growth positively.

 

Then again, researchers including Landau(1986), Hayek(1989), Henrekson(2001), Mitchell(2005) and Sudha(2007) don’t accept that extension of government consumption influences monetary development emphatically. Their contention was that high government consumption may back off over all total execution of the economy because of the way that the public authority may need to build duties and get to fund their use. All the more instinctively, higher personal assessment might be a disincentive or that it can debilitate people working for extended periods or looking for extra work which thus may diminish pay and total interest. Then again, corporate assessment (benefit charge) will in general expand creation costs and diminishes firms’ benefit and their ability to support use on speculation. Moreover, if the public authority expands their acquiring (particularly from the boycott) to fund its use, it will influence the private areas because of rivalry or group out which thus decreases interest in the private area. Government authorities and lawmakers now and then increment consumption and interest in useless tasks or in products that the private area can create all the more productively to score modest prevalence and guarantee that they keep on excess in force which thusly shows that administration exercises produce misallocation of assets and obstructs the development of public yield level now and again.

 

As per receipts from (oil benefit assessment and eminences) which is under the oil income area, [ organisation annual duty, custom and extract obligations, esteem add charge (VAT) and others ] which is under the non oil income area, (CBN measurable announcement, 2012); the all show that that administration use has kept on expanding in Nigeria because of expansion sought after for public products like streets, correspondence, power, instruction, wellbeing and above all both interior and outer protections. Accessible measurements show that all out government use (both capital and repetitive) and its segments have kept on expanding over the most recent couple of years. The insights show that administration intermittent use expanded from 716.1 million to 4.8 billion from 1970 – 1980 then to 3,310,343.38 million of every 2010. Besides, the public authority repetitive use shows that consumption on broad organisation, guard, public gathering, interior security, horticulture, development, correspondence and transportation, training and wellbeing all expanded during the period under survey. Also government capital consumption expanded from 187.8 million to 883,874.75 million from 1970-2010. Moreover, the different segments of capital use ( that is financial administrations, schooling and wellbeing) likewise show a rising pattern between 1970 to 2012.

 

Nigeria actually positions among the most unfortunate nations on the planet with over 60.9% of the more than 163 million populace being poor. That arranges Nigeria under non-industrial countries which shows that the addition of government use has no impact on Nigeria’s development and improvement. In spite of the fact that the Nigerian economy is projected to be developing, neediness is probably going to deteriorate as the hole between the rich and helpless keeps on augmenting. Given this issues raised over, this exploration tries to inspect the effect of government consumption on monetary development in Nigeria utilising GDP as reliant variable , and intermittent use , capital use, and other contributing components, for example, imports, trades, foreign direct venture, to analyse the effect of government use on financial development in Nigeria from 1970 to 2012.

 

1.3 OBJECTIVES OF THE STUDY

Government spending is an essential venture for financial development at the removal of strategy producers in an agricultural nation like Nigeria. Current conditions oblige the appropriate allotment and productive usage of government use as the prize is more prominent moreover, the punishment for awful arrangement in this regard is more noteworthy than any time in recent memory in the domain of globalisation. More or less, government consumption could antagonistically influence financial development, if its distribution and use are not appropriately tended to.

 

This study aims to establish the relationship between  the following variables or components  of aggregate production function and economic growth in Nigeria empirically using Barros model.

 

• The impact of government consumption expenditure on economic growth in Nigeria.
• The impact of government investment expenditure in Nigeria.
• The influence of government investment expenditure on human capital development on economic growth in Nigeria.
• The impact of capital stock on economic growth in Nigeria.
• The impact of the labor force on economic growth in Nigeria.
• The impact of private investment on economic growth in Nigeria.

 

1.4 RESEARCH QUESTION

The research questions formulated to guide this study are:

• Has government investment spending contributed to economic growth in Nigeria?
• Does government consumption expenditure exert any significant impact on economic growth in Nigeria ?
• Has government investment on human capital development influenced economic growth in Nigeria

?

• Does capital stock in Nigeria impact significantly on economic growth in Nigeria ?
• Does private investment have any significant impact on economic growth in Nigeria?

 

 

1.5 RESEARCH HYPOTHESIS

The hypothesis formulated to guide this study are:

 

• Government consumption expenditure has no significant impact on economic growth in Nigeria.
• Government investment on human capital development does not influence economic growth.
• Government investment has no impact on economic growth in Nigeria.
• Labour force does not contribute significantly to economic growth in Nigeria.
• Capital stock in Nigeria does not have a significant impact on economic growth in Nigeria. Private investment does not have any significant impact on economic growth in Nigeria.

 

 

 

 

 

1.6 SIGNIFICANCE OF THE STUDY

The examination centers around exploring the effect of government consumption on monetary development in Nigeria. Numerous people have completed examinations on government consumption and how it influences financial development in Nigeria. In any case, this paper is attempting to add another measurement to it by separating the informative factors into government utilisation consumption, government venture and government speculation use on human resources improvement, load of capital, workforce and private venture. The most firmly related works are sketched out as follows; Nurudden and Usman (2010) contemplated the effect of government use in Nigeria utilising information from 1977-2007 and ECM technique. The factors utilised are repetitive use and capital use on safeguard, horticulture, schooling, transport and correspondence. They didn’t utilise total creation capacities since work and capital are depleted. This investigation merges consumption on human resources (training and wellbeing). It likewise neglects to total the other government venture and utilisation spending in Nigeria. Usman, Mobolaji, Kilishi, Yakubu, (2011) look at the effect of public use on financial development in Nigeria for the time of 1970-2008 utilising total creation capacity of Barro (1990). The examination arranged government consumption into organisation, training, transport and correspondence. Much the same as Usman and Nuruddeen (2010) they didn’t total government use on human resources. The investigation likewise didn’t merge government speculation and government utilisation use into discrete classes.

 

Muke (2009) looks at the connection between government spending and monetary development from 19702006 utilising Ram (1986) creation work. The investigation characterised government use into schooling, wellbeing, government utilisation spending and private speculation. Over the span of the examination, the investigation kept both schooling and wellbeing spending independently however dissected them together as though they were merged. This examination is an improvement over these obligations since our investigation coordinates both instruction spending and wellbeing spending to show human resources advancement

 

This investigation is particular from any remaining examinations since it orders government consumption into non-beneficial and gainful government use dependent on Barro (1990) groupings. The non-profitable use identifies with all administration utilisation consumption barring wellbeing and schooling. The beneficial use identifies with government use on human resources improvement and government venture.

 

Also, the examination depends on an extensive stretch of investigation from 1970-2010, which is a huge time span for the investigation of the issue of the examination.

 

Thirdly, I accept that this investigation will incite and clear a path for additional examinations in the territory as it uncovers the trouble in settling the observational inquiry of the effect of government spending on development.

 

Fourthly, this investigation joins the latest information and utilises both quantitative examination and further developed monetary method (vector mistake adjustment) model to consider the effect of government spending on financial development. Subsequently the result of this examination will give result and strategy suggestion to strategy producers by connecting previously mentioned holes.

 

 

 

 

 

 

 

 

 

 

1.7 SOPE OF THE STUDY

The investigation is limited to the effect of government consumption on financial development in Nigeria from 1970-2010.

 

One of the impediments of the investigation emerges from absence of concurrence on the reasons for financial development. Financial specialists are not sure about the overall significance of components which impact monetary development. Without such information, it is hard to make an important end on the effect of government consumption on monetary development.

 

Another restriction of the examination is that it doesn’t unequivocally consider the nature of government spending, which is presumably the main factor. The types of the government employees and the conditions in which they work have sway on imaginative and proficient utilization of public assets. Inefficient public spending can take different structures, remembering spending for wages and compensations of ineffective or phantom laborers. Public spending is likewise useless when government consumptions don’t arrive at assigned spending targets. This occurs for instance when government authorities are bad and look for payoffs for specially choosing recipients of government programs, for approving private venture projects and so forth

 

The econometric aftereffect of this investigation is likewise restricted by the nature of the information. This restriction emerges from the issue of irregularity of information as announced by various organizations and even by various offices in similar establishments.

 

The restrictions of this examination lies in the accompanying zones:

 

The information utilized for the investigation covers just the time of 1970-2010, regardless of the importance of time arrangement information for any period previously or after this period for this examination, are not thought of

 

The factors remembered for the examination are ostensible total national output (NGDP), government utilization consumption (GCE), government venture (GI), government speculation on human resources improvement (GIHC), capital stock (KAP), workforce (LAB) and private speculation (PI). NGDP is utilized as a clarified variable while GCE, GI, GIHC, KAP, LAB and PI are the illustrative factors. Regardless of the significance of different factors in clarifying the effect of government consumption on monetary development, they are excluded.

 

 

 

 

 

1.8 DEFINITION OF TERMS

• Aggregate demand: A schedule or curve which shows the total quantity of goods and services, demanded at different prices.
• Aggregate production function: this is a function showing the maximum output of a country given a set of inputs, assuming that these inputs are used efficiently.
• Capital expenditure: Refers to spending on fixed assets such as roads, schools, hospitals, building, plant and machinery etc, the benefits of which are durable and lasting for several years.
• Capital stock: Means the total value of the fiscal capital of an economy; including inventories as well as equipment.
• Capital: Human made resources (machinery and equipment) used to produce goods and services.
• Classical economics: The macroeconomic generalisations accepted by most economists before the 1930s which led to the conclusion that a capitalistic economy would employ its resources fully.
• Current expenditure: Refers to spending on wages and salaries, supplies and services, rent, pension, interest payment, social security payment. These are broadly considered as consumable items, the benefits of which are consumed within each financial year.
• Dependent variable: A variable in which changes as a consequence of a change in some other (independent) variables.
• Direct relationship: The relationship between variables which change in the same direction.
• Economic growth: Increase in real output or in real output per capita.
• Economic growth: Means increase in an economic variable, normally persisting over successive periods. The variable concerned may be real or nominal GDP.
• Economic model: A simplified picture of reality representing an economic situation.
• Economic policy: Course of action intended to correct or avoid a problem.
• Economic resources: Land, labor, capital and entrepreneur which are used in the production of goods and services.
• Expanding economy: An economy in which the net domestic investment is greater than zero.
• Fiscal policy: The use of taxation and government spending to influence the economy.
• Government expenditure: Refers to the expenses that government incurs for its maintenance, for the society and the economy as a whole.
• Gross Domestic Product (GDP): Refers to the money value of goods and services produced in an economy during a period of time irrespective of the people.
• Growth model: It is a simplified system used to stimulate some aspects of the real economy.
• Growth rate: The proportional or percentage rate of increase of any economic variable over a unit period, normally a year.
• Independent variable: The variable causing a change in another variable.
• Industrially Advanced Countries (IACs): Countries such as the US, Canada, Germany, Japan and Nations of Western Europe which have developed market economies based on large stocks of technologically advanced capital goods and skilled labor force.
• International Monetary Fund (IMF): The international association of nations which was formed after World War II to make loans of foreign monies to nations with temporary payment deficits and to administer adjustable pegs.
• Investment: Keynesian economics: The macroeconomic generalization which leads to the conclusion that a capitalistic economy does not always employ resources fully.

 

• Labor productivity: Total output divided by the quantity of labor employed to produce the output.
• Market failure: Refers to a label for the view that the market does not provide panacea for all economic problems.
• Market forces: The forces of supply and demand, which determine equilibrium quantity and price in the market.
• Monetarism: An alternative to Keynesianism; the macroeconomic view that the main cause of changes in aggregate output and the price level fluctuations is the money supply.
• Neoclassical economics: The theory that, although unanticipated price level changes may create macroeconomic instability in the short-run, the economy is stable at the full employment level of domestic output in the long-run because of price and wages flexibility.
• Nominal GDP: Means GDP at current basic prices less indirect taxes net of subsidies.
• Poverty: Inability to afford an adequate standard of consumption.
• Price level: The weighted average of prices paid for the final goods and services produced in an economy.
• Rate of interest: Prices paid for the use of money or for the use of capital.
• Transfer expenditures: refer to expenditures on pension, subsidies, debt interest, disaster relief packages, etc. transfers are seen as redistribution of resources between individuals in the society, with the resources flowing through the public sector as intermediary.

IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA