IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA

IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study examines the impact of government expenditure on economy growth in Nigeria. In the light of the empirical review and other discussions, a number of questions arose as to whether there is significant relationship between government recurrent expenditure and economic growth of Nigeria, if there is significant relationship between government capital expenditure and economic growth of Nigeria as well as to determine if there is significant relationship between government transfer expenditure and economic growth of Nigeria. Using the Ordinary Least Square (OLS) regression technique with the aid of computer software, for a 1993 – 2012 time series data, the empirical findings revealed among other things, that government investment expenditure has a significant impact on Nigeria’s economic growth. The study is recommends that Transfer expenditure such as provident fund, pensions and other Social Security benefits such as NHIS scheme positively affect the economic growth of Nigeria, and by using government expenditure to achieve supply-side improvements in the macro-economy, such as spending on education and training to improve labour productivity, the economic growth of Nigeria increases it also considers that Administration expenditure, Capital and recurrent expenditure also affect the economic growth of a country. On the strength of these evidences, this work recommends that the Federal Government should be very conscious about how it uses the fiscal policy to regulate government expenditure; government should be consistent with its expenditure/payments as this will stimulate economic growth. Finally, the government should take full advantage of the benefits of capital expenditure, for instance, establishment of industries, setting up of cottage industries, road constructions; the operations could be labour intensive so as to increase employment. If these recommendations are efficiently implemented, the impact of government expenditure on economic growth will be enhanced.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Over the past decades, the public sector spending has been increasing in geometric term through government various activities and interactions with its Ministries, Departments and Agencies (MDA’s), (Niloy et al. 2003). Although, the general view is that government expenditure either recurrent or capital expenditure, notably on social and economic infrastructure can be growth enhancing although the financing of such expenditure to provide essential infrastructural facilities including transport, electricity, telecommunications, water and sanitation, waste disposal, education and health can be growth retarding (for example, the negative effect associated with taxation and excessive debt). The size and structure of government expenditure will determine the pattern and form of growth in output of the economy (Taiwo, and Abayomi, 2011).

The structure of Nigerian government expenditure can broadly be categorized into capital and recurrent expenditure. The recurrent expenditure are government expenses on administration such as wages, salaries, interest on loans, maintenance etc., whereas expenses on capital projects like roads, airports, education, telecommunication, electricity generation etc., are referred to as capital expenditure. One of the main purposes of government spending is to provide infrastructural facilities (Taiwo and Abayomi, 2011).

Nurudeen and Usman (2010) added that, in Nigeria, government expenditure has continued to rise due to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods like roads, communication, power, education and health. Besides, there is increasing need to provide both internal and external security for the people and the nation. Available statistics, according to Nurudeen and Usman (2010) show that total government expenditure (capital and recurrent) and its components have continued to rise in the last three decades. For instance, government total recurrent expenditure increased from N3, 819.20 million in 1977 to N4, 805.20 million in 1980 and further to N36, 219.60 million in 1990. Recurrent expenditure was N461, 600.00 million and N1, 589,270.00 million in 2000 and 2007, respectively. In the same manner, composition of government recurrent expenditure shows that expenditure on defense, internal security, education, health, agriculture, construction, and transport and communication increased during the period under review. Moreover, government capital expenditure rose from N5, 004.60 million in 1977 to N10, 163.40 million in 1980 and further to N24, 048.60 million in 1990. The value of capital expenditure stood at N239, 450.90 million and N759, 323.00 million in 2000 and 2007, respectively. Furthermore, the various components of capital expenditure (that is, defense, agriculture, transport and communication, education and health) also show a rising trend between 1977 and 2007.

Some scholars have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs. High levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand. Thus, government expenditure, even of a recurrent nature, can contribute positively to economic growth. On the other hand, endogenous growth models such as Barro (1990), predict that only those productive government expenditures will positively affect the long run growth rate. 3

The effect of government spending on economic growth is still an unresolved issue theoretically as well as empirically. Although the theoretical positions on the subject are quite diverse, the conventional wisdom is that a large government spending is a source of economic instability or stagnation. Empirical research, however, does not conclusively support the conventional wisdom. A few studies report positive and significant relation between government spending and economic growth while several others find significantly negative or no relation between an increase in government spending and growth in real output.

Gregarious and Ghosh (2007) made use of the heterogeneous panel data to study the impact of government expenditure on economic growth. Their results suggest that countries with large government expenditure tend to experience higher economic growth.

Gemmell and Kneller (2001) provide empirical evidence on the impact of fiscal policy on long run growth for European economy. Their study required that at least two of the taxation/expenditure/deficit effects must be examined simultaneously and they employ panel and time series econometric techniques, including dealing with the endogeneity of fiscal policy. Their results indicate that while some public investment spending impacts positively on economic growth, consumption and social security spending have zero or negative growth effects.

Mitchell (2005) evaluated the impact of government spending on economic performance in developed countries. He assessed the international evidence, reviewed the latest academic research, cited examples of countries that have significantly reduced government spending as a share of national output and analyzed the economic consequences of these reforms. Regardless of the methodology or model employed, he concluded that a large and growing government is not conducive to better economic performance. He further argued that reducing the size of government would lead to higher incomes and improve American’s competitiveness.

According to Olorunfemi, (2008) studied the direction and strength of the relationship between public investment and economic growth in Nigeria, using time series data from 1975 to 2004 and observed that government expenditure impacted positively on economic growth and that there was no link between gross fixed capital formation and Gross Domestic Product. He averred that from disaggregated analysis, the result reveal that only 37.1% of government expenditure is devoted to capital expenditure while 62.9% share is to current expenditure.

In the light of the above, this study intends to examine the impact of government expenditure on economic growth of Nigeria.

1.2 STATEMENT OF THE RESEARCH PROBLEM

The purpose of this study is to analyse the effect of government expenditure on the rise of economic growth with a view of showing the rising trend between 1993 and 2012. In the light of this, the following problems have been identified, recurrent expenditure, capital expenditure, transfer expenditure, administration expenditure.

1.3 OBJECTIVES OF THE STUDY

The broad objective of the study is to examine the impact of government expenditure and economic growth of Nigeria.

The specific objectives are:

1. To determine if there is significant relationship between government recurrent expenditure and economic growth of Nigeria.

2. To examine if there is significant relationship between government capital expenditure and economic growth of Nigeria.

3. To evaluate if there is significant relationship between government transfer expenditure and economic growth of Nigeria.

TOPIC: IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA

Format: MS Word

Chapters: 1 - 5
Delivery: Email

Number of Pages: 80

Price: 3000 NGN

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