Impact Of Government Expenditure On Nigerian Economic Growth (1987-2017)

Project and Seminar Material for Economics

Impact Of Government Expenditure On Nigerian Economic Growth (1987-2017)


Abstract


The work was on the impact of Government Expenditure on Nigeria Growth (1981 – 2010) dealing with secondary data from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics Regression Analysis with (OLS) technique was used. Our findings indicate that there is a positive correlation between Inflation Money Supply Government Consumption Expenditure. Relevant time series data used in the model includes those on gross domestic Product (GDP} and different structures of government. Results of the study show government expenditure has a significant effect on economic growth though the significance is form dependent. i.e. the form of government expenditure considered. Also, capital and recurrent expenditure have significant effect on economic growth but in varying degrees and extent. Finally, it was found out that capital expenditure would have exert positive impact on the level of economic growth but for the issue of corruption and institutional oddity in Nigeria though the intended capital expenditure is indirectly converted to recurrent expenditure somehow which has its own effect on the Economic growth.


Chapter One


Introduction

1.1 Background to the Study

Economic growth generally refers to a sustained increase in per capital national income or output over a long period of time. It is an economic situation whereby the quantum of increase in national output must exceed the rate of growth in population. As expressed in Nworji, I. D ,Okwu, A .T, Obiwuru T C and Nworji, L.O (2012) it means a growth in a nation’s potential GDP, depending on the way and manner it is measured.

The attainment of Economic growth is a pertinent macroeconomic objective of nations, most importantly after the Second World War (Kumar, 2010). This is in view of the fact that almost all national economies and governments have lean towards to intervening and caring out the fundamental roles of allocation, stabilization, distribution and regulation of the economy especially in a situation where and when the market has proved to be inefficient and, or its activities has become socially unacceptable. In order to carry out these function governments pursues fiscal and monetary policy instruments such as taxation and spending (expenditure) to achieve accelerated economic growth and influence the working of the economy. The essence is to maximize economic welfare and ultimately ensure permanent aims of stimulating long-term growth of national economy.

Importantly, the parity between government expenditure and economic growth has continually triggered off series of debates among scholars. Overtime, government has been involved in fiscal policy measures such as provisions of public goods such as defense, road, education, health and power to mention but the few. Some scholar such as Abu and Abdullahi (2010) among others had argued that increase in government expenditure on social-economic and physical infrastructures encourages economic growth. By implication then, it can be said that government expenditure on health and education raises productivity of labour and increase the growth of national output. Also, scholars such as Abu and Abdullahi (2000), Al-Yousif (2000), Ranjan and Sharma (2008) and Cooray(2009) were of the opinion that; government expenditure on infrastructural amenities such as road, communication, power and soon reduces production cost, increases private sector investment and profitability of firms and, hitherto fosters economic growth.

Other scholars on the hand totally objected the above claims and submitted that increasing government expenditure tend to slow down the overall performances of the economic. Laudau (1986), Baro (1991) were of the opinion that higher government expenditure leads to a disaggregated economy. They were of position that increase taxes and/or borrowing by governments may discourage individual from working as higher income taxes discourages individual from working for long hours or being motivated to work. This may consequently reduce aggregate national income and output vis-Γ -vis investment level. They also contended that increase government expenditure will lead to more borrowings by government and crowd out private sector leading to lesser investment and national output. The bottom-line of these studies as mentioned above is that higher government expenditure has a negative impact on economic growth.

A cursory look at the Nigeria economy since independence and more precisely since the end of civil war in 1970 and the oil boom that follows in the 1970s have shown that there has been continued increase in government expenditure as a result of huge receipts from production and sales of petroleum resources and an increase in the demand for public goods such education, health, transport, communication, defence and security, agriculture, electricity and energy to mention but the few.

The paradox of the above is that the rising government expenditure, both recurrent and capital has not shown no any appreciable contribution to growth and development. To add to the above is the fact that over 50 percent of Nigerians are poverty ridden and lives under US $2 per day. To cap it, public infrastructures in Nigeria are in dilapidated state while industries are collapsing due to epileptic power supply and poor road network, all leading to higher rate of unemployment and insecurity. The macroeconomic indicators in the country are nothing to write home about as indicators like balance of payments, import obligations, inflation rate, exchange rate, GDP and national saving rate are all in dwindling state in the last couples of years (CBN 2008).

It is in lieu of the above tha this research thesis is designed to investigate the effect of government expenditure on economic growth in in nigeriaa between 1981 and 2017. This research will be country specific as it seeks to investigate the effect of government expenditure on economic growth in Nigeria.


1.2 Statement of the Problem

There has been no consensus among various theoretical literatures in relation to the effect of public expenditure on economic growth. Empirically, there are plethoras of works on the effect of public expenditure on economic growth in developing countries. Other studies like Easterly and Rebelo (1993) Singh and Weber (1997), Semmle, S.K (2007) , Motmmell (1990) and Delome (1999) established that there are significant positive growth effects of public expenditure, others, studies like AbuBadaer and Abu-Quarn (2003) and schaltegger and Torgler (2006) indicated that large government size is disadvantageous to economic growth. According to the CBN, a cursory look at the total government (capital and recurrent) expenditures between 1980 and 2017 shown that government expenditure has been on the rising. For example, figures from CBN show that between 1970 and 2099, capital expenditure on economic services rose from N15.5milliom to809120.5, that on social and community services from 1.4million to120049.2million, and transfers from 100.7milliom to 211758.1 million. Likewise, on recurrent side during the same period, expenditures on services rose from 25.95million to 340193.77million, that on social and community services from 43,55million to 346071.95million and on transfer from 511.42milliom to 622171.10million (CBN, 2009). With these gorgeous increments in these sectoral allocations, the expectation is that there will be a correspondent growth trend in the economy. But what is the reality on ground? This is the crux of this study. This study is a country specific analysis as it concentrates on Nigeria, its government spending and its effect on economic growth.


1.3 Objectives of the Study

Generally the objective of this research is to examine the effects of government expenditure on economic growth in Nigeria. Specifically, the study is set to;

  1. To estimate the impact of government recurrent expenditure on economic growth.
  2. To investigate the effect of government capital expenditure on economic growth.
  3. To examine the effect of total government expenditure on economic growth

1.4 Research Hypotheses

Taking into consideration the above listed objective of the study, the following hypotheses are formulated;

  1. H0: Government recurrent expenditure does not have any significant impact oneconomic growth in Nigeria.
    H1: Government recurrent expenditure does have significant impact on economic growth in Nigeria.
  2. H0: Government capital expenditure does not have any significant impact on economic growth in Nigeria.
    H1: Government capital expenditure does have significant impact on economic growth in Nigeria.
  3. H0: Government total expenditure does not have any significant impact on economic growth in Nigeria.
    H1: Government total expenditure does have significant impact on economic growth in Nigeria.

1.5 Significance of the Study

The significance of the study is rooted in the belief that appropriate and prioritized government expenditure is imperative to economic growth in every economy. The states of affairs regarding public spending are topics that have attracted considerable debate in both developed and developing economies. Conversely, government expenditure has its peculiar problem in commanding increased economic growth as far as Nigeria is concern in spite of the assumed essential roles it plays in promoting economic growth. This research thesis therefore, this study seeks to be an addendum to existing studies by empirically analyzes the impact of government expenditure on economic growth with special attention to Nigeria.

Hence, it is believed that, the outcome of the empirical findings from this study will benefit among others the government, those in charge of managing government treasury to have an insight into areas where public funds can be channeled so as to promote economic development and growth. Finally, it will stand as a better avenue to assist government and all stakeholders by aiding them to make rational choice in initiating and allocating public goods and on how public goods among competing ends to the benefit of the entire population.


1.6 Scope of the Study

This thesis centers on issues in government expenditure and economic growth in Nigeria. It covers a period of 1981-2017. The reason for choosing this period is that the period is a period of military exigencies which eventually ushered the democratic government in 1999. The study uses aggregate time series data from secondary sources.


1.7 Organization of the Study

This project work is divided into five distinct but related chapters.

  • Chapter one focuses on the introduction which includes background to the study, statement of problem, objectives of the study, study hypotheses, significance, scope of the study and, organization of the study.
  • Chapter two will focus on literature review and theoretical framework of the study while
  • Chapter three address research methodology
  • Chapter four will focus on data presentation, analysis and interpretation of results and;
  • Chapter five is the last chapter and centers on summary, conclusion and recommendations for the study as well as the limitation of the study.

Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

The chapter one of the study attempted to address the background, problem, objective and research questions. Other issues raised include: research hypotheses, significant and scope of the study. Empirical works were reviewed in chapter two and relevant related issues to the study were also reviewed. Here, objective and critical examination was given to the circumstances under which the public expenditure operates and taking position from the views of past scholars who have at one time or the other contributed to knowledge.

Chapter three examine the methodology adopted as well as method of data collection, method and tool of analysis as well as justification for the research methods used.

Chapter four presents analyses and interprets the data collected via our data collection tools. In addition, the hypotheses formulated were discussed and research findings were intensely reported. Finally, last chapter discussed the summary, limitation, conclusion and recommendations of the study.


5.2 Recommendations

With reference to the findings of this study, the following policy options are recommended that:

  1. There an urgent need for government to make sure that both capital and recurrent expenditure are judiciously and religiously managed in such a manner that it will boost nations production base and promote economic growth and of the country.
  2. Expenditure in all the sectors of the economy should receive increased funding (with more credence to capital expenditure). Likewise, nation’s resources need to be well managed and properly channeled towards execution of projects that will promote development and growth of the economy.
  3. Furthermore, to tackle the menace of leakages in the expenditure channel, government need to strengthen her institutions most importantly those antigraft agencies through improved funding, capacity building and orientation so as to combat corruption and corrupt practices.
  4. Finally, public expenditure on capital and infrastructure should be boosted to encourage the private sector in job creation that would increase productivity and reduce the rising government expenditure in Nigeria.

5.3 Conclusion

Purposively, this study is set outto practically investigate the impact of government expenditure and economic growth using econometric modeling with annual time series covering the period 33 years (1981-2017). The study employed the Cointegration Rank test to look at the nature of the relationship between these variables and found no long run relationship between them which gave rise to estimating the model formulated using VAR techniques.

Hence, the study concludes that government expenditure has a significant impact on economic growth though the significance is form dependent. i.e. the form of government expenditure considered. It was seen economic growth in Nigerian over the years has been significantly affected by both capital and recurrent expenditure but the level of their effect varies in degree and extent. This study found that capital expenditure would have really positively impacted the level of economic growth but for the issue of corruption and institutional oddity though the intended capital expenditure is indirectly converted to recurrent expenditure somehow which has its own effect on the Economic growth.


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