EFFECT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1981-2017)

ABSTRACT

In this study, attempt was made to investigate the effect of government expenditure on economic growth in Nigeria. The study covers a period between 1980 and 2017 and uses aggregate time series data from secondary source. 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-à-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 511.42million 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.

EFFECT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1981-2017)