IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (2000-2015)

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IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (2000-2015)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The nexus between government expenditure and economic growth has continued to generate controversies among scholars. Government performs two major functions in an economy namely protection (defense or security) and provision of certain public goods (Robinson, etal, 2014). Protection function consists of the creation of rule of law and enforcement of property rights. The protection function helps in curtailing the occurrence of crimes, protects lives and properties and protects the nation in entirety from external aggression. Furthermore, it is also the responsibility of the government to ensure the adequate provision of public goods such as roads, water, electricity, health, education, housing etc, to improve the material wellbeing of the populace.

Some scholars such as Abdullah (2010); Okoro (2013) and Robinson, etal, (2014) to mention a few, argued that increase in government expenditure on socioeconomic and physical infrastructures encourages economic growth. For example, government expenditure on health and education has the tendency to raise the productivity of labour and further stimulate the level of national output. Similarly, government expenditure on physical infrastructures such as roads, power, communication, water etc, reduces the cost of production by the manufacturing sector, encourages private sector investment, enhances foreign investment, raises the performance and profitability of firms and further propels economic growth. Supporting these views, scholars such as Ranjan (2008) and Corray (2009) adduced that that the enlargement of government expenditure contributes positively to economic growth.

However, some scholars such as Egbetunde and Fasanya (2013) and Taiwo and Kabir (2011) did not support the assertion that increasing government expenditure promotes economic growth. They rather adduced that higher government expenditure may reduce the overall performance of the economy. For instance, in an attempt to finance rising expenditure, government may raise taxes and/or borrowing. Higher income taxation discourages individuals from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In similar way, higher profit tax tends to increase the cost of production and reduces investment expenditure; the private sector would be crowded out, thus reducing private investment. Furthermore, in a bid to gain popularity and federal acceptance, politicians and government officials sometimes increase expenditure and investment on unproductive projects or in goods that the private sector can produce more efficiently. Thus, government activity can sometimes lead to misallocation of resources and retards the growth of national output.

In Nigeria, government expenditure has continued to rise due to large proceeds from the production and sales of crude oil over years and the demand for public goods have also been on the upward trend. Available statistics showed that total government expenditure (capital and recurrent) have continued to rise in the last three decades. For instance, total recurrent expenditure rose from N461, 600 million to N1, 589, 270 million between 2000 and 2013. In the same manner, the composition of government recurrent expenditure showed that expenditure on defense, internal security, education, health, construction, transportation and communication increased as well between 2000 and 2013. The capital expenditure stood at N239, 450 million and N860, 230 million in 2000 and 2013. Furthermore, the various components of capital expenditure (defense, health, education, transportation and communication) have been on the increased as well during those periods. (CBN, 2014).

The relationship between government spending and economic growth is important for all developing economies like Nigeria, most of which have experienced increasing level of government spending and have achieved low level of economic development overtime. Since independence, the revenues accruing to Nigeria has been on the increase annually. Also public spending incurred by the government has been on the upward trend over years, despite this, Nigeria is still bedeviled with poor level of productivity in relation to demand for them, dilapidated state of existing infrastructural facilities, low level of technology, high rate of unemployment, dearth of functional and effective infrastructures, epileptic power supply, low per capita income, low savings and investment and many more.

1.2 STATEMENT OF PROBLEM

Unfortunately, rising government expenditure has not translated into meaningful improvement in the standard of living of the people as Nigeria ranks among the poorest countries in the world. In addition, majority of Nigerians have continued to live in abject poverty, with more than 50% living on less than US$2 per day. Coupled with these, dilapidated infrastructures especially roads and power supply has led to the collapse of some local industries and migration of some multinational firms, which has escalated the unemployment rate in the country. Moreover, macroeconomic indicators such as balance of payments, inflation rate, interest rate, exchange rate, national savings, per capita income reveal that Nigeria has not fared well in the last couple of years.

1.3 OBJECTIVES OF THE STUDY

The study seeks to examine the impact of government expenditure on economic growth in Nigeria. Specifically, the study is targeted to;

i. Examine the impact of government capital expenditure on economic growth in Nigeria.

ii. Examine the impact of government recurrent expenditure on economic growth in Nigeria.

1.4 RESEARCH QUESTIONS

Based on the objectives stated above, the study attempts to provide satisfactory answers to the following research question;

i. What is the impact of government capital expenditure on economic growth in Nigeria?

ii. What is the impact of government recurrent expenditure on economic growth in Nigeria?

1.5 RESEARCH HYPOTHESES

In line with objectives of the research and the questions of interest, the following hypotheses are therefore stated:

H01: Government capital expenditure has not contributed significantly to economic growth in Nigeria between 2000 and 2015.

H02: Government recurrent expenditure has not contributed significantly to economic growth in Nigeria between 2000 and 2015

1.6 METHODOLOGY

The study empirically assesses the impact of government expenditure on economic growth in Nigeria. To this end, the instrument to be used for the collection of data for the purpose of this research is questionnaire. Data related to this research work will be analyzed using percentage and simple statement as referred to the information collected from respondents through the research questionnaire.

The statistical analysis adopted was correlation. All computations requiring the use of data analysis technique were accessed by a computer statistical software package called SPSS (Statistical Package for Social Sciences) to estimate the impact of government expenditure (capital and recurrent) on economic growth in Nigeria. The choice of this technique is informed by the desirable properties of the correlation such as unbiasedness, minimum variance, consistency, sufficiency and linearity.

1.7 JUSTIFICATION FOR THE STUDY

Nigeria has been incurring large amount of expenditure on capital projects and recurrent expenditure. Despite this huge expenditure, no meaningful inclusive growth has been recorded in the economy. Furthermore, increased government expenditure has failed to significantly improve the material wellbeing of the citizenry.

Moreover, the existing physical infrastructures especially roads and power supply have not been in good shape over years. Also, infrastructures in critical sectors such as education and health, which constitute the basic human capital development, have continued to deteriorate in recent times. Little wonder, the reason for the low level of human capital formation in Nigeria. Government expenditure alone does not secure growth and development, but expenditure directed to enhance the quality of living of the masses guarantees sustainable economic growth and development. It is therefore on this basis, the study was necessitated to examine the impact of government expenditure in recent period- 2000-2015.

1.8 SCOPE OF THE STUDY

The study is delineated to examine the effect of government expenditure on economic growth in Nigeria for the period, 2000-2015. This time frame was picked in order to examine recent trend in government expenditure and economic growth in the Nigerian economy.

1.9 LIMITATION OF THE STUDY

During the course of carrying out the study, several limitations were encountered. They were:

a) Dearth of Research Material: The research materials available to the researcher are insufficient, thereby limiting the study.

b) Time Constraint: The time frame given to conduct this study is relatively short considering the other academic commitment and dedication of the researcher.

1.10 DELIMITATION

In research studies of this nature, there is normally the enthusiasm to touch as many areas as possible which are connected to this subject matter. However due to the exclusive nature of this work, those topics of interest can only be briefly examined.

1.11 ORGANISATION OF THE STUDY

The study contains five chapters. The first chapter is the introductory part of the study. Chapter two reviews relevant literature found applicable to the study. Chapter three focuses on the trend in government expenditure and economic growth in Nigeria. Chapter four delves into the research methodology and empirical analysis. The last chapter focuses on the summary of research findings, conclusion.

1.12 DEFINITON OF TERMS

Capital Expenditure: It is a component of government expenditure incurred on capital projects such as roads, railways, telecommunications, electricity and the like. This kind of expenditure involves huge amount of money and is not incurred on regular basis.

Recurrent Expenditure: It is a component of government expenditure incurred on regular basis such as wages and salaries, interest on loans, general administration and maintenance.

Government Expenditure: This refers also to public expenditure. It is the total expenditure incurred by the government for its maintenance of itself as an institution and to ensure the provision of public goods to citizenry.

Economic Growth: This is the quantitative increase in the volume of a country’s level of productivity or GDP between two consecutive quarters.

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