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.
TABLE OF CONTENTS
Title Page i
Approval page ii
Table of Contents vii
1.0 Introduction 1
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 4
1.4 Research questions 5
1.5 Research Hypotheses 5
1.6 Significance of the Study 6
1.7 Scope and limitations 7
1.8 Organisation of the study 8
1.9 Definitions of terms 9
2.0 Introduction 12
2.1 Conceptual Framework 12
2.1.1 An Overview of Government Expenditure 14
2.1.2 Types of government expenditure 16
2.1.3 Government expenditure Policies in Nigeria 16
2.1.4 Purpose of government expenditure 18
2.1.5 Significant of government expenditure 18
2.1.6 Component of government expenditure 19
2.1.7 Determinants of Government Expenditure 21
2.1.8 Impact of government expenditure on other variables 24
2.1.9 Effect of government expenditure on long-term trends 25
2.1.10 Government consumption output 26
2.1.11 Classification of government expenditure 30
2.1.12 Need for government expenditure 32
2.1.13 Expenditure planning process 33
2.1.14 Anatomy of government expenditure plans 33
2.1.15 The role of government expenditure 35
2.1.16 Characteristics of a develop economy 35
2.1.17 Distinction between underdeveloped and developed economy 37
2.1.18 Factors affecting economic growth 39
2.1.19 Benefits of economic growth 48
2.1.20 Obstacles to economic development 50
2.1.21 Economic development and growth 50
2.1.22 Ingredients of economic development 52
2.1.23 The links between health and development 54
2.1.24 Effects of increase in government expenditure 55
2.1.25 Components of aggregate economy 57
2.2 Prior Empirical Review 60
2.3 Theoretical frameworks 67
2.3.1 Theory of government expenditure 67
2.3.2 Theory of increasing government expenditure 68
2.3.3 Peacock and Wiseman’s theory of expenditure 68
2.3.4 Ernest Engel’s Theory of government expenditure 69
2.3.5 Wagner law of increasing state activities 70
3.0 Introduction 74
3.1 Research Design 74
3.2 Restatement of hypothesis 75
3.3 Research population 75
3.4 Sample and sampling technique (s) 76
3.5 Research instrument (s) 76
3.6 Validity and reliability of instruments 77
3.6.1 Validity of the instrument 77
3.6.2 Reliability of the instrument 77
3.7 Method of data collection 77
3.8 Model specification 77
3.9 Data analysis techniques 79
4.0 Introduction 81
4.1 Presentation of data 81
4.2 Restatement of model specification 82
4.3 Analysis and interpretation 83
4.3.1 Hypothesis one 83
4.3.1a Interpretation of hypothesis one (economic growth and total recurrent expenditure) 85
4.3.1b Discussion of findings 86
4.3.2 Hypothesis two 87
4.3.2a Interpretation of hypothesis two (economic growth and total capital expenditure 89
4.3.2b Discussion of findings 90
4.3.3 Hypothesis three 91
4.3.3a Interpretation of hypothesis three (economic growth and total transfer expenditure) 93
4.3.3b discussion of findings 94
5.0 Introduction 95
5.1 Summary of Findings 95
5.2 Implication of findings 96
5.3 Recommendations 97
5.4 Conclusions 98
5.5 Contribution to knowledge 98
5.6 Suggestion for further studies 99
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.
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.
1.4 RESEARCH QUESTIONS
The following research questions are the main question this research paper intends to address:
1. Is there significant relationship between government recurrent expenditure and economic growth of Nigeria?
2. Is there significant relationship between government capital expenditure and economic growth of Nigeria?
3. Is there significant relationship between government transfer expenditure and economic growth of Nigeria?
1.5 RESEARCH HYPOTHESES
Hypothesis, according to (osuala, 2001; 56) is defined as a conjectural statement of the relationship between two or more variables. In the course of finding solutions to the problems identified in the study, three hypotheses were formulated. They are later tested based on the data obtained from the field survey and other relevant sources on the subject of this research.
The following hypotheses will be tested in the course of this study.
Ho: There is no significant relationship between government recurrent expenditure and economic growth of Nigeria.
H1: There is a significant relationship between government recurrent expenditure and economic growth of Nigeria.
Ho: There is no significant relationship between government capital expenditure and economic growth of Nigeria.
H1: There is a significant relationship between government capital expenditure and economic growth of Nigeria.
Ho: There is no significant relationship between government transfer expenditure and economic growth of Nigeria.
H1: There is a significant relationship between government transfer expenditure and economic growth of Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the relationship between government expenditure and economic growth. The study would also facilitate the examination of the effects of government expenditure and economic growth in Nigeria and thus boosting the empirical evidence from Nigeria. Therefore this research work is apparently going to be useful to the following,
i) Government; this research will be relevant to the top officials of the government as it will enable them to come out with pragmatic policies for expenditure management aimed at improving the quality of their economic growth.
ii) Companies; this research enable companies acquaint themselves with the effects of rise of sales which will enhance their profit
iii) Citizens; most citizens are ignorant of the fact that they benefit more from economic growth of Nigeria cause of the blunt thinking that government benefit alone from all, the findings of this
study will enlighten the citizens more on how government expenditure can actually have effect on economic growth.
iv) The economy; it will also highlight to the economy as a whole because if the level of economic growth is rise, government will be able to provide more resources to help in the development of the economy.
v) Contribution to existing work; the findings of this study could be seen as a contribution to existing works on impacts of government expenditure on economic growth in Nigeria. Indeed, this would contribute immensely in building up academic knowledge in a wide range issues.
vi) Further research; the study would also play a significant role of engineering further research into other aspects of topic under consideration or other related topics in the economic growth, in other words, forming a future research in this area. it would also add to the available literature on the areas of study while also providing a platform for other researchers who may want to further this study.
vii) Education analysts; the result of the study would be of benefits to education analysts, and institutions in examining the effectiveness of government expenditure and economic growth.
viii) Empirical researchers; It will also be useful in stimulating public discourse given the dearth of empirical researchers in these areas from emerging economies like Nigeria.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study is undertaken to examine the impact of government expenditure on economic growth. In term of time series, a period of twenty years is used (i.e. 1993 to 2012) as means of assessing the impact of government expenditure on the growth of Nigerian economy. It is hoped that this will help to achieve the stated objective of the study.
In any research study of this nature, there is normally the enthusiasm to touch as many areas as possible which are connected to the various needs of such study. However due to the nature and scope of the work, such a wild scope is out of the question since a work of this nature can hardly achieve a feat. This study will examine mainly the Impact of government expenditure on economic growth of Nigeria covering the period 1993 to 2012.
i) Time factor; this project was carried out when academic were at its peak, particularly for the final year students as this was one of the courses offered by the researcher. Therefore, there were challenges faced by the researcher in time allotment
ii) Non availability of records; this is one of the most important limiting factors in the course of the study. There were no records of past research works done to see the style, design and writing methods by past graduating students since the researcher is among the first set of students that will be graduating from the school.
iii) Fund; the problem of funding was not left out in the course of research to this study. This type of study required adequate money and time to enable the researcher visit the necessary places for collection of data. Insufficient funding was a limiting factor for the in depth study of this research since it was financed from meager pocket money of the researcher.
1.9 ORGANISATION OF THE STUDY
This research studies the impact of government expenditure on economic growth in Nigeria. It is organized into five chapters. The first chapter shall contain the background of the study, the statement of the research problem, the objectives of the study, the research questions etc. that would guide the study. Chapter two would present the literature review on the subject matter. The methodology to be adopted in the study would be stated in chapter three. Chapter four shall
focus on the presentation and interpretation of the regression results. The last chapter five would present the summary of the findings, conclusion and appropriate recommendations.
1.0 DEFINITION OF TERMS
This aspect relates to definition of the concepts used for purpose of this study.
1) Aggregate demand: A schedule or curve which shows the total quantity of goods and services, demanded at different prices.
2) 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.
3) 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.
4) Capital stock: Means the total value of the fiscal capital of an economy; including inventories as well as equipment’s.
5) Classical economics: The macroeconomic generalizations accepted by most economists before the 1930s which led to the conclusion that a capitalistic economy would employ its resources fully.
6) 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.
7) Dependent variable: A variable in which changes as a con sequence of a change in some other (independent) variables.
8) Economic growth: Means increase in an economic variable, normally persisting over successive periods. The variable concerned may be real or nominal GDP. Increase in real output or in real output per capita.
9) Economic model: A simplified picture of reality representing an economic situation.
10) Economic policy: Course of action intended to correct or avoid a problem.
11) Economic resources: Land, labour, capital and entrepreneur which are used in the production of goods and services.
12) Expanding economy: An economy in which the net domestic investment is greater than zero.
13) Fiscal policy: The use of taxation and government spending to influence the economy.
14) Government expenditure: Spending by government at any level. It consists of spending on real goods, and services purchased from outside suppliers; spending on employment in state services such as administration, defense and education; spending on transfer payment to pensioners; spending on community services; spending on economic services..
15) Growth rate: The proportional or percentage rate of increase of any economic variable over a unit period, normally a year. ..
16) Poverty: Inability to afford an adequate standard of consumption.
Niloy, B., Emanuel. M. H and Denise. R.O (2003): Government expenditure and Economic Growth: A Disaggregated Analysis for Developing Countries, JEL, Publication.
Nurudeen, A. and Usman, A. (2010), Government Expenditure and Economic Growth in Nigeria, 1970 2008: A Disaggregated Analysis, Business and Economics Journal, 1(10):1 11
Taiwo, M. and Abayomi, T. (2011), Government Expenditure and Economic Development: Empirical Evidence from Nigeria, European Journal of Business and Management, 3(9): 18 – 28.