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Keywords: THE EFFECT OF PUBLIC EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA
- Background of Study
The place of public expenditure as an impetus to economic growth is in no doubt. The public spending in developing countries has been rising astronomically due to the quest for economic development it engenders through increasing the growth rate of the economy, providing more employment opportunities, raising income and reducing inequality of wealth as opined by Jhingan (1997).
Developing economist has been faced with an increasing size of government. Government operations and its impact on economic growth has become an emerging major public debate. However the observed growth in public spending appears to apply to most countries regardless of their level of economic development. Indeed as early as 1983, Adolf Wagner had formulated the law of expanding state activity which states that government spending leads to higher level of economic development. The postulate was derived primarily from the nineteenth century German experience of rapid industrial and economic growth. The basis of this being that sector with high social priority and low rates of return would not attract private investment and hence the need to channel government funds.
The aim of government is to attain better allocative and distributional equality through greater disbursements of public and quasi-public goods. The rate and size of government expenditure arouses a great deal of controversy in macroeconomics. While countries have moved towards economic freedom and open markets (Gwartney, Holcombe and lawson1998), government expenditures have increased more and more.According to Manoj and Gaurav (2012) public expenditure is the expenditure incurred by public authorities like Federal, state and local government to satisfy the collective social wants of the people. Public expenditure is necessary to maintain macroeconomic stability because it is an important fiscal tool and can be used to manipulate the economy (Beg et al., 1984).
Economic growth is a necessary lubricant for ensuring sustainable development. Todaro (1995) citing Kuznets views a country’s economic growth as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growth capacity based on advancing technology and the institutional and ideological adjustment that it demands. Also Smith (2003) views economic growth as the steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income. Economic growth represents the expansion of a country’s potential GDP or output.
Achieving sustained economic growth is clearly a predominant objective of publicexpenditure policy. The relationship between public expenditure and economic growth is an important subject of analysis and debate (Mitchell, 2005). The concern of fiscal authority is the stimulation of economic activities to facilitate growth and development through government revenue and public expenditure. The extent and depth of poverty and the desire to reduce it in developing countries including Nigeria requires more impetus from fiscal policy makers. The weakness of institutions and the private sector to mobilise and direct savings efficiently makes it crucial for government tomobilise revenue and harness the resources for economic growth and development.
Over the past decades and half, a substantial volume of empirical research has been directed towards identifying the elements of public expenditure that bear significant association with economic growth. Different scholars have raised various suggestions about this issue but for simplicity purpose they are divided into two schools of thought. The first school of thought did not support the claim that increasing government expenditure promotes economic growth, instead they assert that higher government expenditure may slowdown overall performance of theeconomy. For instance, in an attempt to finance the rising expenditure, government may increase taxes. Thus, higher taxes reduce income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms.
On the other hand, the second school of thought argues that larger participation by government is not inimical to efficiency, productivity and growth in the economy. These scholars argued that increase in government expenditure on socio-economic and physical infrastructures encourages and spur economic growth. They cite government role in ensuring efficiency in the resource allocation, regulation of markets, and stabilization of the economy and harmonisation of socialconflicts as some of the ways in which government could facilitate economicgrowth. They further articulate the need for provision of certain goods andservices that would otherwise not be provided by private sector, in order toplace the economy on a predetermined growth path.In a nutshell they view that the overall role ofgovernment is to attain better distributional equity throughgreater disbursement of public and quasi- public goods.
1.2 Statement of Problem
It is noteworthy to observe that government expenditures on various sectors seem to have contributed to the economic growth at the different rate in Nigeria. Owing to the diverse feelings on the above, the argument has been inconclusive on whetheror not these critical sectors contribute significantly to the economic growth in Nigeria.Many researchers and practitioners have made several attempts to inquire whether there is any relationship between government public expenditure and economic growth in Nigeria. Over the past decades, Nigerian government public expenditure has been consistently increased through its various activities and interactions with ministries, departments and agencies, from million naira to billion naira, down to trillion naira concurrently, yet millions of Nigerians are engulfed in abject poverty and the country is ranked among the poorest in the world with more than 60 percent living below $2 (US dollars) per day according to (Abu &Abdullahi, 2010).
Sequel to this, majority of Nigerians frankly believe that government expenditure (both capital and re-current) should accelerate economic growth by providing adequate security and provision of certain public good as it is the main top government priority (Landau, 1983). In line with this, Maku (2014) also argue that these infrastructure requires large amount of spending to be able to maintain them and such facilities includes, transport, electricity, water and sanitation among others. Unfortunately, such expenditure meant to promote essential infrastructural have not played any significant impact on economic growth of Nigeria as pointed by (Adesoye et al. 2010). Recent study conducted by Okoro A.S (2013) also noted that Nigeria government public expenditure is classified into two categories; capital and recurrent expenditure. The author further stress that capital expenditure are those that involves capital projects (e.g. roads, airports, education, electricity among others); while re-current expenditure concerns with government expenses on administration.
In this study, emphasis is placed on both capital and recurrent expenditure on economic growth of Nigeria. Several studies have been identified in this area of research. For example, Ebong, Fidelis and Udeme (2013) earlier research focused on “government expenditure effect on economic growth in Nigeria (1990-2013). Although, the authors of this research have identified gap existing from previous studies. This study covers all the sectors of the Nigerian economy (both capital and re-current expenditures) and extends the study period to 2016. The above gap is bridged thus leading to study purpose or objective, which seeks to investigate effect of government expenditure on the growth of the Nigeria economy between 1990 to 2016. Therefore, the study gap that exists makes this study to be exceptionally unique as compared to previous research within this study area.
In a nutshell, the problem of study arises from the fact that Nigeria has over the years been experiencing increasing levels of public expenditure without commensurate growth and development to match such expenditures, especially under the Fourth Republic’s democratic system. The study has attempted to empirically investigate this problem in order to show if government expenditure has actually not matched the expected corresponding increase in domestic output from 1990 to 2016. The choice of the period is to reflect the impact of rising public expenditure on economic growth in Nigeria during a relatively stable democracy.
1.3 Research Questions
This research work will find answers to the following questions:
- What economic postulations can be utilised to justify the need of government intervention?
- What is the trend of federal government expenditure in Nigeria?
- What are the factors responsible for increasing public expenditure?
- What are the implications of increased government spending on the economy?
1.4 Objective of the Study
The general objective of this study is to examine the effect of increasing public expenditure on economy. However the specific objectives are as follows:
- To assess the need for government intervention in the economy.
- To examine the channels through which public expenditure is transmitted to economic growth (production, distribution, stabilization and level of employment).
- To identify factors and reasons for increasing public expenditure.
- To ascertain the impediments to economic growth via publicexpenditure failure in Nigeria.
1.5 Research Methodology
For the purpose of this study, secondary data would be employed. Secondary data are data already generated, analysed, classified and published by researchers. Research materials are intended to be sourced from the internet, Central bank of Nigeria statistical bulletin, National Bureau of Statistics annual bulletin, relevant textbooks and other unpublished research works.
The Ordinary least square method shall be used to analyse data for the study.
1.6 Research Hypothesis
According to theEnglish dictionary, research hypothesis can be defined as a tentative conjecture explaining an observation or phenomenon that can be tested by further investigation. Hypothesis is of great importance since identifying research problem is of major importance in research.
The following hypotheses would be verified in this work:
H0: Public expenditure has no significant impact on Nigeria economic growth.
H1:Public expenditure has significant impact on Nigeria economic growth.
1.7 Scope of the Study
This study aims at assessing relationship between public expenditure and economic growth. The choice is made out of my interest given the nation’s economic circumstances. The period covered is 27 period, 1990-2016. The availability of uniform data on relevant variables also informed my choice.
1.8 Significance of Study
It is not an overstatement to state that the desire to achieve rapid economic growth by most countries of the world is incontestable. The main thrust of this research work is to make findings about possible ways of reducing the federal government expenditure to the barest minimum subject to achieving economic growth.
This research work will help policy makers to design appropriate expenditure pattern necessary for sustainable economic growth in Nigeria. It would also make government see their expenditure responsibility more important than before so as to control and regulate economic activities and bring economy to a state of stabilisation through their spending activities.
Finally, the study will add to existing knowledge of public expenditure literature. The findings of this work will also be a handy material for researchers in similar field.
1.9 Plan of the Study
The following chapters in this study will explain the research process in better details. The structure of this study starts with chapter one focusing on the background of study, statement of problem, research questions, objectives of study, research methodology, research hypothesis, scope of the study, significance of study, plan of the study and definition of terms.
Chapter two is about the literature. This chapter captures the relevant research that have been carried out by others researchers. This chapter will also discuss and explain in depth about the literatures relevant to the area of public expenditure and economic growth.
Chapter three focuses on model and methodology. This chapter will discuss the method that will be used in this research. It included the research design, research method, data analysis and others.
Chapter four conducts the empirical tests of a time series regression analysis from year 1990 to 2016 and describes the outcome of the regression analysis. The results of the research will then be analyzed to answer the relevant research question.
Chapter five, the last chapter focuses on a discussion of the empirical results and discusses conclusions and recommendations based on the study. This part will provide a summary of the findings, a discussion of the implications of the study and recommendation.
1.10 Definition of Terms
- Government: The body with the power to make and/or enforce laws to control a country, land area, people or organisation.
- Public sector: This is the part of the economy whose activities are under the control and supervision of the government.
- Fiscal policy: It is the manipulation of government expenditure and taxes with a view to influence macro-economic variable such as GDP, price level employment, etc. towards a desired direction.
- Public or social goods: They are goods solely provided and supplied by government to the society as a whole with the benefit accruing collectively to society.
- Externalities: These are activities which require government intervention to guarantee optimal output but do not require direct government provision.
- Warrants: They are documents issued by the Minister of Finance to the Controller and Accountant-General to authorise the Controller for the release of moneys to spending organisations for such expenditures. Warrant can be in the form of either recurrent or capital expenditure warrants.
- Recurrent expenditures: They are expenditures that are incurred by government departments in the day to day operations and services of the departments.
- Capital expenditure: These are the expenditures that are made to acquire physical and permanent assets, either in form of equipment, vehicles and buildings.
- Economic growth: This is the sustained increase in the country’s per capita income accompanied by expansion in its labour force, consumption, capital and volume of trade.
Keywords: THE EFFECT OF PUBLIC EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA
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