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THE IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1  Background of the study

Following the suggestion of John Marynard Keynes, Government have been playing serious role for most economics of the world, government usually inter-vanes in most economy to achieve macro-economic goals, price stability, creation of employment achieve industrialization and maintain a reasonable level of economic growth. The government of Nigeria is not left out in this quest. The relationship between government expenditure and economic growth has continued to generate series of debate among scholars, government performs two (2) functions, one protection (i.e. security) and provisions of certain public goods by Abdullah HA, 2000 and AL- You sift Y, 2000). Protection function consists of the creation of rule of law and enforcement of property rights.

This helps to minimize risk of criminality, protection of life and property, and the nation from external oppression. Under the provision of public goods are defense, roads, education health and power, etc. some scholars argue that increase in government expenditure on socio- economic and physical infrastructures encourage economic growth for example. Government expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communication power, etc. reduces production costs, and increase private sector investment and profitability of firms, thus festering economic growth. Supporting this view, scholars such as (AL-Yousif Y, 2000 ) (Abdullah HA 2000) (ranjan KD 2000) concluded that expansion of government expenditure contributes positively to economic growth.

However, some scholars did not support the claim that increasing government expenditure promotes economic growth, instead they assert that higher government expenditure may slowdown overall performance of the economy. For instance, in an attempt to finance rising expenditure government may increase faxes and / or borrow to solve the situation. Higher income tax discourages individual from working for long hours or even searching for jobs. This in turn reduces income and Applegate demand. In the same vein, higher profit tax tends to increase production costs and reduces investment as well as profitability of firms. Moreover, if government increase borrowing (especially from banks) in order to finance its expenditure, it will complete (romds- out) away the private sector thus reducing private investment, furthermore, in a bid to score cheap popularity as they continue to remain in power, politician and government officials sometimes increase expenditure and investment in unproductive projects and in goods that the private sector can produce more efficiently. Thus, government activity can sometime produces misallocation of resources and impedes the growth of national output. In fact, studies by (Laudew D, 1986 Barro R, 1991, and foster S, Henrekson M 2001) suggest that large government expenditure has negative impact on economic growth.

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 goods like roads, communication, power, and education health. Besides, there is increasing need to provide both internal and external security for the people and the nation. Available statistics 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 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.

Government capital expenditure rose from N5, 004.60 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. (Central bank of Nigeria statistical bulletin, 2008) unfortunately, rising government expenditure has not translated to meaningful growth and development as Nigeria ranks among the poorest countries in the world. In addition, many Nigeria have continued to wallow in object poverty, while more than 50 percent live on less than US$ 2 per day. Couple with this is dilapidated infrastructure (especially roads and power supply) that has led to the collapse of meaning industries, including high level of unemployment. Moreover macroeconomic indicator like balance of payments, import obligation, inflation rate, exchange rate and national saving reveal that Nigeria has not fared well in the last couple of years (central bank of Nigeria statistical bulletin 2008). Given the issues raised above, this research work tries to assess the impact of government expenditure on economic growth in Nigeria.

1.2   Statement of the Problem

As stated earlier, the intent of government for the economy is generally positive, hence government expenditure is targeted towards achieving this goals. Over the years in Nigeria, the federal government have been spending on the economy as we see increase on receipts from production and sales of crude oil, and the increased demand for public goods, like roads communication power, education, health etc but in most cases the intent of these spending are not realized due to some reasons like, corruption, misplacement of priority low level of implementation and policy dis-continuity, it is also been argued in some quarter that government expenditure, possess danger to the Nigeria economy instead of improving it. The high level of corruption is posited to be the cause of this, thus this work therefore tries to answer the following questions.

1.   What are the intent of government expenditure in Nigeria?

2.   Do government expenditure have impact on economic growth in Nigeria?

3.   Are there possible recommendations that will help improve the situation?

1.3     Objectives of the Study

In the course of this research the following objectives will be meet.

1.   The intent of recent government expenditure in Nigeria will be examined (explore)

2.   To assess the impact of government expenditure in Nigeria

3.   Policy recommendation based on the findings of the research will be made.

1.4     Hypothesis of the study

The following hypothesis will guard this research

Ho:  Government expenditure has no significant impact on economic growth in Nigeria.

H1:  Government expenditure has significant impact on economic growth in Nigeria.

1.5     Significance of the study

The important of assessing the impact of government expenditure are quite numerous. This study is therefore important to the following groups, Firstly, the federal government, state government etc in Nigeria will find this work important because it will guard their future spending. Secondly, the ministry of finance (ministry that controls and administer government spending) other ministry, departments and agencies (MDAS) and other government parastatals will find this work relevant as it helps to educate and guide them in making recommendation to the government on where and what  to spend on. Thirdly, the private sector and the general public will find this work important as they will learn through this work on how to pre-empt. Finally, this work serve as a point reference to subsequence researchers just as it add to existing literatures.

1.6     Organization of the study

The study is structured and presented in five chapters. Chapter one introduces the study, it gives the background of the study, shows the statement of the problems and also reveals the objectives, significance, scope and limitation of the study. More importantly, the hypothesis is also presented in chapter one. Chapter two features the review of existing literatures on the research topic. It also analyses the various theoretical approaches to the study. Chapter three deals mainly with methodology of the study. It focuses on data collection, research designs, and instruments of measurement and model specifications. Data presentation and analysis of findings are the hall mark of chapter four. Also hypothesis testing are also carried out in same chapters followed by result interpretation chapter five discuss summary of the findings, offer conclusions and useful recommendations.

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