THE IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH

Introduction

1.1 Background To The Study

The relationship between government expenditure and economic growth has continued series of debate among scholars. Keynes (1936) posit that the solution to economic depression is to induce the firms to invest through some combination of reduction in interest rates and government capital investment including infrastructure.

This claim that an increase in government expenditure promotes economic development is not supported by all scholars. A good number of prominent authors especially of the neoclassical school argue that increased government expenditure may slow down the aggregate performance of the economy because in an attempt to finance raising expenditure, government may have to increase taxes and or borrowing. The higher income tax may discourage or may be a disincentive to additional work which in turn may reduce income and aggregate demand. In the same vein, high corporate tax leads to increase in production costs and reduce profitability of firms and their capital to incur investment expenditure. On the other hand, increased government borrowing (from the banks) required to finance its expenditure may compete and crowds-out private sector and this reduce private investment in the economy. Sachs (2006) posited that among the developed countries, those with high rates of taxation and high social welfare spending perform better on most measures of economic performance compared with countries with low tax low rates of taxation and low social services spending. Hayek (1989) however countered this argument saying that high levels of government spending in addition to harming, does not, through social welfare engendered fairness, economic equality and international competitiveness. This argument is closely related to Sudha (2007) who points out that countries with large public sectors have grown slowly. Thus, there is no general consensus among scholar on the impact of increasing government expenditure on economic development.

According to the Revenue Mobilization Allocation and Fiscal Commission − RMFC (2011) the federal government of Nigeria spends 52.2% of total government revenues. The remaining revenues are shared among the Federating States and Local Government Areas (LGAs) on the basis of detailed sharing formula.

The level of increase of government revenue from oil revenue and non-oil revenues including borrowing from internal and external sources has significantly impacted the level of government expenditure in Nigeria over the years under review.

The level of increase in external loans further accelerated the debt over-hand situation and other problems. The problems were so severe that restructuring of the economy was inevitable. As a result, a comprehensive economic reform programme was introduced in 1986. In the period between 1988 and 1997 − a period of structural adjustment and economic liberalization, the GDP responded to economic adjustment policies and grew at a positive rate of 4% (Onakoya et al, 2013). The real GDP development shows that on aggregate basis, when measured by the Real Gross Domestic Product (RGDP) grew by 7.8% in 2010 (NBS, 2010; CBN, 2010, 2012).

The mismatch between the performance of the Nigerian economy and massive increase in government total expenditure over the years raises a critical question on its role in promoting economic growth and development. Some authors contend that the link between public expenditure and economic development is weak while others report varying degree of causality relationship in Nigeria (Onakoya et al, 2012).

1.2 Statement Of The Problem

The relationship between government expenditure and economic growth has continued to generate series of debate among scholars. Government performs two functions − protection (and security) and provision of certain public goods (Yousif, 2000; Nurudeen and Usman, 2008). Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks to criminality, protect life and property and the nation from external aggression, defense, roads, education, health, power and communication to mention but a few.

Some scholars argue that increase in government expenditure on socio-economic and physical structures encourages economic development. For example, government expenditure on health and education raises the productivity of labour and increase the development of national output. Similarly, expenditure on infrastructure such as roads, communications, power etc reduces production costs, increases private sector investment and profitability of firms, thus fostering economic development. Supporting this view, scholars such as Keynes (1936), Sachs (2006), Cooray (2009) conclude that expansion of government expenditure contributes positively to economic development.

Nonetheless, some scholars did not support the claim that increasing government expenditure promotes economic development, instead they assert that high government expenditure may slow down overall aggregate performance of the economy in that in the bid to finance rising expenditure, government may have to increase taxes and/or borrowing. The higher income tax may discourage or be a disincentive to individual working for long hours or searching for additional work which in turn may reduce income and aggregate demand. In the same way, higher corporate tax (profit tax) tends to increase production costs and reduces the profitability of firms and their capacity to incur investment expenditure.

Moreover, if government increases borrowing (especially from the banks) in order to finance its expenditure, it will compete (crowds-out) away the private sector, thus reducing private investment. It was further argued that in a bid to score cheap popularity and ensure that they continue to remain in power, politicians and government officials sometimes increase expenditure and investment in unproductive projects or in goods that the private sector can produce more efficiently. Thus, government activity sometimes produces misallocation of resources and impedes the development of national output. In fact, the studies by Mitchell (2005) and Sudha (2007) shows that large government expenditure has negative impact on economic development.

In Nigeria, the government expenditure has continued to rise due to receipts from oil revenue (Petroleum profit tax and royalties) and non oil revenue (company income tax, custom and excise duties, value added tax [VAT] and others) (CBN 2012). And 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 show that total government expenditure (capital and recurrent) and its components have continued to rise in the last few decades under review. In the same manner, the composition of government recurrent expenditure shows that expenditure on general administration, defense, National Assembly, internal security, agriculture, construction, transportation and communication, education and health increased during the period under review. Unfortunately, rising government expenditure has not translated to meaningful development and development, as Nigeria ranks among the poorest countries of the world. In addition, many Nigerians have continued to live in abject poverty, while more than 60.9% of over 180 million population are poor.

Although the Nigerian economy is projected to be growing, poverty is likely to get worse as the gap between the rich and the poor continues to widen. Couple with this, is dilapidated infrastructure (especially roads and power supply) that has led to the collapse of many industries, including high level of unemployment. Moreover, macroeconomic indicators like balance of payments, imports obligations, inflation rates, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of decades under review.

1.3 Objectives Of The Study

The main objective of this study is to empirically examine the impact of government expenditure on economic growth in Nigeria.

The specific objectives of the study are as follows:

1. To evaluate the contribution of government expenditure on economic growth in Nigeria.
2. To examine factors that as hinder adequate government expenditure in Nigeria.
3. To make policy conclusions and recommendations based on the results of the study.

1.4 Research Question

The research questions, which would guide this study, are as follows:

1. Is there any significant relationship between government expenditure and economic growth?
2. Has government expenditure brought about economic development over time?
3. What are the factors that hinders government expenditure appropriation?

1.5 Research Hypothesis

The hypothesis that will guide through this research is:

• H0: Government expenditure has no significant relationship with economic growth in Nigeria.
• H1: Government expenditure has significant relationship with economic growth in Nigeria.

1.6 Significance Of The Study

The quality of research work lies on the relevance to the society being studied. The significance is the ability to draw a relationship between government expenditure and economic growth in Nigeria, whether government expenditure has significant impact on Nigeria economic growth.

Again, this research will be of immense value to the different sectors of the economy (both public and private) most especially the government.

In conclusion, the study would be of immense help to the government, monetary authority, individuals, economists, students, planners, financial analysts, stock brokers and others who might be interested in researching into the field in the future, by shedding more light into the widely held view about the relationship between government expenditure and economic growth.

1.7 Research Methodology

The analysis that will be made in this study shall be based on macroeconomic data in Nigeria economy. Due to the linearity nature of the model formulation, Ordinary Least Square (OLS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the model using Eviews.

Multiple regression model shall be used in the estimation. The model shall seek to investigate the effect of government expenditure on economic growth in Nigeria economy. This is a follow up on the objectives of study stated earlier.

1.8 Scope Of The Study

The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the fiscal sector). This work cannot cover all the facets that make up the fiscal sector, but will look at government expenditure as being used by the government for the stabilization and attaining economic development.

The empirical analysis and estimation covers the period between 1981 and 2016. This restriction is unavoidable because of the non-availability of some data.

The data for this study would be obtained mainly from secondary sources; particularly from Central Bank of Nigeria (CBN) publications such as the CBN Statistical Bulletin, CBN Annual Reports and Statements of Accounts, and National Bureau of Statistics publications.

1.9 Limitations Of The Study

Finance is one of the factor that assist a good research. Financial constraint created difficulties in the course of this research work, however, it did not hinder the research. The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happenings with respect to the impact of government expenditure on economic growth in Nigerian economy.

1.10 Organisation Of The Study

This study shall be divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two presents related literature on government expenditure and economic growth. The research methodology, which includes theoretical framework, sources of data, model formulation, estimation techniques etc, are stated in chapter three while data presentation, analysis and interpretation of regression result were made in chapter four. Concluding comments in chapter five reflects on the summary, conclusion, recommendations and suggestion for further studies based on the findings of the study.

1.11 Definition Of Terms

Capital Government Expenditure:

Can be described as 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.

Capital Stock:

Means the total value of the fiscal capital of an economy; including inventories as well as equipments and plants.

Recurrent Government Expenditure:

Refers to the expenses that government incurs for its maintenance, for the society and the economy in entirety.

Gross Domestic Product (GDP):

Refers to the money value of goods and services produced in an economy during a period of time irrespective of the people.

Economic Growth:

This refers to the increased over time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizens in increasing number and diversity. It is the study of the process by which productive capacity of the economy is increased over time to bring about rising level in national income.

Economic Development:

This is a multi dimensional process involving the provision of basic needs, acceleration of economic development, reduction of inequality and unemployment, eradication of poverty as well as changes in attitude, constitution and structure in the economy.