GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1981 TO 2013)
CHAPTER ONE
INTRODUCTION
1.1     BACKGROUND OF THE STUDY
    Many developing countries are currently undergoing substantial macroeconomic adjustments. It is not clear how such programs are affecting government expenditure and hence long-term economic growth and development (Fan and Rao, 2003). Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future.
    The increasing nature of public expenditure in Nigeria has been a major source of concern to an average Nigerian citizen today. This become worrisome in view of the fact while government expenditures on yearly basis are escalating, the standard of living of the people is falling astronomically, insecurity and insurgency heightened (Boko Haran, kidnappings, hired assassins). Many Nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than US$2 per day. Couple with this, are dilapidated infrastructure (especially roads and power supply) that has led to the collapse of many industries, including high level of unemployment and abandoned elephant projects. Moreover, macroeconomic indicators like balance of payments, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of years (Sevitenyi, 2012).
    The effects of fiscal policy on economic growth have been extensively tested within endogenous growth theory. Among the different components of fiscal policy, the impact of government expenditure on growth and welfare has been investigated in several studies Barro (1990). Some of the empirical studies in this area have been on a cross-country nature (Easterly and Rebelo, 1993). For instance, Islam (1995) using panel data regression analysis submitted that the level effects for individual countries can be captured through heterogeneous intercepts (the fixed effects). Devarajan et al., 1996). Gupta et al. (2005) on the composition of government expenditure and growth for a sample of developing countries found a negative significant relationship between the capital (current) component of public expenditure and per capita real GDP growth for 43 countries for a period of 21 years (1970 to1990), while Gupta et al. (2005) found quite the reverse for 39 countries between 1990 to 2000. Lee et al. (1998) citing Islam (1995), find that slope heterogeneity, even  when random, causes major difficulties for estimation in dynamic panels. They contend that potential heterogeneity in growth rates of different countries renders the standard fixed effects panel estimator to be biased (Gregoriou and Ghosh, 2009).
    The knowledge on the dynamic relationship between government expenditure and economic growth according to Arpaia and Turrini (2008) is relevant for policy making in two major respects in Nigeria and across the globe. First, it improves the understanding of long-term, structural public finance issues. For instance, is the size of government shrinking or expanding in Nigeria? Are long-term trends in the size of government in Nigeria similar across countries or there are relevant differences? Answering these questions is relevant for the debate on the sustainability of public finances in Nigeria. Second, a better understanding of the dynamic relationship between government expenditure and economic growth helps the comprehension of policy-relevant issues over a short-to medium term horizon (Arpaia and Turrini, 2008). Disposing of a reliable measure of the structural relation between the non-cyclical component of government expenditure and potential output is key to obtain a benchmark against which to evaluate the stance of expenditure policy and then of overall fiscal policy. Judging whether expenditure policy is expansionary or contractionary requires some idea about how a neutral expenditure policy would look like. However, while there is broad consensus that a neutral revenues policy is such that government revenues move together with output in a proportion depending on structural factors such as the degree of progression of the tax system and the responsiveness of the various tax bases with respect to output (the output elasticity of revenues), no clear a-priori exists for what concerns expenditure policy (Arpaia and Turrini, 2008). Thus estimating the relationship between government expenditure and economic growth will help to formulate a benchmark for neutral expenditure policy grounded on empirical evidence.
1.2     STATEMENT OF THE RESEARCH PROBLEM
    Government in developing countries spend an average of 26% of their GDP on goods and services, a figure which has risen by 8% points over the last fifteen years (World Bank, 1992). The magnitude and growth of this figure has prompted a lot of studies on the relationship between government size and economic growth (Lindauer and Velenchik, 1992). Fewer studies have been conducted about how the compositions of government expenditures affect a country growth rate. This of course remains a central question to be answered. Firstly, while the size of government is a public choice issue, its composition is open to policy debate. Several studies have distinguished between productive and unproductive public expenditure and show how a country can improve its economic performance by changing the mix between productive and unproductive public expenditure. Two, after a decade of fiscal adjustment, during which many of the white elephants in government budgets were weeded out, some developing countries are faced with hard choices when undertaking further fiscal restraints. Which components of government expenditure should be cut, health, education, infrastructure and defence? The answer to this question will however depends on the contributions of these individual components to economic growth.
    There have been numerous studies on the impact of government spending on the growth of national economies (Aschauer 1989; Barro 1990; Tazi and Zee 1997). These studies found conflicting results about the effects of government spending on economic growth. For instance, the study of Barro (1990) endogenized government spending in a growth model by analyzing the relationship between size of government and rates of growth and saving. He concluded that an increase in resources devoted to non-productive (but possibly utility enhancing) government services is associated with lower per capita growth. Tazi and Zee (1997) also found no relationship between government size and economic growth. On the other hand, Aschauer (1989) empirical results indicate that non-military public capital stock is substantially more important in determining productivity than is the flow of military spending, that military capital bears little relation to productivity, and that the basic stock of infrastructure of streets, highways, airports, mass transit, sewers, and water systems has most explanatory power for productivity (Fan and Rao, 2003).
    It should be recalled that one of the major objectives of government in undertaking public expenditures is to increase per capita income of its citizenry. Per capita income on the other hand is usually used as a proxy for economic growth and development of a country because it is easier to measure than all other goals of government. Thus, this study is an attempt to empirically re-examine the impact of some of the components of government expenditures on economic growth in Nigeria.
1.3    RESEARCH QUESTIONS
i)    What is the relationship between government recurrent expenditure and economic growth in Nigeria?
ii)    What is the relationship between government capital expenditure and economic growth in Nigeria?
1.4    OBJECTIVE OF THE STUDY
    The study seeks to achieve the followings objectives:
i)    To determine the relationship between government recurrent expenditure and economic growth in Nigeria.
ii)    To examine the relationship between government capital expenditure and economic growth in Nigeria.
1.5    HYPOTHESES OF THE STUDY
    The following are the hypotheses of the study stated in their null form:
i)    There is no significant relationship between government recurrent expenditure and economic growth in Nigeria.
ii)    There is no significant relationship between government capital expenditures and economic growth in Nigeria.
1.6    SIGNIFICANCE OF THE STUDY
    The relevancy of this study on the impact of government expenditure on economic growth cannot be underestimated. 
    First, it will help to improve the understanding of long-term, structural public finance issues as to whether the size of government is shrinking or expanding in Nigeria? Or are long-term trends in the size of government in Nigeria similar across countries or there are relevant differences? Answering these questions is therefore very relevant for the debate on the sustainability of public finances in Nigeria.
    Secondly, a better understanding of the dynamic relationship between government expenditure and economic growth helps the comprehension of policy-relevant issues over a short-to medium term horizon
    It will also be relevant to the researchers and academia by providing them relevant data to carry out further studies in the same area or similar areas of interest to them.
    Policy makers and all relevant regulatory bodies in country will also find the study very useful as it will give them the true picture of the impact of government expenditure in Nigeria so as to provide necessary adjusted for better improvement where necessary.
    Finally, the study will be very relevant to students of finance and allied disciplines as it will be a viable data base for them to carry out further investigation either in the same area or similar areas.
1.7    SCOPE OF THE STUDY
    This study on government expenditure on economic growth in Nigeria will cover a period of 33years (1981 to 2013). It involves the use of secondary source of data, and which shall be sourced from the Central Bank of Nigeria statistical bulletin (2013).
1.8    LIMITATION OF THE STUDY
    The three limitations envisage in this study has to do with the accuracy of the data used, the sources of data and the methodological weaknesses with respect to the use of the ordinary least squared (OLS). However, effort will be made to minimize errors and thus assure the reliability of results so obtained.