THE IMPACT OF GOVERNMENT CAPITAL EXPENDITURE PATTERN ON ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
Economic growth refers to increase in a country’s Gross Domestic Product, although this differs depending on how national product has been measured. Economic growth must be sustained for a developing economy to break the circle of poverty. Countries usually pursue fiscal policy to achieve accelerated economic growth. Tanzi (1994) observes that fiscal policy applies to the use of fiscal instruments (taxation and spending) to influence the working of the economic system in order to maximize economic welfare with the overriding objective of promoting long-term growth of the economy Perhaps, the aspect of public finance that has received much attention in the literature, debate and empirical analysis is the economic effects of public expenditures. Many support a large public expenditure on the ground that it puts money into circulation, increased investment and employment and reduces tax adverseness.
However, public expenditure has some obvious economic consequences. For instance, when the state enters the market for factor inputs or labour, it stimulates unhealthy competition with the private sector firms for these same materials or labour services. As such, the government becomes the largest purchaser of goods and services because of its widespread activities, as hitherto evidenced in Nigeria.
To this extent, Suleiman (2009) observes that the size of Government and its impact on economic growth has emerged as a major fiscal management issue facing economies in transition. He notes that previous research focused predominantly on size of Government in industrialized countries, but given the openness of most Developing Countries (DCs), trade dependency, the vulnerability to external shocks, and volatility of finances, the role and size of Government become germane to adjustment and stabilization programmes. Mitchell (2005) has argued that a large and growing government is not conducive to better economic performance. For decades, public expenditures have been expanding in Nigeria, as in any other country of the world. Akpan (2005) opines that the observed growth in public spending appears to apply to most countries regardless of their level of economic development. This necessitates the need to determine whether the behaviour of Nigerian public expenditure and the economy can be hinged on the Wagner’s (1883) Law of Ever-increasing State Activity, or the Keynesian (1936) theory and Friedman (1978) or Peacock and Wiseman’s (1979) hypotheses.
Over the years, increases in the finances of the Federal Government have led to a number of theoretical and empirical investigations of the sources of such increases. Researchers have particularly questioned whether increases in the size of the federal budget tend to be initiated by changes in expenditures followed by revenue adjustments or by the reverse sequence, or both (Baghestani and McNown, 1994; Akpan, 2005). Friedman (1978), for example, argues that governments adjust expenditures to the level of revenues, so that control of taxation is essential to limit growth in government. Alternatively, the spend-and-tax model posits that revenues will be adjusted to finance any politically chosen level of expenditures. A third perspective, reflecting the institutional separation of allocation and taxation functions of the federal government, hypothesizes the independent determination of revenues and expenditures.
However, Suleiman (2009) observes that the fiscal volatility of the post-1979 period indicates a continued absence of coordination between expenditure and revenue decisions. He also opines that examining the empirical relationship between government revenues and expenditures is a crucial step in understanding the future path of the budget deficit.
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.
Despite the rise in government expenditure in Nigeria over these years, there are still public outcries over decaying infrastructural facilities. Also, merely few empirical studies have taken holistic examination of the effect of government expenditure on economic growth regardless of its importance for policy decisions. More so, for Nigeria to be ready in its quest to become one of the largest economies in the world by the year 2020, determining the effect of public expenditure on economic growth is a strategy to fast-track growth in the nation’s economy.
1.1 STATEMENT OF THE RESEARCH PROBLEM
The relationship between government expenditure and economic growth has continued to generate series of controversies among scholars in economic literature. The nature of the impact is inclusive. Some authors believe that the impact of government expenditure on economic growth is negative or insignificant (Akpan 2005, Folster and Henrekson 1999, Laudau 1993), others believed that the impact is positive and significant (Korman and Brahmasrene, 2007, Donald and Shuaglin 1993). On the other hand some others believe that government expenditures does not exert any impact on economic growth (Gupta; 2002). Economic growth is an essential ingredient for sustainable development. Economic growth brings about a better standard of living of the people and this most a time is brought about by improvement in availability of infrastructures, access to food, health, housing, education. These sectors are very important in stimulating the economic activities as well as addressing the nation’s human developmental and thereby bring about sustainable development
Expenditure on infrastructure such as transportation and communication brings about reduction in production costs, which surely increase private sectors investment and profitability of firms and thereby fostering economic growth. Good health promotes productivity.
Expenditure on defense is a necessity for safe guarding and protecting the nation from outside and internal aggressions, while agriculture expenditure promotes food production, a basic necessity for human existence. This paper investigates the long run effect of government expenditure on some key sectors on the economic growth of Nigeria. The objective being to see the extent to which the opinion that government expenditure does not lead to significant growth in the economy can be validated using Nigerian data
Various empirical studies on the relationship between government expenditure and economic growth also arrived at different and even conflicting results. Some studies suggest that increase in government expenditure on socio-economic and physical infrastructures impact on long run growth rate. For instance, government expenditure on health and education raises that productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as road, power etc. reduces production costs, increase private sector investment and profitability of firms, thus ensuring economic growth (Barro, 1990; Barro and Sali-i-Martin, 1992; Roux, 1994; Okojie, 1995; Morrison and Schwartz, 1996). On the other hand, observations that growth in government spending, mainly based on non-productive spending is accompanied by a reduction in income growth has given rise to the hypothesis that the greater the size of government intervention the more negative is its impact on (Glomm and Ravikumar, 1997; Abu and Abdullah, 2010).
A crucial question that requires an urgent answer is whether the government aggregated, disaggregated and sectoral expenditures impact positively on economic growth in Nigeria. This study attempts to provide an answer to this question by empirically estimating the effects of government capital expenditure on economic growth in Nigeria.
1.2 OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the impact of government capital expenditure pattern on economic growth in Nigeria. However, to achieving this, the study will have the following specific objectives;
1. To analyze the trend in government’s capital and recurrent expenditure and economic growth in Nigeria.
2. To evaluate the effect of capital expenditure on economic growth in Nigeria
3. To determine the relationship between government’s recurrent expenditure on economic growth in Nigeria.
1.3 RESEARCH QUESTION AND HYPOTHESES
The study intends to proffer answers to the following questions
1. What is the trend in government’s capital and recurrent expenditure and economic growth in Nigeria?
2. What is the effect of capital expenditure on economic growth in Nigeria?
3. What is the relationship between recurrent expenditure and economic growth?
1.3.1 RESEARCH HYPOTHESES
H01: pattern of capital expenditure has no significant effect on economic growth
H02: recurrent expenditure has no significant relationship with economic growth
1.4 SIGNIFICANCE OF STUDY
This research study intends to contribute to the existing literature on public expenditure and economic growth. From a practical perspective, the findings of this study will be useful to monetary authorities, policy makers and investors both domestically and internationally within a strategic condition at the micro or macroeconomic level.
Over the years, the size, structure and growth of government expenditure have increased tremendously and become increasingly complex. Not only has recent political developments engendered expenditure growth, the challenge of raising additional and identifying alternative sources of revenue to meet the ever increasing needs of governance have made it more imperative to take a more focused look at government activities, especially its expenditures. In less developed countries like Nigeria, less attention had been given to examining the productiveness of the various components of public spending. This was borne out of the observation that the primary objective of fiscal policy was aggregate demand management (Diamond 1990). By and large, this view placed prominence on aggregate government expenditure and appeared unenthusiastic to differentiate between or among the various components of public expenditures.
Consequently, this study dwells primarily on the expenditure side of public finance, and seeks to examine the relationship between government expenditure and economic growth in Nigeria. Although, this is in line with previous empirical studies considered for the Nigerian situation, it is a departure from Suleiman (2009) whose study considered both revenue and expenditure aggregation.
However, from the foregoing, this study aims at investigating the impact of public expenditure on economic growth in Nigeria and to ascertain whether there is a relationship between gross domestic product (GDP) and government expenditure in Nigeria.
1.6 RESEARCH METHODOLOGY
For the purpose of this research study, secondary data shall be used. Secondary data is sourced through journals, articles and textbook. Frequency tables will be used in the data analysis while the hypothesis will be tested using ordinary least square OLS method of regression. Analysis of obtained data is done through e-views 7.0.
1.7 SCOPE AND PLAN OF THE STUDY
This study seeks to evaluate the impact of government capital expenditure pattern on economic growth in Nigeria. Covering a 15 year period from (2001-2015). The data to be subjected to analysis are limited to CBN statistical bulletins which might be slightly inaccurate.
The study is sectioned into five chapters. With the first chapter focusing on the introductory aspect of the study, Chapter 2 reviews all relevant literatures, Chapter 3 will focus on the methodology to be adopted in the study, Chapter 4 analyzes the data gathered and interpret while Chapter 5 conclusively summarize the whole study hence providing due recommendations.
