Impact of government expenditure on Nigeria economic growth 1981-2016. Download the full project material with reference. Government expenditure is a fiscal policy stabilization measure to control the economic activities. Thus research on the impact of government expenditure on Nigeria economic growth is justified.
1.1 Background to the Study
The most critical function of government expenditure is to maintain reasonable degree of price level stability and an appropriate rate of economic growth that will enhance the economy to achieve full development potential and stabilization (Musgrave, 1989 in Noko, 2013). Economic stabilization is achieved when government spending, through its fiscal role succeeds in maintaining high employment, reasonable degree of price level stability and appropriate rate of economic growth, with allowances for positive effects on trade, balance of payment, savings, investment and productivity (Noko, 2013). As long as the markets are imperfect, macroeconomic financial variables changes necessitate movement in government fiscal operations as well as fluctuation in price level and growth rate.
It is obviously presumed that Government performs two basic functions- protection (and security) and provisions of certain public goods. The Protective function entails creation of rule of law and enforcement of property rights which helps to minimize risks of criminality, protect life and property, and the nation from external attacks; while defense, roads, education, health, and power, etc are goods provided by government (Abu and Abullahi 2010). It is the role of government expenditure (spending) to continue to restore price stability and growth rate fluctuation through the budgetary mechanism. The economy will feel the effect of the government spending more positively when the economic growth rate is on the increase and the price level is relatively stable (Noko, 2013).
Thus, government spending is an aspect of public finance that deals with how government spends the money generated in meeting the needs of the public at large (Noko, 2013). It has been the desire of nations from all over the world to improve the welfare of their people and give them the power not only to afford the basic necessities of life, but also to empower them to be economically useful to their nations. It is the quest to achieve these that nations are stimulated to increase their Gross Domestic Products (GDP), achieve balance of payment equilibrium, achieve price stability, and increase business activities. Thus, economies are working towards achieving economic growth. Beyond this, they are working towards achieving economic development which does not only involve economic growth, but also transformational changes that accelerate the pace of growth (Ogundipe and Oluwatobi, 2014). 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 (Abdullahi, 2010).
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For instance, Lipsey and Crystal (2007), advocate that government spending through its fiscal operations has important effects on the level of Gross Domestic Product in both the short run and long run. It has also been hypothesized that when government spends too much or very little money relative to the availability of goods and services in the economy, there would be corresponding pressures (increase or decrease) on prices, which may give rise to inflation, deflation or stagnation
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. The conceptual framework of this study is built on the Wagner’s law of increasing state activities on the causal relationship between federal government spending recurrent and capital on one hand and Gross Domestic Product on the other. Government spending for the purpose of this paper refers to the total in cash or ‘cheque’ terms of the federal, state and local government spending plus financial transfers to the ‘parastatals’ at the three levels of government. It is the spending on the performance of government operations within a period of time. It includes recurrent expenditure and capital expenditure.
1.2 Statement of the Problem
The underdevelopment of the Nigeria’s economy is a reflection of irregularity of government spending, inappropriate channelling of government funds to development projects, which has made Nigeria’s government to rely on oil for over 80% of her revenue. Nigeria government spending over the years have sky-rocketed but the problem here is inefficient channelling of the fund to key priority areas of the economy, or the case of embezzlement. Available CBN statistical data show that total government expenditure (capital and recurrent) continued to rise over the years. For instance, while government total capital expenditure on economic services, social, community services, transfers, among others increased from N110,163.10 million, N15,034 million and N28340 million respectively in 1980, 1989 and 1991 respectively, it further increased to N883874.5 million and N918548.9 million respectively in 2010 and 2011.Recurrent expenditure on same hand increased from N4805 million, N25994 million and N38243 million respectively in same period down to N3310343.38 million and N3054333 million respectively in 20010 and 2011 (see CBN Statistical Bulletin, 2011). A view of the growth pattern of the government spending shows that government spending has risen more proportionately than the crowding effect of growth in the economy. Government expenditures on these and other services or sectors would be expected to generate a corresponding growth trend in the economy. This necessitates the research interest for empirical quantitative measure of the effect of government spending on the growth of the economy.
In addition, many Nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than US$2 per day. Coupled with these, is the 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, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the couple of years. Therefore, the purpose of this paper is to investigate the relationship between government expenditure and economic growth in Nigeria, using a disaggregated approach.
1.3 Research Questions
The following research questions shall help in actualizing the aims of this research work;
- To what extent has government expenditure impacted on economic growth in Nigeria?
- Is there any observed long run relationship between government expenditure and economic growth in Nigeria?
1.4 Objectives of the Study
The general objective of this study is to examine the relationship between government expenditure and Nigeria economic growth. The specific objectives include to:
- examine the extent to which government expenditure impact on economic growth in Nigeria.
- determine the long run relationship between government expenditure and economic growth in Nigeria.
1.5 Statement of Hypotheses
The following null hypothesis will be tested at 5 percent level of significance:
H0: Government expenditure does not have significant impact on economic growth in Nigeria.
H0: There is no significant long run relationship between government expenditure and economic growth of Nigeria.
1.6 Significance of the Study
As the federal government of Nigeria is undertaking policies that will promote the economic growth of Nigeria, this study would act as a source of information on various ways the government can expend her income to improve the living standard of the masses and its instruments for stabilizing the economy. It would serve as guide to the policy makers towards policy initiation, and policy implementation that will reduce the poverty level in the country and accelerate growth in the economy.
It would help students have indept knowledge of the role of government expenditure in the economic growth of Nigeria, and finally, it will be a huge source of information for other researcher’s in the subject area.
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1.7 Scope and Limitations of the Study
The study center’s on the relationship between government spending and economic growth in Nigeria from 1981-2015. The study covers the period of 32 years. This period is believed to be enough to capture the impact as well as the long-run relationship between government expenditure and economic growth in Nigeria.
The researcher encountered a number of constraints in the course of this work to include: data sourcing or data inconsistency due to poor nature of information management in Nigeria. Other constraints are: time factor, financial constraints and host of other constraints.
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