IMPACT OF GOVERNMENT EXPENDITURE ON NIGERIA’S ECONOMIC GROWTH (1981-2013)

 

ABSTRACT

This study empirically examined the impact of Government expenditure on Nigeria’s economic growth between the period 1981-2013. The data for this research work was obtained from the CBN Statistical Bulletin for the relevant period under study and analysed using ordinary least square (OLS) regression technique. The empirical results were on Augmented Dickey Fuller test.  In the second step, Johansen co-integration test was conducted. The presence of long run equilibrium found led to the use of Error Correction Mechanism (ECM). The entire regression plane is statistically significant. This means that the joint influence of the explanatory variables [government recurrent expenditure (GRE), Government capital expenditure (GCE) and Government expenditure on health (GEH)] on the dependent variable (GDP) is statistically significant. The study therefore recommends among others that; Government should at all level of as a matter of urgency sustain the macroeconomic stability of the country through their expenditure patterns; spending in rational manner, Government should through its expenditure, regulate the flow of investible funds and boost employment by increasing its expenditure on the creation of skills acquisition centre and investing in industry that can employ the roaming youth in the country; this is aimed at increasing the masses purchasing power.

 

TABLE OF CONTENTS

TITLE PAGE   i

APPROVAL   ii

DEDICATION   iii

ACKNOWLEDGEMENT   iv

ABSTRACT   v

TABLE OF CONTENTS  vi

 

CHAPTER ONE   1

INTRODUCTION   1

1.1       Background of the Study  1

1.2       Statement of the Problem   3

1.3       Research Question  4

1.4       Objectives of the Study  4

1.5       To Statement of Hypotheses  4

1.6       Significance of the Study  5

1.7       Scope and Limitations of the Study  5

 

CHAPTER TWO   6

LITERATURE REVIEW    6

2.1       Theoretical literature  6

2.1.1    Wagner Law of Increasing State Activities  6

2.1.2    Peacock and Wiseman Hypothesis  8

2.1.3    Keynes view of Government Expenditure  10

2.2       Empirical Literature  17

 

CHAPTER THREE   25

RESEARCH METHODOLOGY   25

3.1          Research Design   25

3.2       Model Specification   25

3.4          Method of Evaluation   26

3.5          Sources of Data  29

 

 

CHAPTER FOUR   30

PRESENTATION AND ANALYSIS OF RESULTS  30

4.1       Unit Root Test 30

4.2       Test for Cointegration  31

4.3       Vector Error Correction Model 32

4.4       Test of Hypothesis  34

4.5       Implication of the Result 35

 

CHAPTER FIVE   37

SUMMARY, CONCLUSION AND RECOMMENDATION   37

5.1       Summary of the Findings  37

5.2       Conclusion  38

5.3       Policy Recommendation  38

REFERENCES  40

APPENDIX I  43

APPENDIX II  44

 

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The most critical function of government expenditure is to maintain reasonable degree of price level stability and an appropriate stable economic growth that will enhance the economy to achieve full development potential and stabilization (Musgrave, 1989). 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 the role of government expenditure (spending) to continue to restore this 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). 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).

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.

Government capital expenditure refers to spending on capital projects like roads, airports, education, telecommunications, electricity and the acquisition of investment goods like plant and machinery and other items having an expected working life of more than one year (Anyafo, 1996).

GDP is here conceptualized as the total monetary value of all goods and services produced in an economy over a specified period of time, usually one year. The way GDP react is a function of the magnitude and direction of the effects of the forces of government expenditure at play in the economy. Economic growth refers to the expansion of the country’s potential GDP or output of goods and services while price stability refer to a state where the prices of goods and services remain relatively stable (not changing or being disturbed) over a period of time.

1.2       Statement of the Problem

The underdevelopment of the Nigeria economy is a reflection of irregularity of government spending, inappropriate channelling of government funds to development projects, which has made Nigeria government to rely on oil for over 80% of her revenue. Nigeria government spending over the year have sky-rocketed but the problem here is inefficient channelling of the fund to key priority area 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 year. For instance, while government total capital expenditure on economic services, social, community services, transfers among others increased from N110,163.10 million, N150,034 million and N280340 million respectively in 1980, 1989 and 1991 respectively. It further increased to N883874.5 million and N918548.9 million respectively in 2010 and 2011. While recurrent expenditure on same hand increased from N4805 million, N25994 million and N38243 million respectively in same period down to N33103430.38 billion and N305433300 billion respectively in 2010 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 necessitated the researcher’s interest for empirical quantitative measure of effect of government spending on 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. Couple 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 study is to investigate government expenditure and economic growth in Nigeria using a disaggregated approach.

1.3       Research Question

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 economy.   The specific objectives includes to:

• To examine the extent to which government expenditure impact on economic growth in Nigeria.
• To determine the long run relationship between government expenditure and economic growth in Nigeria.

1.5       Statement of Hypotheses

The following null and alternate 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.
• H₀: There is 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 polices that will promote the economic growth of Nigeria, this study would act as a source of information on various ways government can expend her income to improve the living standard of the masses and its instruments for stabilizing the economy. It would also serve as guide to the policy makers towards policy initiation. It would help students and researchers to carry further work related to this project.

1.7       Scope and Limitations of the Study

This study centers on the relationship between government spending and economic growth in Nigeria from (1981-2013). 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 inconsistence due to poor nature of information management in Nigeria. Other constraints are; time factor s the researcher is a student and combines little time available with academic work, financial constraints and host of other constraints.

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