THE IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA.

ABSTRACT

 

 This study examines the impact of government expenditure on economic growth in Nigeria using annual time series data covering the period between 1981 and 2020. The techniques employed are Descriptive statistics, Unit Root Test, Johansen Cointegration Analysis, Ordinary Least Square, and Granger causality test. The unit root test results show that all variables are not stationary at levels but became stationary at first difference i.e. I (1) variables. The Cointegration test indicated the existence of long-run relationship between the variables. The ordinary least square results show that there is a negative and significant relationship between recurrent expenditure and economic growth in Nigeria, a negative and significant connection between current expenditure and economic growth, and a positive and significant connection between total expenditure and economic growth in Nigeria. Based on these findings, it is concluded that Real Gross Domestic Product is strongly influenced by Total expenditure.   

Keywords: Government Expenditure, Economic growth, Descriptive Statistics, Johansen Cointegration, Ordinary Least Square, Granger causality, Nigeria.

CHAPTER ONE

INTRODUCTION

1.1        Background of the Study

Government expenditure remains an important tool utilized in the process of development. It plays a vital role in the functioning of any economy at almost all stages of growth and development. Government expenditure remains an important instrument utilised in the process of development. It plays a vital role in the functioning of any economy at almost all stages of growth and development.

The societies we have today are inextricably linked to the reality of established authorities – governments. Due to market failure, providing important public goods such as national security, defense, education, health, transportation and communication, police and fire protection, among others, would be nearly impossible. As a result, governments’ primary means of meeting citizens’ demands is to increase spending by allocating monies to various sectors of the economy. Public expenditure is one of the major mechanisms used by the government to influence economic activities, according to Ebong, Ogwumike, Udongwo, and Ayodele (2016).

The importance of government spending in the running of any economy, whether developing, developing, or developed, cannot be overstated. According to Olayiwola, Bakare-Aremu, and Abiodun (2021), the need for efficient resource allocation among the various arms, organs, or strata of government, as conditioned by the need for efficient resource allocation among the various arms, organs, or strata of government, as conditioned by the need for efficient resource allocation among the various arms, organs, or strata of government, as conditioned by the need for efficient resource allocation among the understudying of government expenditure and its antecedent effect on economic growth, and vice versa, has been a topic of sustained attention among academics over the last decade, leading to the publication of numerous scholarly works.

According to Al-Yousif (2000), the government has two basic responsibilities:

preserving law and order (which includes the protection and security of its citizens) and providing vital amenities and infrastructures such as good roads, security, education, piped water, health, and power. Scholars have maintained for years that greater government spending, particularly on socioeconomic, economic, and physical infrastructure, promotes economic growth. For example, it is thought that spending on education and health will boost national output by improving labor quality and productivity (Adegboyo, Olufemi, Olaniyan and Oladipo, 2021). Infrastructure spending, such as roads, communications, power, and water, is seen in a similar light.

Government expenditure, according to Olanrewaju and Funlayo (2021), is an important tool for a government to influence a nation’s economy. Economists have long recognized the importance of encouraging economic growth. In any case, the general consensus is that government spending, particularly on social and economic infrastructure, can boost growth, even if financing such spending to provide essential infrastructure such as transportation, electricity, telecommunications, water and sanitation, waste disposal, education, and health can stifle it (Okoye, Omankhanlen, Okoh, Urhie & Ahmed, 2019).

According to Okoye, Modebe, Erin, and Evbuomwan (2017), higher government expenditure boosts economic agents’ spending capacity, making more output necessary. They contend that government spending promotes demand by increasing consumer spending on non-essential items, resulting in increased economic activity. Large government spending, according to Adegboyo (2020), promotes both public and private sector demand for products and services, resulting in greater output in response to demand pressure.

According to Edeme and Olisakwe (2019), infrastructure that encourages economic growth is established through public spending, regional imbalances are minimized, social overheads are developed, citizen education and training is provided, and so on. Increased government expenditure, according to Chude and Chude (2013), is an effective instrument for stimulating general demand in a stagnating economy and promoting the greenhouse effect. Because the tasks and responsibilities of government have been expanding consistently, there has been a consistent increase in the volume of public spending in all parts of the world, including Nigeria (Adegboyo, 2020).

 

1.2       Statement of the Problem

The relationship between government spending and economic growth has gotten a lot of attention in recent years, especially for developing countries, because of the importance of government spending in accelerating growth and development, as well as the liquidity challenges that developing economies face as a result of the financial system’s underdevelopment. According to Edeme and Olisakwe (2019), the government’s expenditure pattern tends to define the rate of growth and development a country may achieve at any given time. Government spending in vital areas such as the real sector, health, infrastructure, and education, among others, will increase a country’s aggregate productive capacity, according to Okoye et al. (2019).

In reality, providing infrastructure services to suit the needs of businesses, homes, industries, and other users is one of the primary roadblocks to economic development in emerging countries, including Nigeria. The antecedent of large receipts from crude oil production and sales, as well as rising demand for social utilities such as roads, communication, electricity, education, water, and health, has led to a continuous growth in government spending in

Nigeria. The necessity to secure both internal and external security for citizens and the nation as a whole is growing every day. 2013 (Okoro). Edeme & Olisakwe (2019) and Adegboyo (2020) stated that government spending has steadily increased in Nigeria, as it has in many other developing nations, without corresponding increases in economic growth and development. In Nigeria, for example, despite massive public spending, the country’s degree of development is still small. Increased capital and recurring expenditure are predicted to boost the economy’s productive base, resulting in growth (Olanrewaju and Funlayo, 2021).

 

Despite the continuous increase in government spending in Nigeria, this may not have translated into real growth and development, since the country remains one of the world’s poorest nations, with insecurity and the negative impact of the COVID-19 pandemic on the economy. As a result, many Nigerians continue to live in abysmal poverty, with more than half of the population surviving on less than $1 per day (Okoye, et. al., 2019). Furthermore, many macroeconomic indices such as the balance of payments, import and export requirements, currency rate, inflation rate, and national savings reveal that Nigeria as a country has not fared better over the previous three decades. It is so discouraging that the level of government spending in Nigeria does not appear to have matched the rate of economic growth (Olanrewaju & Funlayo, 2021).

 

1.3       Objectives of the Study

This study evaluates the impact of government expenditure on the growth of Nigerian economy. Specifically, the study aims at:

1. Examining the impact of changes in government expenditure on economic growth.
2. Examining the causal relationship between changes in government expenditure and economic growth in Nigeria

 

1.4        Research Questions

To ensure that the stated objectives are properly addressed, the following research questions are put across:

1. Does changes in government expenditure have any impact on economic growth in

Nigeria?

1. Is there any causal relationship between changes in government expenditure and economic growth in Nigeria?

 

1.5        Research Hypothesis

In order to respond to the above stated research questions, the following hypothesis are stated in their null forms:

 

H₀: Changes in government expenditure has no impact on economic growth.

H₀: There is no causal relationship between changes in government expenditure and economic growth in Nigeria

 

1.6       Scope and limitations of the Study

The scope of this research is confined to examining the impact of government spending on the growth of the Nigerian economy from 1981 to 2020. This time period was chosen based on economic history. The Nigerian economy underwent a significant transformation in the 1980s, leading to the implementation of the Structural Adjustment Program (SAP). It is also the time when the standard of living index decreased, causing an increase in the incidence of poverty and necessitating increased government spending to mitigate the effect. The Nigerian economy (GDP), recurrent expenditure (REXP), capital expenditure (CEXP), and total expenditure (TOTAL) shall be the research variables (TEXP).

 

1.7       Significance/Justification of the Study

Any research to investigate the effect and relationship between public expenditure and the growth of Nigerian economy occupies important details which cannot be over-emphasized. This study is aimed at exploring whether the various government expenditure tools and mechanisms have actually helped in the growth of Nigerian economy. The outcome of this study would help to understand the significance of government expenditure which includes the provision of those facilities that are not covered by the market economy.

The parastatals responsible for poverty reduction in Nigeria will find this study useful as it will unveil the current poverty profile and the need for the government to focus its spending on the noted areas. More so, the Government will benefit from this study because it will help them to channel public fund on the economy judiciously. The citizens of Nigeria remain the most beneficiaries of this study as the outcome would help government to make policies that will promote their standard of living, thereby, contributing to the growth of knowledge in the society.

Students of Economics and other researchers will find the study useful in improving their knowledge on government expenditure and how this would better the growth of Nigerian economy.

 

1.8 Organization of the Study

This research will be divided into five sections. The first chapter will act as an introduction; it will present and specify the study’s basic structure, as well as the study’s primary problems to be explored and addressed, as well as the hypothesis to be evaluated.

The study’s second chapter focuses on a review of related literature that is relevant to the investigation. The study’s research methods and techniques, as well as the materials used in the study, are covered in Chapter 3. The data acquired throughout the study is presented and examined in chapter four. Finally, chapter five summarizes, concludes, and offers solutions and recommendations for how government spending can be properly channeled so that the average Nigerian is economically empowered and sustained through the use of public expenditure, instigating adaptable and acceptable policies for all.

                                                     

THE IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA.

Sharing is caring!