CHAPTER ONE : INTRODUCTION
- BACKGROUND OF THE STUDY
Government Expenditure and Economic Growth have a strong relationship which has been argued about for a long time now. In 1936, Keynes argued that the solution to economic depression is achieved by persuading the firms to invest through reduction of interest rates and government capital investment which includes infrastructure.
Many scholars have the belief that an increase in government expenditure increases the growth of an economy, meanwhile other scholars believe otherwise. The neo classical school of thoughts argue that increasing government expenditure could decrease the aggregate production of an economy. Their argument is; in order for the government to increase their expenditure, they definitely need financial resources which are generated through increment of Tax or Borrowing from abroad. Increment of tax may lead to a decrease in income and aggregate demand because higher taxes discourage additional work. Furthermore, increasing Tax leads to increase in costs of production and decreases investment. If the government decides to increase their borrowing in order to increase their expenditure on the other hand, this reduces private investment due to competition and overcrowding. In 2006, a scholar named Sachs argued that countries with high tax rates and low social service spending are better off when it comes to economic performance when compared with countries with low tax rates and low social service spending (this only applies to developed countries).
In more detailed facts, the federal government of Nigeria (FGN) spends over 52% of its total government revenues and the remaining 48% are shared among federal states and local government areas (LGAs) according to the revenue mobilization allocation and fiscal commission (RMFC) IN 2011. The government revenue that is generated from oil revenue and non oil revenue, borrowing from internal and external sources increased significantly and this affected the level of government expenditure in Nigeria over the years. The central bank of Nigeria (CBN) referenced that the total expenditure increased from 716.1 million naira to 4.8 billion naira between 1970 – 1980. As of 2010 it increased up to 3.3 trillion naira. The government capital expenditure increased from 187.8 million naira to 10.2 billion naira between 1970 – 1980 and further to 1.8 trillion in 2010.
According to the national bureau of statistics (NBS), the GDP (Gross Domestic Product) per capita of nigeria became larger by 132% between 1960 – 1969 and the growth rate peaked at 283% between 1970- 1979. Between 1979 -1983, there was a fiscal imbalance with negative consequences on balance of payment due to high levels of inflation and unemployment rates which led to the need of restructuring the economy due to the severeness of the problem. In order to manage this issue, the government introduced a comprehensive economic reform programme in 1986 with the aim of achieving structural adjustment and economic liberalization. This program was adopted Between 1988 – 1997 according to CBN and NBS which in turn indicated a positive GDP growth of 4% and a real GDP growth of 7% on aggregate basis by the year 2010. The discrepancy between the massive increase in government total spending and the performance of the Nigerian economy over the years raises a critical question on its role in promoting economic growth and development. Some authors argue that the relationship between government expenditure and economic growth in Nigeria is weak while other authors believe otherwise. The question that arises is what is the relative contribution of capital expenditure and recurrent expenditure on economic
growth in Nigeria ? This paper aims to investigate the impact of government expenditure on economic growth in Nigeria over the years.
STATEMENT OF THE PROBLEM
Series of debates about the relationship between government expenditure and economic growth among scholars continue to emerge. The government performs two major functions “protection in terms of security” and “provision of certain public goods and services”. The protection function consists of generation of rules governed by laws and enforcement of property rights. With the aid of these rules and enforcement of property rights, individuals with criminal intent become highly discouraged, life, properties and external threats are highly protected. Other few public goods and services that benefit from this function include, defence, health, education, power, roads and communication. Some scholars including Keynes(1936), Sachs(2006), Ram(1986), Ranjha and Sharma(2008), Barro(1990) argue that increase in government expenditure on socio economic and physical structures encourages economic growth. Take for instance, an increase in government expenditure on health and education leads to an increase in labour productivity and growth of national output. Also, government spending on infrastructure such as roads, power, communication etc leads to reduction of production cost, increase in private sector investment and firm’s profit which in turn boost economic growth . In conclusion, these scholars believe expansion of government expenditure affects economic growth positively.
Then again, researchers including Landau(1986), Hayek(1989), Henrekson(2001), Mitchell(2005) and Sudha(2007) don’t accept that extension of government consumption influences monetary development emphatically. Their contention was that high government consumption may back off over all total execution of the economy because of the way that the public authority may need to build duties and get to fund their use. All the more instinctively, higher personal assessment might be a disincentive or that it can debilitate people working for extended periods or looking for extra work which thus may diminish pay and total interest. Then again, corporate assessment (benefit charge) will in general expand creation costs and diminishes firms’ benefit and their ability to support use on speculation. Moreover, if the public authority expands their acquiring (particularly from the boycott) to fund its use, it will influence the private areas because of rivalry or group out which thus decreases interest in the private area. Government authorities and lawmakers now and then increment consumption and interest in useless tasks or in products that the private area can create all the more productively to score modest prevalence and guarantee that they keep on excess in force which thusly shows that administration exercises produce misallocation of assets and obstructs the development of public yield level now and again.
As per receipts from (oil benefit assessment and eminences) which is under the oil income area, [ organisation annual duty, custom and extract obligations, esteem add charge (VAT) and others ] which is under the non oil income area, (CBN measurable announcement, 2012); the all show that that administration use has kept on expanding in Nigeria because of expansion sought after for public products like streets, correspondence, power, instruction, wellbeing and above all both interior and outer protections. Accessible measurements show that all out government use (both capital and repetitive) and its segments have kept on expanding over the most recent couple of years. The insights show that administration intermittent use expanded from 716.1 million to 4.8 billion from 1970 – 1980 then to 3,310,343.38 million of every 2010. Besides, the public authority repetitive use shows that consumption on broad organisation, guard, public gathering, interior security, horticulture, development, correspondence and transportation, training and wellbeing all expanded during the period under survey. Also government capital consumption expanded from 187.8 million to 883,874.75 million from 1970-2010. Moreover, the different segments of capital use ( that is financial administrations, schooling and wellbeing) likewise show a rising pattern between 1970 to 2012.
Nigeria actually positions among the most unfortunate nations on the planet with over 60.9% of the more than 163 million populace being poor. That arranges Nigeria under non-industrial countries which shows
that the addition of government use has no impact on Nigeria’s development and improvement. In spite of the fact that the Nigerian economy is projected to be developing, neediness is probably going to deteriorate as the hole between the rich and helpless keeps on augmenting. Given this issues raised over, this exploration tries to inspect the effect of government consumption on monetary development in Nigeria utilising GDP as reliant variable , and intermittent use , capital use, and other contributing components, for example, imports, trades, foreign direct venture, to analyse the effect of government use on financial development in Nigeria from 1970 to 2012.
