IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1986-2016)

ABSTRACT

The study focus on the impact of Government expenditure on economic growth in Nigeria from 1986-2016. This research work uses secondary data, which were obtained from the Central Bank of Nigeria Statistical Bulletin. The data obtained include; Gross domestic product, Capital government expenditure, recurrent government expenditure, gross fixed capital formation and total labour in Nigeria economy. The data were be collected for a period of thirty one years, i.e. 1986 to 2016. The study employs the Ordinary Least Square Regression Technique in the analysis of the secondary data obtained from the Central Bank of Nigeria statistical Bulletin. Various econometric and statistical measures are employed in the analysis of the data. The result of the regression analysis of the model reveals that capital government expenditure, recurrent government expenditure, gross fixed capital formation and total labour was positively related gross domestic product. Based on the empirical analysis, it is concluded that government expenditure has significant impact on the economic development in Nigeria and has argued that government consumption expenditure depresses economic development in Nigeria. The study went further to recommend among others that Government capital spending in industries and agriculture if properly managed will raise the nation’s production capacity and employment, which in turn will increase economic development in Nigeria.

CHAPTER ONE

1.1     Background to the Study

The relationship between public spending and economic growth has attracted several debates among researchers. Keynes (1936) argues that the solution to the economic crisis is to encourage companies to invest by combining a reduction in interest rates and government investments, including infrastructure.

This assertion, that increased public spending promotes economic growth, is not supported by all researchers. A number of prominent authors, particularly from neoclassical schools, argue that increased public spending may slow the overall performance of the economy because, in order to finance expenditures, the government may need to raise taxes and / or borrow. Higher income taxes can discourage extra work, which can in turn reduce income and aggregate demand. In the same way, the high corporate tax leads to an increase in production costs and reduces the profitability of companies and their capital to incur capital expenditures. On the other hand, the increase in government borrowing (from banks) needed to finance spending, can compete with and crowd out the private sector, reducing private investment in the economy. Alani (2006) argues that developed countries perform better in terms of taxation and social protection than countries with low tax rates and social spending. Barro (2007), however, contradicts this argument by saying that high levels of government spending in addition to damage, through welfare, do not create equity, economic equality and international competitiveness. This argument is consistent with Brown (1996) who points out that countries with large public sectors have experienced slow growth. Thus, there is no general consensus among researchers on the impact of increased government spending on economic growth.

According to the Revenue and Finance Allocation Board - RMFC (2011), the federal government of Nigeria spends 52.2% of total government revenue. Remaining revenues are shared between the Federated States and Local Governments (LGAs) based on a detailed sharing formula.

The level of increase in government revenues from oil revenues and non-oil revenues, including borrowing from internal and external sources, has significantly affected the level of government spending in Nigeria in the years under review.

Nigeria's gross domestic product (GDP) per capita grew by 132 percent between 1986 and 2000 and peaked at 283 percent between 2000 and 2016 (National Bureau of Statistics - NBS, 2016). The level of increase in external lending has further accelerated the situation of debt distress and other problems. The problems were so serious that the restructuring of the economy was inevitable. As a result, a comprehensive economic reform program was introduced in 1986. Between 1988 and 1997 - period of structural adjustment and economic liberalization, GDP reacted to economic adjustment policies and grew at a positive rate of 4% Onakaya (2012). Real GDP growth shows that on a global basis, measured by real gross domestic product (RGDP), it increased by 7.8% in 2016 (SNB, 2016, CBN, 1980; CBN 2016; CBN 212).

The mismatch between the performance of the Nigerian economy and the massive increase in total public spending over the years raised a critical question about its role in promoting economic growth and development. Some authors argue that the link between public spending and economic growth is weak, while others report variable causality relationships in Nigeria (Onakaya, Fasanya, Babalola, 2012). The question that arises is what is the relative contribution of capital and recurrent expenditures to economic growth in Nigeria? This thesis aims to study the impact of public expenditure (recurrent expenditure and capital expenditure) on economic growth in Nigeria from 1986 to 2016

1.2     Statement of the Problem

Most poor Nigerians do not get their fair share of government by public services spend such as health and education. (Solow 1956).  In Nigeria, the government expenditure has continued to rise due to receipts from oil revenue and non-oil revenue (company income tax, custom and excise duties, value added tax [VAT] and others) (CBN Statistical Bulletin, 2012). Increased demand for public (utilities) goods like roads, communication, power, education and health. Besides there is increasing need to provide both internal and external security for the people and the nation.

Unfortunately, rising government expenditure has not translated to meaningful growth and development, as Nigeria ranks among the poorest countries of the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 60.9% of over 163 million of the population are poor. The Business Day Newspaper of Tuesday 14 February, 2012 reported that the percentage of Nigerians living in abject poverty – those who cannot afford the bare essentials of food, shelter and clothing – rose to 60.9% in 2016 as compared to 54.7% in 2004. Although the Nigerian economy is projected to be growing, poverty is likely to get worse as the gap between the rich and the poor continues to widen. Coupled with this, are dilapidated infrastructures (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, imports obligations, inflation rates, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of decades under review. Given the issues raised above, this research seeks to examine the impact of government expenditure on economic growth in Nigeria using GDP as dependent variable, and recurrent expenditure, capital expenditure and other controlling variables such as import, export, foreign direct investment to examine the impact of government expenditure on economic growth in Nigeria from 1986 to 2016.

1.3     Research Questions

The research questions formulated to guide this study are;

1. What is the impact of government expenditure on economic growth in Nigeria?
2. What is the relationship between government real total capital expenditure and economic growth in Nigeria?
3. What is the impact of government expenditure pattern on economic growth in Nigeria?

1.4     Research Objectives

The general objective of the study is to find out the impact of government expenditure on economic growth in Nigeria.

The specific objectives are;

1. To examine the impact of government expenditure on economic growth in Nigeria.
2. To examine the relationship between government real total capital expenditure and economic growth in Nigeria
3. To examine the impact of government expenditure pattern on economic growth in Nigeria?

1.5     Statement of Research Hypothesis

The hypothesis that would guide this work is Null hypothesis against the Alternative hypothesis as follows;

1.      H₀: There is no relationship between government real total capital expenditure and economic growth in Nigeria

H₁: There is significant relationship between government real total capital expenditure and economic growth in Nigeria

2.      H₀:  There is no significant impact of government expenditure pattern on economic growth in Nigeria

H₁:   There is a significant impact of government expenditure pattern on economic growth in Nigeria

1.6     Significance of the Study

The study investigates the impact of government expenditure on economic growth in Nigeria. Many people have carried out studies on government expenditure and how it affects economic growth in Nigeria. But I am trying to add a new dimension to it by breaking down the explanatory variables into government consumption expenditure, government investment, and government investment expenditure on human capital development, stock of capital, Labour force and private investment. The most closely related works are outlined below.  Nurudeen and Usman (2010) studied the impact of government expenditure in Nigeria using data from 1977-2007 and ECM method. The variables used are recurrent expenditure and capital expenditure on defence, agriculture, education, transport and communication. He did not make use of aggregate production function since labour and capital are excluded. This study consolidates expenditures on human capital (education and health). It also fails to aggregate the other government investment and consumption spending in Nigeria. Usman, Mobolaji, Kilishi, Yaru and Yakubu (2011) examine the impact of public expenditure on economic growth in Nigeria for the period of 1986-2008 using aggregate production function of Barro (1990). The study classified government expenditure into administration, education, transport and communication. Just like Nurudeen and Usman (2010), they did not aggregate government expenditure on human capital. The study also did not consolidate government investment and government consumption expenditure into separate categories.

Maku (2009) examines the link between government spending and economic growth from 1986-2006 using  Ram (1986) production function. The study classified government expenditure into education, health, government consumption spending and private investment. In the course of the analysis, the study kept both education and health spending separately but analyses them jointly as if they were consolidated. This study is an improvement over these studies since it integrates both education spending and health spending to indicate human capital development.

This study is distinct from all other studies because it classifies government expenditure into non-productive and productive government expenditures based on Barro (2007) classifications. The non-productive expenditure relates to all government consumption expenditure excluding health and education. The productive government expenditure relates to government expenditures on human capital development and government investment.

Secondly, the study is based on long period of analysis from 1986-2016, which is a sufficient time frame for the analysis of the problem of the study.

Thirdly, I believe that this study will provoke and pave a way for further studies in the area as it reveals the difficulty in resolving the empirical question of the impact of government spending on growth.

Fourthly, this study incorporates the most recent data and employs both qualitative analysis and a more advanced econometric technique (vector error correction) model to study the impact of government spending on economic growth. Thus the outcome of this study will provide result and policy implication to policy makers by bridging the aforementioned gap.

1.7     Scope and Limitations of the Study

The scope of the study was delimited to the impact of Government expenditure on economic growth in Nigeria from 1986-2016. The scope of the variables included in the study are nominal gross domestic product (NGDP), government consumption expenditure (GCE), government investment (GI), government investment on human capital development (GIHC), capital stock (KAP), labour force (LAB) and private investment (PI). NGDP is used as explained variable while GCE, GI, GIHC, KAP, LAB and PI are the explanatory variables.

It is inevitable that a survey research of this nature must have some constraints which impact on this study. The materials for a proper and effective research work constituted a major limitation and even the decision to use questionnaire in data collection constituted some limitation of the study, that is, how to get the true and required information from the workers.

Finally, there was an anticipation of the problem of convincing the respondents on the filling of the questionnaires and releasing and to give the true and required information. But for the quick intervention the clerk of the institution who took time to clear the air and convince their colleague, helped me to accomplish my assignment.

1.8     Definition of Terms

Aggregate demand: A schedule or curve which shows the total quantity of goods and services, demanded at different prices.

Aggregate production function: this is a function showing the maximum output of a country given a set of inputs, assuming that these inputs are used efficiently.

Capital expenditure: Refers to spending on fixed assets such as roads, schools, hospitals, building, plant and machinery etc, the benefits of which are durable and lasting for several years.

Capital stock: Means the total value of the physical capital of an economy; including inventories as well as equipment.

Capital: Human made resources (machinery and equipment) used to produce goods and services.

Classical economics: The macroeconomic generalizations accepted by most economists before the 1930s which led to the conclusion that a capitalistic economy would employ its resources fully.

Current expenditure: Refers to spending on wages and salaries, supplies and services, rent, pension, interest payment, social security payment. These are broadly considered as consumable items, the benefits of which are consumed within each financial year. 

Dependent variable: A variable in which changes in it, leads to a consequence of change in some other (independent) variables.

Direct relationship: The relationship between variables which change in the same direction.

Economic growth: Increase in real output or in real output per capita.

Economic growth: Means increase in an economic variable, normally persisting over successive periods. The variable concerned may be real or nominal GDP.

Economic model: A simplified picture of reality representing an economic situation.

Economic policy: Course of action intended to correct or avoid a problem.

Economic resources: Land, labour, capital and entrepreneur which are used in the production of goods and services.

Expanding economy: An economy in which the net domestic investment is greater than zero.

Fiscal policy: The use of taxation and government spending to influence the economy.

Government expenditure: Refers to the expenses that government incurs for its maintenance, for the society and the economy as a whole.

Government expenditure: Spending by government at any level. It consists of spending on real goods, and services purchased from outside suppliers; spending on employment in state services such as administration, defence and education; spending on transfer payment to pensioners; spending on community services; spending on economic services.

Gross Domestic Product (GDP): Refers to the money value of goods and services produced in an economy during a period of time irrespective of the people.

Growth model: It is a simplified system used to stimulate some aspects of the real economy.

Growth rate: The proportional or percentage rate of increase of any economic variable over a unit period, normally a year.

Independent variable: The variable causing a change in another variable.

Industrially Advanced Countries (IACs): Countries such as the US, Canada, Germany, Japan and Nations of Western Europe which have developed market economies based on large stocks of technologically advanced capital goods and skilled labour force.

International Monetary Fund (IMF): The international association of nations which was formed after the World War II to make loans of foreign monies to nations with temporary payment deficits and to administer adjustable pegs.

Investment: Spending for capital goods and addition to inventories.

Keynesian economics: The macroeconomic generalization which lead to the conclusion that a capitalistic economy does not always employ resources fully.

Labour productivity: Total output divided by the quantity of labour employed to produce the output.

Market failure: Refers to a label for the view that the market does not provide panacea for all economic problems.

Market forces: The forces of supply and demand, which determine equilibrium quantity and price in market.

Monetarism: An alternative to Keynesianism; the macroeconomic view that the main cause of changes in aggregate output and the price level fluctuations is the money supply.

Neo-classical economics: The theory that, although unanticipated price level changes may create macroeconomic instability in the short-run, the economy is stable at the full employment level of domestic output in the long-run because of price and wages flexibility.

Nominal GDP: Means GDP at current basic prices less indirect taxes net of subsidies.

Poverty: Inability to afford an adequate standard of consumption.

Price level: The weighted average of prices paid for the final goods and services produced in an economy.

Rate of interest: Prices paid for the use of money of for the use of capital.

Transfer expenditures: refer to expenditures on pension, subsidies, debt interest, disaster relief packages, etc. transfers are seen as redistribution of resources between individuals in the society, with the resources flowing through public sector as intermediary.