ABSTRACT
This research work tested the validity of wagners law in Nigeria using time series data from 1980 – 2015 and granger causality analysis. The result of the study showed that GDP (Gross Domestic Product) has a positive effect on GEXP (Government Expenditure) in Nigeria. The study therefore recommended government should make and adopt policies that will boost the level of GDP (Gross Domestic product) since it affects gut expenditure positively.
CHAPTER ONE
- Background of the study
Many developing countries are currently undergoing substantial macroeconomic adjustment. It is not clear how such programmes are affecting government expenditures and hence longer-term economic growth and poverty reduction. Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyse the relative contribution of various expenditures to production growth and Poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future.
The link between public expenditure and economic growth has attracted considerable interests on the part of economic researchers both at the theoretical as well as empirical level. Roughly speaking, one may distinguish between two opposing views:
On the one hand, there is the Keynesian approach according to which government spending is an important policy tool to be used to ensure a reasonable level of economic activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh and Sahni, 1984); and secure an increase in productive investment, thus providing a socially optimal direction for growth and development (Ram, 1986). The opposite view is that excessive state intervention in economic life affects growth performance in a negative way for two reasons: first, because government operations are often conducted less efficiently, they reduce the overall productivity of the economic system, second, because excessive government expenditure (usuallyaccompanied by high taxation levels) distorts economic incentives and results in suboptimal economic decisions (Barro 1990; King and Rebelo 1990).
Those who support larger size of the government give credence to the provision of certain goods and services that would otherwise not be provided by the private sector.
They assert that government comes into economic activities due to failure of the market and externalities to establish a predetermined growth path. Government exists so as to provide social and physical infrastructure, by undertaking some investment and expenditures. By these ways, the government can directly or indirectly improve the productivity of the private sector by efficient and effective allocation of resources.
The existence of government is correctly justified when one looks at the legal functions of the government, in terms of property rights (Atkinson and Stiglitz 1980:5), provision of security, maintenance of law and order, etc. In this sense, government expenditures have become expedient and necessary to overcome the obstacles of economic development. However, when the size of the public sector becomes very large it can impinge on economic growth and development (Peden and Bradley (1989: 239), Vedder and Gallaway (1998), Folster and Henrekson (2001), etc). The larger the size of the public sector, the more difficult it becomes to coordinate the activities of the key players in the system. Larger governments tend to crowd out private investment, which invariably impinges on domestic output (Ahmed and Miller, 1999). Larger sizes of government can also create output volatility (Acemoglu and Ziliboti, 1997; and Koskela and Viren, 2003).
Maintaining law and order, in particular, securing property rights is probably the most acceptable rationale for government intervention. Theoretically, it is argued that enforcement of property rights being a public good, its provision can only bematerialized through collective action (Gradstein, 2004). The rationale for the existence of government anywhere, including Nigeria, can be viewed from the perspective of the institutions of property rights, rule of law, governance, security, enforcement of the rule of law, etc. Nigeria is a Federal state with three tiers, with multiple and diverse ethnic and other socio-political differences, which most often determine the volume and rate of spending. The nature of public spending (in Nigeria) depends majorly on the revenue – of which oil controls a greater percentage – and which is also determined by the vagaries of world market interactions. The other institutional factors which can influence the public spending and economic growth include institutional quality (the enforcement of property rights), political instability (riots, coups, civil unrests, civil wars, etc), characteristics of political regimes (elections, constitutions, executive powers), social capital (the extent of civic – private – activity and organizations) and social characteristics (differences in income and in ethnic, religious, and historical background) (Aron, 2000:100). All these affect nations’ investment directly as they create harsh environment and insecurity, which increases transaction costs and mar the private investment for growth.
According to North (1990:110), “Third World countries are poor because the institutional constraints define a set of payoffs to political/economic activities that do not encourage productive activity”. Such rules affect both individuals and organizations, defined as political organizations (city councils, regulatory agencies, political parties, tribal councils), economic organizations (firms, trade unions, family farms, cooperatives, etc), educational bodies (schools, universities, vocational training centres), and social organizations (churches, clubs, civic associations) (Aron, 2000).
The inability of the government to enforce the rule of law affects the economies of developing countries, including Nigeria, and as such, rent-seeking behaviours,corruption, bribery and protection of individuals and organizations connected with highly placed people become the common phenomenon. These behavioural attitudes raise the transaction costs and costs of information in the production process and make the rule of law unreliable.
Bearing all these in mind, it is necessary to verify the impact of the growth of government expenditure. Research is therefore needed to examine the source of shocks and how they influence the economy. Output volatility in Nigeria is another area that we need to find whether it is caused by public expenditure rise.
- Statement of the problem
The issue of public sector expenditure in Nigeria has been a serious concern for scholars and the situation has been so politicized to the extent that money are spent on projects that can be better provided by private sector more efficiently. Nigeria being the most populous country in the continent with about 167million based on the Nigeria population commission’s estimate and this in fact shows that having a large population to feed and basic infrastructures like hospitals, schools, roads etc to provide. But unfortunately, the country has a huge infrastructure deficit, which has impacted negatively on its economic and social well-being of its people. This situation has been largely attributed to the large scale corruption and increasing size of the government’s administration. This upward trend in the size of government administration has necessitated the need to spend 78percent of its annual budget on recurrent expenditure, while not more than 22 percent were left for the capital expenditure.
It is a fact that no society throughout history has ever obtained a high level of economic affluence without a government. Government is a necessary, though by no means sufficient, condition for prosperity (Vedder and Gallaway, 1998). Where governments did not exist, anarchy reigned and little wealth was accumulated by productive economic activity. We should note, however, that where governments, on the other hand, have monopolized the allocation of resources and other economic decisions, societies have not been successful in attaining relatively high levels of economic affluence. Economic progress is limited when government is zero percent of the economy, and also when it is at or near 100 percent. Too much government stifles the spirit of enterprise and lowers the rate of economic growth.
The recent revival of interest in growth theory has also revived interest among researchers in verifying and understanding the linkages between fiscal policies and economic growth. Government spending can stimulate particular sectors as well as Increase aggregate demand taken globally. Over some past two decades, a substantialvolume of empirical research has been directed towards identifying the elements of public expenditure (at its aggregate and disaggregate levels) that bear significant association with economic growth. Recent literature on endogenous growth theory predicts that fiscal policy changes can affect the long-term growth rate by influencing the determinants of growth (physical and human capital, technological changes, employment and savings) (Hjerppe, et. al. 2006).
The relationship between economic growth and government spending, or more generally the size of the public sector, is an important subject of analysis and debate.
A central question is whether or not public sector spending increases the long run steady state growth rate of the economy. The general view is that public expenditure, notably on physical infrastructure or human capital, can be growth-enhancing although the financing of such expenditures can be growth-retarding. Existing literature in Nigeria has not been in agreement on the nature and impact of government expenditure on economic growth.Ekpo (1995) finds that capital expenditure on construction and manufacturing crowds out private investment.
Ogiogio (1995) observed a long run relationship between economic growth and government expenditure. Aigbokhan (1996) reported a bi-directional causality between government total expenditure and national income. Essien (1997) using data from 1960-1994 found no causality between public expenditure and national income.
Odusola (1996) and, Nurudeen&Usman (2010) find that military expenditure has no significant relationship with economic growth in Nigeria. However, Adewara and Oloni (2012) found that expenditure on defence is positively related with economic growth Akpan (2005) used Error Correction Model (ECM) in his study of the impact of government expenditure on economic growth in Nigeria with two lags. Aregbeyen,(2006); Babatunde, (2009) showed that government capital expenditure has a significant positive effect on real output, but that real government recurrent expenditure has insignificant effect on growth. Olorunfemi (2008) in a study on the relationship between economic growth and public expenditure in Nigeria surprisingly concluded that there is no link between gross fixed capital formation and GDP and that public expenditure affects GDP without elaborating the type of relationship.
Nurudeen and Usman (2010) studied the impact of government expenditure on economic growth by disaggregating the government expenditures into capital expenditure, recurrent expenditure, defence, education, health, transport and communication and fiscal balance, using cointegrationmethod, and found that all the variables except defence and agriculture are statistically significant. From this review, there is no consensus among researchers on the nature and impact of public expenditure on the performance of Nigeria (and indeed other countries). Further investigation into the matter is of ultimate necessity for Nigeria.
Nigeria has consistently had deficit spending over the years without equivalent rate of economic growth. Data shows that output of Nigeria has been fluctuating for some years and the sources of these shocks may not be clear. The growth rate (real GDP growth) of output was 3.2, 2.4, 2.8, 3.8 and 4.7 respectively, in 1997, 1998, 1999, 2000 and 2001, while the total expenditure growth was 12.1, 15.6, 28.1, 15.6, and 19.3 per cent in 1997, 1998, 1999, 2000, and 2001, respectively (CBN, 2001). This implies that the growth rate of public expenditure was far higher than that of economic growth.
The aggregate expenditure of the Federal Government, in nominal terms, increased by 32.2 per cent to N3,240.8 billion in 2008 (CBN, 2008). As a proportion of GDP, total expenditure increased by 13.5 per cent, from 11.7 per cent in 2007, while the GDPgrowth rate was 6.4 percent, almost the same as the 6.5 per cent recorded in 2007 and the average annual projected growth rate for the period 2004 – 2008. This implies that the public expenditure is growing faster than the rate at which the output is growing.
As a percentage of GDP, recurrent expenditure increased from 1.2 percentage points to 8.8 per cent. Most of the components of recurrent expenditure increased relative to their levels in 2007. As a proportion of Federal Government revenue, capital expenditure was 30.1 per cent, exceeding the stipulated minimum target of 20.0 per cent under the WAMZ secondary convergence criteria. The data speaks volume that the economy does not grow at a fast rate as the growth rate of government expenditures. It is expected that as the public expenditure expands output is expected to expand also, because public expenditure should be translated into output growth.
Or does it imply that much of the public expenditure find their ways into some other paths different from the intended routes?
However, in 2009, the aggregate expenditure of general government fell by 5.1% from its level in 2008, which represented 29.4% as compared with 31.5% in 2008, while GDP growth rate, at 1990 constant prices, was 6.7%, which exceeded the 6.0% recorded in 2008 and annual growth rate of 6.4% for the period of 2005 – 2009 (CBN Annual Report, 2009:74). In 2010, the aggregate expenditure of general government increased by 15.3% from the level in 2009. As a proportion of GDP, it represented 28.4% as compared with 28.8% in 2009, while the growth rate of GDP was 7.9% which exceeded the 7.0% recorded in 2009 and the average annual growth rate of 6.7% but lower than the target growth rate of 10% for the year (CBN, 2010).
From these data, the rate at which the output grows has been lower than that of the growth of public expenditure. This simply means that there is need to investigatewhether the rises in public expenditure have been accompanied by rise in the output of Nigerian economy. The data on the fluctuations of the GDP and public (government) expenditure are inexhaustible. This makes it expedient to understand the nature of such fluctuations in the macroeconomic variables and how they impact on the output of the economy.
- RESEARCH QUESTION
To what extent dose public expenditure affect economic growth of Nigeria?
1.4 OBJECTIVES OF THE STUDY
This study has the main objective of ascertaining the effect of the public expenditures on economic growth of Nigeria. Specifically we intend to compare the pre and post public of expenditures, so as to determine the specific effect.
- HYPOTHESES OF STUDY
Stating only the null hypothesis
Ho: The government expenditure has no positive effect on the economic growth of Nigeria.
- SIGNIFICANCE OF THE STUDY
Whilst acknowledging the fact that this study is not the first of its kind using the Nigeria data. However, it shall go a little further than earlier works to correctly capture all known composition of public expenditure during the years under review to assess the impact of public expenditure on economic growth.
The relationship between government spending and growth is especially important for developing countries like Nigeria, most of which have experienced increasing levels of public expenditures over time. This has tended to be associated with rising fiscal deficit, suggesting their limited ability to raise sufficiently revenue to finance higher level of expenditure.
Rising deficit tends to retard economic growth in developing countries because of the inability of such country to check inflation during deficit years. Thus, this study gives a good insight into problems created by rising government expenditure and how the same impact on growth.
Also, this study will enable policy makers to promote economic without recourse to huge deficit finance. This often results in inflation particularly when increase in government expenditure is no matched by corresponding increase in output. The bitter experience of the oil boom is still fresh in many minds.
- SCOPE STUDY
The growth of government spending and its impact on the performance of the economy shall be examined with data spanning from 1980 to 2016.
Attention shall mainly be focused on exhaustive and productive government expenditure during the period under review.
One major limitation of the study is that the data to be used for the empirical analysis may be porous as such data are often manipulated for political reason. Besides, the study shall cover a limited number of years because of none availability of data. Another constraint to be faced in the cause of my study is time factor; the time frame of my work is going to hinder me from gathering as much information needed for proper analysis of the impact of government expenditure.
Another limitation to my study is finance, lack and insufficient finance for finding sources of information and acquisition of material for my study. But not withstanding of these limitations the study will serve its purpose.
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