ABSTRACT
For the existing studies on the
relationship between sector expenditure and economic growth provide
inconclusive empirical evidence (positive or negative effects). The study therefore employs two different
analytical framework (that is, the aggregate and the sectoral level) to examine
the nature of the relationship between government expenditure and economic
growth in Nigeria
since 1980 to 2011. The study was
anchored in the neo – classical growth theory.
Ordinary least square (OLS) method was employed in estimating the coefficients
of the model. The findings of the study
revealed that there is direct and positive relationship between government
capital expenditure and economic growth while there is inverse relationship
between recurrent expenditure and Economic growth in Nigeria. Based on these findings some recommendation
such as policies reducing the size of government should be pursued with caution
and there is also the need to employ public spending more productively and
efficiently.
TABLE OF CONTENTS
TITLE PAGE
APPROVAL PAGE
CERTIFICATION
DEDICATION
ACKNOWLEDGEMENT
ABSTRACT
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Problem
Objectives of the Study
Research Hypothesis
Scope of the Study
Significance of the Study
Definition of Terms
CHAPTER TWO:
REVIEW OF LITERATURE
Introduction
Conceptual Framework
Review of Empirical Findings
Theoretical Framework
Empirical Literature
CHAPTER THREE: METHODOLOGY
Research Design
Sources of Data
Model Specification
Choice and Identification of
Variables
A Priori Expectation
Estimation Techniques
CHAPTER FOUR: RESULTS AND DISCUSSIONS
Introduction
Presentation of Data
Empirical Result and Interpretation
Discussion of Findings
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
Introduction
Summary
Conclusion
Recommendations
REFERENCES
APPENDICES
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CHAPTER ONE
INTRODUCTION
Background to the Study
The recent revival of
interest in growth theory has also revived interest among researchers in verifying
and understanding the linkage between public sector expenditure and economic
growth. Public expenditure is an
important instrument for government to control the economy. It plays an important role in the functioning
of an economy whether developed or undeveloped country. Public expenditure is concerned with the
utilization of resources by government of the nations resources with regards to
the rules, regulation and policies that shape the planning budgeting. Forecasting, coordinating, directing,
influencing and governing the inflow and outflow of finds in order to maximize
the objective of the institution. In
other words, public sector expenditure deals with government spending and the
level of liquidity in the economy in order to achieve some stated objectives.
In Olukayode (2009) the
general view is that public expenditure either recurrent or capital
expenditure, notably on social and economic infrastructure can be growth,
enhancing. The provision of
infrastructure services to meet the demands of business, household, and other
users is one of the major challenges of economic development in developing
countries like Nigeria.
Ordinarily, the
utilization of the resources of any economy, through public expenditure, should
lead to poverty reduction, improvement in the standard of living of its
citizens mitigation of inequalities in income distribution and improve the
general well being and economic development of the economy.
However, in spite of the
visible attempts by the successive governments of Nigeria to apply her vast financial
resources there exists what has been referred to as “the paradox of plenty”.
Indeed, there has been rather a co-existence of abundant resources and wealth
and extreme poverty in these economics unlike her developed counterparts. For example, a recent world Bank report
estimated that so percent of oil revenues in Nigeria benefits only 1 percent
(one) of the population (World Bank 2004).
The country which ranked
sixth in world oil output is ranked 151 out of 171 countries in human capital
development (UNDP Index 2004). This is
in spite of astronomical increases in public expenditure over the years. For example, Nigeria national budget has been
increasing in leaps and bounds over the years.
The relationship between public sector expenditure and economic growth
has continued to generate series of debate among scholars. Government performs two function – protection
(security) and provisions of certain public goods Abdullah (2000) and Al – Yousif
(2000). Protection function consists of the creation of rule of low and
enforcement of property rights. This
helps to minimize risks of crimmality, protect life and property and the nation
from external aggression. Under the
provision of public goods are defense, roads, education, health and power, to
mention a few. Some scholars argue that
increase in government expenditure on socio – economic and physical
infrastructure encourages economic growth.
For examples, government expenditure on health and education raises the
productivity of labour and increase the growth of national output.
Similarly, expenditure on
infrastructure such as roads, communication, power, reduces production costs,
increase private sector investment and profitability of firms thus fostering
economic growth. Supporting this view,
scholars such as Al – Yousif (2000), Abdullah, (2000), Ranjan and Sharma (2005)
and Couray, (2009) concluded that expansion of government expenditure
contributes positively to economic growth.
Researchers on public
sector expenditure and economic related topics have been many and varied and so
are the theories. For instance Ram
(1986) found that a stringer positive relationship exists between public sector
expenditure and economic growth in lower income countries than in higher income
countries. Offurum (2005) in an
extensive study investigated the impact of public sector expenditure on
economic growth. He made a comparative
analysis of selected countries and concluded that significant relationship
exists between some macro economic variables and changes in public sector
expenditure.
However most of these
works have concentrated on the size of public sector expenditure and its
determinants without giving much consideration to the effects of public sector
expenditure activities on the growth of the economic under the study. However, some scholars did not support the
claim that increasing government expenditure promotes economic growth, instead
they assert that higher government expenditure may slowdown overall performance
of the economy. For instance, in all
attempt to finance rising expenditure, government may increase taxes and/or
borrowing. Higher income tax discourages
individual from working for long hours or even searching for jobs.
This in turn reduces
incomes and reduces investment expenditure as well as profitability of
firms. Moreover, if government increases
borrowing (especially from the banks) in order to finance it’s expenditure it
will compete (Crowds – out) away the private sector thus reducing private
investment. Furthermore, in a bid to
score cheap popularity and ensure that they continue to remain in power,
politicians and investment in unproduction project or in goods that the private
sector can produce misallocation of resources and impedes the growth of national
output.
In fact, studies by
Laudau (1986), Barro, (1991) Engen and Skinner (1992) and Folster and Henrekson
(2001) suggested that large government expenditure has negative impact on
economic growth. Granger causality tests
have been widely used in studies of public finance as well as several studies
of the determinants of economic growth including money supply (Aigbokan, 1995);
government spending and exports in Nigeria
and China
(Odusola and Akinlo, 1995). However, to
the best of my knowledge, only few of previous studies have used Granger
causality to examine the linkage between public sector expenditure and economic
growth. In the Nigerian economy public
expenditure can broadly be categorized into capital and recurrent expenditure.
The recurrent expenditure
are government expenses in administration such as wages, salaries, interest on
loams, maintenance etc. whereas expenses on capital project like roads,
airports health, education, telecommunication, electricity generation etc. are
referred to as capital expenditure (Obmna, 2003).
Governments intervene in
the economy to achieve a number of policy outcome, including addressing market
failure or improving social equity by redistributing resources. In particular, spending tends to be more
transparent, better allowing the community to hold government accountable for
their decisions. For example, it is
often difficult to determine the burden, distribution and sustainability of
regulation as the economic effects are difficult to measure. The greater accountability on spending also
means that it is often the most effective mean of achieving government policy
objective.
Spending as a proportion
of GDP is a measure to the level of direct government involvement in over all
economic activity. Measuring spending as
a proportion of GDP has at least two benefits.
First, it provides a comparable base for analyzing spending through
time. Unlike normal dollars, spending as
a proportion of GDP provides a meaningful comparison between years of relative
resource use.
Second, spending as a
proportion of GDP shows the relative extent of government intervention in the
economy and therefore assists in analysis of social choice. GDP represents the resources
available and spending represents the share of those resources allocated by
government through the budget. Based on
the above this paper attempts to investigate whether increasing government
spending induces economic growth performance in Nigeria.
Statement of the Problems
The role of public sector
expenditure in economic growth has been equity and stability which varied
across different phases of the economy in Nigeria. The historical importance of public
expenditure lies in the mixed economy model adopted after independence in Nigeria whereby
the government assumed the primary responsibility of building the capital and
infrastructure base to promote economic growth and development. The inadequate returns on capital outlays and
the macro economic crisis of early amities arising out of high fiscal deficit
shifted the focus of public expenditure to efficiency in its utilization for
facilitating adequate returns and restoring macro – economic stability. While the fiscal policy goal of stability
could be achieved, the modus operandi of public expenditure through curtailing of
the capital compinents raised concerns about infrastructure investment and its
impact in the long – term growth potential of the economy. An improved fiscal performance during 2003 to
2004 engendered by containment of the non – planned expenditures and supported
by high revenue mobilization on the back of buoyant real activity paved the way
for renewed commitment towards fiscal consolidation in Nigeria. The poor growth performance of the Nigerian
economy since 1986 has generated interest in issue of growth and
development. However, financial
liberalization was introduced in 1986 to realize necessary finance and promote
growth. This has made it necessary to
study and understand the relationship between finance and growth. Research work from the financial community
have focused on the issues of financial sector growth and economic growth. It is against these issues raised above that
called for undertaking this study to assess whether gross public expenditure
granger cause gross domestic product vice versa in Nigeria in the context of
economic growth. Thus whether gross
public expenditure affect gross domestic product in Nigeria.
Objectives of the Study
The major objective of
this study is therefore, to determine whether there is a relationship between public
sector expenditure and economic growth in Nigeria.
Also, to assess whether
gross public expenditure affect gross domestic product as a measure of economic
growth in Nigeria
economy.
The specific objective
are:
1)
To determine whether Gross public expenditure has any implication
on Gross domestic product in Nigeria.
2)
To examine the longrun relationship between the gross public
expenditure and economic growth.
Research Hypothesis
In
view of the objective of the study, the following hypothesis have been formulated
in null form.
i
H0: Gross public expenditure does not has
any significant implication on the Nigeria economic growth.
ii
Ha: Gross public expenditure and economic
growth do not have longrun relationship in Nigeria economy.
Scope of the Study
The study focuses on
public sector expenditure and economic growth in Nigeria. It covers a period of (1980 – 2011) fiscal
year in Nigeria. The variable of the study consist of Gross
public expenditure which representing public sector expenditure and Gross Domestic
Product as a proxy of economic growth.
Significance of the Study
The study will be of
benefit to the government especially the policy making him and hence will help
public fund managers in making adequate financial planning, forecast as well as
mending the needed areas in public expenditure.
Also it will encourage government in finding lasting solution to the
problem of income inequality and rising poverty across the country. All stakeholders in the public sector
expenditure will find the work valuable as if redirect and re – orientate the
thinking of managers of public fund to the benefit of all Nigerians. Individual and groups will also benefit from
this study as it will provide the avenue for better public participation in
budget and budgetary implementation and tracking.
Definition of Terms
Public sector expenditure: public expenditure or government
spending can be defined as a total expenses incurred by public authorities at
all levels of administration (local, state and federal government in a
particular country).
Economic Growth: Economic growth can be defined as an increase
in the amount of goods and services produced by an economy for over a period of
time.
