NEXUS BETWEEN PUBLIC SECTOR EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA
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
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Problem
Objectives of the Study
Scope of the Study
Significance of the Study
Definition of Terms
CHAPTER TWO: REVIEW OF LITERATURE
Review of Empirical Findings
CHAPTER THREE: METHODOLOGY
Sources of Data
Choice and Identification of Variables
A Priori Expectation
CHAPTER FOUR: RESULTS AND DISCUSSIONS
Presentation of Data
Empirical Result and Interpretation
Discussion of Findings
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
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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:
- To determine whether Gross public expenditure has any implication on Gross domestic product in Nigeria.
- To examine the longrun relationship between the gross public expenditure and economic growth.
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.
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