GOVERNMENT EXPENDITURE AND MACRO ECONOMIC PERFORMANCE IN NIGERIA

ABSTRACT

This study examines the long and short run relationship between public expenditure and economic growth in Nigeria over the period of 1986-2014, using Johansen cointegration and error correction approach. Two components of Government expenditure and gross capital formation ratio are derived from Cobb Douglas production function. The result shows recurrent expenditure is the major driver of economic growth in Nigeria. Controlling for the influence of non-oil revenue, this study shows a negative and significant long run relationship between economic growth (rgdpc) and recurrent expenditure coexists with a positive short run relationship, highlighting the dual effects of recurrent expenditure on economic growth in Nigeria. For the capital expenditure, this study documents negative and significant long run effect of capital expenditure on economic growth in Nigeria. The variance decomposition confirms the collective contribution of public expenditure on economic growth. The finding of this study have some policy implications for policyholders because it could be guide on effective utilization of public funds on rightful projects rather than spending it on enormous projects that will not translate into meaningful growth of the economy

Keywords

Recurrent expenditure; Capital expenditure; Gross capital formation; Johansen cointegration; Economic growth; Government expenditure

CHAPTER ONE

Introduction

Background to the Study

For decades the relationship between Government expenditure and economic growth has continued to occupy series of debate among researchers and policy makers. The common consensus among the researchers is that Government expenditure has been identified as an important instrument which the government uses to influence the performance of the economy Oni LB, Aniakam O, Akinsanya TA (2014)  The channel through which public authorities satisfy the collective want of the people can be classified under Government expenditure. Salawu observed that public expenditure is the expenses incurred by the government for the maintenance of itself, the economy and the society at large. Public expenditure is an important mechanism which the government uses to pilot significant effects on the general growth of the economy. Anyanwu [4] observed that public expenditure is simply government spending from revenue derived from taxes and other sources. Again, the study articulated that public expenditure is centered on expenses contracted on government own maintenance for the growth and stability of the general economy. Another study by Anyanwu [5] noted that public expenditure is that part of fiscal tools that embraces and puts to use judiciously, all revenue generated from all sources, for the growth and installed system in the economy.

On decomposed level, Ankrani is of the opinion that government spending on collective needs and wants of the country in different areas including pension, infrastructure, capital investment, roads etc. are categorically classified under Government expenditure. Jhingan [6] conclusively added that public expenditure is “the beginning and end of the collection of revenues by the government”.

In line with the aforementioned, there is a direct relationship between the amount of Government expenditure and economic growth. Therefore, the policy makers place more emphasis on the roles of Government expenditure as an instrument which the government can apply to restore some economic problems such as reduction in inequality, inflation, fall in exchange rate, unemployment, dwindling oil price and the desire to restore the economy on the part of full employment, price stability, balance of payment equilibrium and above all, increase in economic growth. No wonder Mankiw, David, and David [7] earlier reviewed that economic growth is the increase in the inflation-adjusted market value of goods and services produced by economy overtime. Ideally, economic growth brings about a better standard of living of the people and this most at times is brought about by improvement in availability of infrastructure, access to food, health, housing, education, good roads etc. These improvements are very important in stimulating economic activities as well as addressing the nation’s human capital development.

Another point of interest among scholars in Nigeria economy is that total government expenditure in terms of capital and recurrent expenditures have continued to rise over the last three decades [8]. Notable studies in the likes of Abu, Abdullahi and Omoke all stressed that expenditure on defense, internal security, education, health, agriculture, construction transport and communication are rising overtime.

Judging from the above viewpoints, the various components of capital and recurrent expenditure have risen between the decades of 1981 and 2010. It has been a great debate among researchers in economic literature on the impact and contribution of this multiple increase in our economy [9] emphasized that recurrent expenditure during the last decade under review (2010) had accounted for over 50% of total expenditure, while the share of capital expenditure was relatively below 50% of total Government expenditure. It must also be noted that the Government capital expenditure, theoretically, is the aspect of Government expenditure expected to drive economic growth. Out of the various categories in Government capital expenditure, in the light of the foregoing, it could be deduced that the current state of Nigeria economy could be partly linked to the nature of Government expenditure. Intuitively, for a developing nation capital expenditure particularly in capital projects or infrastructural development ought to constitute significant proportion of her total Government expenditure to lay the foundation for economic growth and sustainable development, but this has not been the case in Nigeria. However, we are careful not to jump to the conclusion that the preponderance of recurrent expenditure over capital expenditure has -adversely affected the nation’s economy. This is purely on the desired results in the economy to force an increasing intervention on the part of the state. This did not lead to a rapid growth in the Government and Government expenditure but, also fed various analytical hypotheses concerning public expenditure [10].

A question therefore, poses itself: “Is the increasing Government expenditure influencing the rate of economic growth in Nigeria?” Specifically, Jhingan observed that some of the reasons adduced for the increase in government expenditure overtime are; inflation, public debt, tax revenue and population.

Researching further, it is a common belief that the government plays a significant role in the development of a country and the Government expenditure is an important instrument for the government to control the economy. Also, economists have noted its effects in promoting economic growth. Meanwhile, the general view is that Government expenditure either recurrent or capital expenditure notably on social and economic infrastructure can be growth enhancing. Jhingan stated that Government expenditure, by increasing social welfare, helps in reducing inequalities of income and wealth and as well can be used to create trade as well as to correct externalities and regional disparities if employed judiciously, thereby fastening economic growth.

From this point that Omoke conclusively put that an increase in government expenditure will yield a positive increase in the growth of the economy by increasing the national income especially, when it is injected in development programs. For example, government expenditure on social and community services such as health and education are capable of raising the productivity of labour and increase the growth of national output. Also, an increase in infrastructural equipment and rise in salaries will motivate the lecturers and teachers to dedicate more time in equipping the students with more skills and knowledge. Similarly, Abu and Abdullah observed that the Government expenditure on infrastructure such as roads, communication, power etc. reduces production costs, increase private sector investment and profitability of firms and fosters economic growth.

In Nigeria today, the Government is predominant. The reason appears to lie in what the government perceived as its social responsibility or share of commitment in the growth and development process. Its largeness has been stimulated by the urge to adopt shock adjustment to economic growth for quicker realization of national aspiration. This has led to the overwhelming consistent increase in the Government expenditure in Nigeria [11]. Specifically, the Government expenditure in Nigeria has continued to raise for over three decades, due to the increased demand for public (utilities) goods like roads, communication, power, education and health [12]. However, it has been argued by scholars if the rising state of Government expenditure in Nigeria has gainfully contributed to economic growth in Nigeria. Okoro pointed that increase in per capita which are a symbol of economic growth that leads to development and reduction in poverty. However, the study alarmed that many Nigerians have continued to wallow in abject poverty, while more than 50% live on less than US$1 per day [13]. Moreover, macroeconomic indicators like balance of payments, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last three decades.

Furthermore, Government has incurred expenses in areas such as physical infrastructure, health, education, economic services, defence and general administration. Economic theory predicts that increases in productive public spending in areas like physical infrastructure, health and education leads to increases in economic growth of a country. Some governments have tried to promote public spending due to an understanding that large Government expenditure is a source of economic growth and development, especially, in a country where Government is predominant like Nigeria. Therefore, understanding the relationship between public expenditure and economic growth could have a significant impact on the formulation and implementation of major macroeconomic policies. It could also guide the formulation of major economic policies required urgent funding and attention.

Controlling for the influence of non-oil revenue, this study seeks to uncover the long run and short run relationship between Government and economic growth in Nigeria using Johansen cointegration approach. By examining the effect of public expenditure on economic growth, this study contributes to a number of studies that have explored Government contribution on economic growth [14].

The remainder of this study is structured as follows: Section 2 details the literature. Section 3 contains details of the data and methodology employed the study. Section 4 contains the presentation of results. Section 5 offers an analysis of the results presented in the previous section and Section 6 concludes this paper.

Statement of the Problems