CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The nexus between government expenditure and economic growth has continued to generate controversies among scholars. Government performs two major functions in an economy namely protection (defense or security) and provision of certain public goods (Robinson, etal, 2014). Protection function consists of the creation of rule of law and enforcement of property rights. The protection function helps in curtailing the occurrence of crimes, protects lives and properties and protects the nation in entirety from external aggression. Furthermore, it is also the responsibility of the government to ensure the adequate provision of public goods such as roads, water, electricity, health, education, housing etc, to improve the material wellbeing of the populace.
Some scholars such as Abdullah (2010); Okoro (2013) and Robinson, etal, (2014) to mention a few, argued that increase in government expenditure on socioeconomic and physical infrastructures encourages economic growth. For example, government expenditure on health and education has the tendency to raise the productivity of labour and further stimulate the level of national output. Similarly, government expenditure on physical infrastructures such as roads, power, communication, water etc, reduces the cost of production by the manufacturing sector, encourages private sector investment, enhances foreign investment, raises the performance and profitability of firms and further propels economic growth. Supporting these views, scholars such as Ranjan (2008) and Corray (2009) adduced that that the enlargement of government expenditure contributes positively to economic growth.
However, some scholars such as Egbetunde and Fasanya (2013) and Taiwo and Kabir (2011) did not support the assertion that increasing government expenditure promotes economic growth. They rather adduced that higher government expenditure may reduce the overall performance of the economy. For instance, in an attempt to finance rising expenditure, government may raise taxes and/or borrowing. Higher income taxation discourages individuals from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In similar way, higher profit tax tends to increase the cost of production and reduces investment expenditure; the private sector would be crowded out, thus reducing private investment. Furthermore, in a bid to gain popularity and federal acceptance, politicians and government officials sometimes increase expenditure and investment on unproductive projects or in goods that the private sector can produce more efficiently. Thus, government activity can sometimes lead to misallocation of resources and retards the growth of national output.
In Nigeria, government expenditure has continued to rise due to large proceeds from the production and sales of crude oil over years and the demand for public goods have also been on the upward trend. Available statistics showed that total government expenditure (capital and recurrent) have continued to rise in the last three decades. For instance, total recurrent expenditure rose from N461, 600 million to N1, 589, 270 million between 2000 and 2013. In the same manner, the composition of government recurrent expenditure showed that expenditure on defense, internal security, education, health, construction, transportation and communication increased as well between 2000 and 2013. The capital expenditure stood at N239, 450 million and N860, 230 million in 2000 and 2013. Furthermore, the various components of capital expenditure (defense, health, education, transportation and communication) have been on the increased as well during those periods. (CBN, 2014).
The relationship between government spending and economic growth is important for all developing economies like Nigeria, most of which have experienced increasing level of government spending and have achieved low level of economic development overtime. Since independence, the revenues accruing to Nigeria has been on the increase annually. Also public spending incurred by the government has been on the upward trend over years, despite this, Nigeria is still bedeviled with poor level of productivity in relation to demand for them, dilapidated state of existing infrastructural facilities, low level of technology, high rate of unemployment, dearth of functional and effective infrastructures, epileptic power supply, low per capita income, low savings and investment and many more.
1.2 STATEMENT OF PROBLEM
Unfortunately, rising government expenditure has not translated into meaningful improvement in the standard of living of the people as Nigeria ranks among the poorest countries in the world. In addition, majority of Nigerians have continued to live in abject poverty, with more than 50% living on less than US$2 per day. Coupled with these, dilapidated infrastructures especially roads and power supply has led to the collapse of some local industries and migration of some multinational firms, which has escalated the unemployment rate in the country. Moreover, macroeconomic indicators such as balance of payments, inflation rate, interest rate, exchange rate, national savings, per capita income reveal that Nigeria has not fared well in the last couple of years.
1.3 OBJECTIVES OF THE STUDY
The study seeks to examine the impact of government expenditure on economic growth in Nigeria. Specifically, the study is targeted to;
i. Examine the impact of government capital expenditure on economic growth in Nigeria.
ii. Examine the impact of government recurrent expenditure on economic growth in Nigeria.
1.4 RESEARCH QUESTIONS
Based on the objectives stated above, the study attempts to provide satisfactory answers to the following research question;
i. What is the impact of government capital expenditure on economic growth in Nigeria?
ii. What is the impact of government recurrent expenditure on economic growth in Nigeria?
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