THE IMPACT OF GOVERNMENT EXPENDITURE ON INFLATION IN NIGERIA ABSTRACT
This study examined the impact of government expenditure on inflation in Nigeria. This research work made use of secondary data which were collected from the central bank Nigeria Statistical Bulletin (2017). The data were collected for a period of thirty two years (i.e. 1981-2017). The Study establishes the order of integration of individual time series through the unit root test and also subjected all the variable to stationary test, however, haven test the stationarity for each time series, test for co-integration was conducted between the variables, which reveals that none of the variables co-integrated, and thereafter an error correction mechanism or model (ECM) was conducted on the model. The result of the Error Correction Mechanism reveals that government expenditure has no statistical relationship with inflation, though the coefficient of government recurrent expenditure was positively related to inflation. Government expenditure and exchange rate was able to explain 9.65% of the total variation in inflation, after taking cognisance of the degree of freedom. The study concluded that Government expenditure is able to induce inflation through its impact on money supply. The study recommends that: Much of government spending should be channeled into productive ventured such as directly productive activities (DPAs) and Social Overhead Capital (SOCs); Money supply should be strictly controlled; Formulate appropriate fiscal and monetary policy - mix to effectively Control inflationary pressure in the economy; Maintain a good strategic balance between capital and recurrent expenditure to prevent the economy from being consumption - based.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Government Expenditure is the amount of resources spent by a particular government to finance all its operations so as to provide public goods. Oyinlola (2010) observed that the size of government expenditure and its impact on economic growth have emerged as a major fiscal management issue facing economies in transition. Singh and Sahini (2014) has urged that a large and growing government is not conducive to better economic performance. For decades public expenditures have been expanding in Nigeria, as in any other country of the world. Akpan (2015) opines that the observed growth in public spending appears to apply to most countries regardless of their level of economic development. Over the years, increases in the finances of government have led to a number of theoretical and empirical investigations of the sources of such increases. Researchers have particularly questioned whether increases in the size of federal budget tend to be initiated by changes in expenditure followed by revenues adjustments or by the reverse sequence or both Baghestani & Mcnown, (2004), Akpan, (2015). A growing government expenditure is contrary to a government’s economic interest because the various methods of financing government such as taxes, borrowing and printing money have harmful effects. Government spending by its very nature is often economically destructive regardless of how it is financed Kneller (2009).
Governments need finances because of their roles in the society. For a government to provide all the public goods, it requires finances which are obtained mainly through taxes, grants and loans Tanzi, (2004). In Nigeria, governments depend more on oil revenues and taxes to finance their operations and often borrow and get grants to finance their budget deficits. Inflation on the other hand determines the value for money that a government will achieve out of its expenditures. One of the most macroeconomic objectives of any country is to sustain high economic growth with low inflation Liu, (2008). Inflation imposes negative externalities on the economy when it interferes with the economies efficiency. It may also reduce a country’s international competitiveness, by making its exports relatively more expensive than its imports thus impacting on the balance of payments Koiman, (2007). Individually, inflation and government expenditure do affect economic growth.
Government expenditure plays an important role in physical and human capital formation over time. Government performs two functions namely: protection and provision of certain goods Abdullah, (2010) and Fasta, Hagen, Hughes, Siebert and Strauch (2003). Protection function consists of the creation of the rule of law and enforcement of property rights which help minimize risk of criminality and external aggression. Under the provision of public goods are health, education, power, agriculture, transportation etc. Many political philosophers like Hobbes and Locke considered the hypothetical disadvantages of life without government Devarjan, Swaroop and Zou (2006). The ideal size of government is not the problem of the economic theory. But, economic theory tells us to examine cost and benefit in order to determine whether resources are allocated in a manner that increase or decrease economic growth.
The basic economic policy of the good society is public expenditure in line with future economic growth and wellbeing. For example, 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 productions cost and increases private sector investment and profitability of firms thus fostering economic growth. Supporting this view, Scholars such as Abdullah, (2010) concluded that expansion of government expenditure determine the inflation rate of an economy. In the Nigerian context for instance, the public sector consists of the Federal, state and local government enterprises. Some government financial operations remain entirely outside the budget and are funded by extra budgetary accounts. Therefore, the effects of expenditure on economic growth may be a comprehensive indicator of public productivity. However, governments have always been very careful in planning her expenditures by means of government budgets and National income.
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