IMPACT OF PUBLIC EXPENDITURE ON NIGERIA’S ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The management of the economy is now in circle of functions of governments throughout the world. The abandonment of laissez fair doctrine of the classical school brought about the government intervention in the working of the economy. Governments all over the world now feel compelled to ensure that their economies are managed to achieve major desirable objectives of full employment, price stability,economic growthand external balance (Ohale and Onyema 2002). John Maynard Keynes, an English Economist, popularized public expenditure as a stabilization tool through his philosophy of active government intervention in an economy that pulled many economies out of the Great Depression of 1930s. Government now play serious role for most economics of the world by intervening in the economy to achieve macro-economic goals, price stability, creation of employment, achieve industrialization and maintain a reasonable level of economic growth.

Many developing countries are currently undergoing substantial macroeconomic adjustment.   It   is   not   clear   how   such   programmes   are   affecting   government expenditures and hence longer-term economic growth and poverty reduction. Thus, it is important   to monitor trends in the levels and composition   of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future.

The link between public expenditure and economic growth has attracted considerable interests on the part of economic researchers both at the theoretical as well as empirical level. Roughly speaking, one may distinguish between two opposing views: On the one hand, there is the Keynesian approach according to which government spending is an important policy tool to be used to ensure a reasonable level of economic activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh and Sani, 1984); and secure an increase in productive investment, thus providing a socially optimal direction for growth and development (Ram, 1986). The opposite  view  is that  excessive  state  intervention  in economic  life affects  growth performance in a negative way for two reasons: first, because government operations are  often  conducted  less  efficiently,  they  reduce  the  overall  productivity  of  the economic   system,   second,   because   excessivengovernment expenditure  (usually accompanied by high taxation levels) distorts economic incentives and results in suboptimal economic decisions (Barrow 1990; King and Rebel 1990).

Those who support larger size of the government give credence to the provision of certain goods and services that would otherwise not be provided by the private sector. They assert that government comes into economic activities due to failure of the market and externalities to establish a predetermined growth path. Government exists so as to provide social and physical infrastructure, by undertaking some investment and expenditures. By these ways, the government can directly or indirectly improve the productivity of the private sector by efficient and effective allocation of resources. The existence of government is correctly justified when one looks at the legal functions of the government, in terms of property rights (Atkinson and Stiglitz 1980:5), provision of security, maintenance of law and order, etc. In this sense, government expenditures have become expedient and necessary to overcome the obstacles of economic development.

However, when the size of the public sector becomes very large it can impinge on economic growth and development (Peden and Bradley (1989: 239), Vedder and Gallaway (1998), Folster and Henrekson (2001), etc). The larger the size of the public sector, the more difficult it becomes to coordinate the activities of the key players in the system.  Larger governments   tend to crowd out private investment, which invariably impinges on domestic output (Ahmed and Miller, 1999). Larger sizes of government can also create output volatility (Acemoglu and Ziliboti, 1997; and Koskela and Viren, 2003).

Maintaining law and order, in particular, securing property rights is probably the most acceptable rationale for government intervention. Theoretically, it is argued that enforcement of property rights being a public good, its provision can only be materialized   through collective action (Gradstein, 2004).  The rationale for the existence of government anywhere, including Nigeria, can be viewed from the perspective of the institutions of property rights, rule of law, governance, security, enforcement of the rule of law, etc. Nigeria is a Federal state with three tiers, with multiple and diverse ethnic and other socio-political differences, which most often determine the volume and rate of spending. The nature of public spending (in Nigeria) depends majorly on the revenue – of which oil controls a greater percentage – and which is also determined by the vagaries of world market interactions.  The  other institutional  factors which can influence the public spending and economic  growth include institutional quality (the enforcement of property rights), political instability (riots,  coups,  civil  unrests,  civil  wars,  etc),  characteristics  of  political  regimes (elections, constitutions, executive powers), social capital (the extent of civic – private - activity and organizations) and social characteristics (differences in income and in ethnic,  religious,  and  historical  background)  (Aron,  2000:100).  All these affect nations’ investments directly as they create harsh environment and insecurity, which increases transaction costs and mar the private investment for growth.

According to North (1990:110), “Third World countries are poor because the institutional constraints define a set of payoffs to political/economic activities that do not   encourage   productive   activity”.   Such   rules   affect   both   individuals   and organizations, defined as political organizations (city councils, regulatory agencies, political parties, tribal councils), economic organizations (firms, trade unions, family farms, cooperatives, etc), educational bodies (schools, universities, vocational training centres), and social organizations (churches, clubs, civic associations) (Aron, 2000). The inability of the government to enforce the rule of law affects the economies of developing countries, including Nigeria, and as such, rent-seeking   behaviours, corruption, bribery and protection of individuals and organizations connected with highly placed people become the common phenomenon. These behavioural attitudes raise the transaction costs and costs of information in the production process and make the rule of law unreliable.

Due to the mixed feeling on the above the debate has been inconclusive on whether or not increasing government spending induces economic growth or not. Based on the above this paper attempts to investigate whether increasing government spending induces economic growth performance in Nigeria.

1.2       Statement of Problems

Nigeria has consistently had deficit spending over the years without equivalent rate of economic growth.  Data shows that output of Nigeria has been fluctuating for some years and the sources of these shocks may not be clear.  The growth rate (real GDP growth) of output was 3.2, 2.4, 2.8, 3.8 and 4.7 respectively, in 1997, 1998, 1999, 2000 and 2001, while the total expenditure growth was 12.1, 15.6, 28.1, 15.6, and 19.3 per cent in 1997, 1998, 1999, 2000, and 2001, respectively (CBN, 2001). This implies that the growth rate of public expenditure was far higher than that of economic growth.

The aggregate expenditure of the Federal Government, in nominal terms, increased by 32.2 per cent in 2008 (CBN, 2008). As a proportion of GDP, total expenditure increased by 13.5 per cent, from 11.7 per cent in 2007, while the GDP growth rate was 6.4 percent, almost the same as the 6.5 per cent recorded in 2007 and the average annual projected growth rate for the period 2004 – 2008. This implies that the public expenditure is growing faster than the rate at which the output is growing. As a percentage of GDP, recurrent expenditure increased from 1.2 percentage points to 8.8 per cent. Most of the components of recurrent expenditure increased relative to their levels in 2007.  As a proportion of Federal Government revenue, capital expenditure was 30.1 per cent, exceeding the stipulated minimum target of 20.0 per cent under the West African Monetary Zone (WAMZ) secondary convergence criteria. The data speaks volume that the economy does not grow at a fast rate as the growth rate of government expenditures. It is expected that as the public expenditure expands output is expected to expand also, because public expenditure should be translated into output growth. Or does it imply that much of the public expenditure find their ways into some other paths different from the intended routes?

However, in 2009, the aggregate expenditure of general government fell by 5.1% from its level in 2008, which represented 29.4% as compared with 31.5% in 2008, while GDP growth rate, at 1990 constant prices, was 6.7%, which exceeded the 6.0% recorded in 2008 and annual growth rate of 6.4% forth period of 2005 – 2009 (CBN Annual Report, 2009:74). In 2010, the aggregate expenditure of general government increased by 15.3% from the level in 2009. As a proportion of GDP, it represented 28.4% as compared with 28.8% in 2009, while the growth rate of GDP was 7.9% which exceeded the 7.0% recorded in 2009 and the average annual growth rate of 6.7% but lower than the target growth rate of 10% for the year (CBN, 2010).

From these data, the rate at which the output grows has been lower than that of the growth of public expenditure simply implies that there is need to investigate whether the rises in public expenditure have been accompanied by rise in the output of Nigerian economy.  The data on the fluctuations of the GDP and public (government) expenditure are inexhaustible. This makes it expedient to understand the nature of such fluctuations in the macroeconomic variables and how they impact on the output of the economy.

1.3       Objective of the Study.

Given the issues raised, the major objective of the study is to ascertain whether there is a relationship between federal government expenditure and economic growth in Nigeria. The specific objectives include:

     I.        To determine the impact of federal government capital expenditure on the economic growth in Nigeria;

   II.        To examine the impact of federal government recurrent expenditure on the economic growth in Nigeria.

  III.        To examine the impact gross fixed capital formation on the economic growth in Nigeria.

 IV.        To determine the impact of inflation rate on the economic growth in Nigeria.

1.4    Research Questions

Having stated the research objective, the research questions formulated to guide the study are:

     i.        What is the impact of federal government capital expenditure on the economic growth in Nigeria?

   ii.        To what extent has federal government recurrent expenditure impacted on economic growth in Nigeria?

  iii.        To what extent has gross fixed capital formation impacted on economic growth in Nigeria?

  iv.     &nbs