1.1INTRODUCTION
economic growth is fundamental for sustainable development. It is not possible, for a developing country, to ameliorate the quality of life of its growing population without economic growth. The relationship between government expenditure and economic growth has continued to generate series of debate among scholars. Government performs two functions- protection (and security) and provisions of certain public goods (Abdullah, 2000) and (Al-Yousif, 2000).
Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks of criminality, protect life and property, and the nation from external aggression. Under the provisions of public goods are defense, roads, education, health, and power, to mention few. Some scholars argue that increase in government expenditure on socio-economic and physical infrastructures encourages economic growth. For example, 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, communications, power, etc, reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth. Supporting this view, scholars such as (Al-Yousif, 2000); (Abdullah, 200); (Ranjan and Sharma, 2008); and (Cooray, 2009) concluded that expansion of government expenditure contributes positively to economic growth. Economic growth represents the expansion of a country’s potential GDP or output. For instance, if the social rate of return on investment exceeds the private return, then tax policies that encourage can raise the growth rate and levels of utility. Growth models that incorporate public services, the optimal tax policy lingers on the characteristic of services. Growth means an increase in economic activities. Todaro (1995) citing Kuznets defined a country’s economic growth as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growth capacity based on advancing technology and the institutional and ideological adjustment that it demands.
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1.2Statement of the Problem
In the last decade, Nigerian economy has metamorphosed from the level of million naira to billion naira and postulating to trillion naira on the expenditure side of the budget. This will not be surprising if the economy is experiencing surplus or equilibrium on the records of balance of payment. Better still, if there are infrastructures to improve commerce with the system or social amenities to raise the welfare of average citizen of the economy. All these are not there, yet we always have a very high estimated expenditure. This indicates that something is definitely wrong either with the way government expands budget or with the ways and manners it has always been computed.
1.3 Research Questions
Hence, in order to justify reasons for so much expansionary effects on the way and manner public expenditure either capital or recurrent expenditure have been geometrically computed in or order to finance the infrastructural facilities towards improving commerce with the system or social amenities so as to raise the welfare of average citizen of the economy, this study tends to provide solution to the following questions: a. Is there any relationship between government expenditure either capital or recurrent expenditure and economic growth in Nigeria? b. Is there any way to justify the surplus, deficit or equilibrium position on Nigeria balance of payment due to the effects created by public spending? c. Is it true that as the nation is expanding its public expenditure on provision of infrastructural facilities as well as administration financing, the economy has been growth-enhancing? d. Does public expenditure on provision of infrastructural facilities as well as administration financing determines the pattern and form of growth in output of the economy? 1.4Objectives of the Study
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The broad objective of this research is to investigate the empirical impact of government expenditure on economic growth in Nigeria, period 1980-2010. The specific objectives are:
1. To investigate the relationship between government expenditure and economic growth
2. To determine the significant effect of government expenditure on economic growth
3. To derive recommendations based on the research findings.
1.5Significance of the Study
The purpose of this study is to empirically re-examine the effect of government spending on the economic growth in Nigeria. Rising government expenditure has not translated to meaningful growth and development, as Nigeria ranks among the poorest countries in the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than US$2 per day. Couple with this, is dilapidated infrastructure (especially roads and power supply) that has led to the collapse of many industries, including high level of unemployment.
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 couple of years. Given the issues raised above, this research seeks to examine the effect of government expenditure on economic growth in Nigeria. The research work is organized as follows. Chapter 1 is the introduction, while chapter 2 contains literature review and theoretical framework. Chapter 3 consists of methodology and model estimation, while chapter 4 contains discussion of results. Chapter 5 is for recommendations and conclusion. 1.6Research Hypothesis
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Hypothesis One
H01: There is no relationship between government expenditure and economic growth. Hypothesis Two
H02: Government expenditure has no significant effect on economic growth.
CHAPTER TWO
LITERATURE REVIEW
This section discusses relevant literature and theoretical framework on the linkage between government expenditure and economic growth. Relevant issues that would be discussed in this chapter are: 1. General overview
2. Economic development and Growth
3. Empirical Evidences
4. Overview of Public expenditure in Nigeria
5. Theoretical review
6. Theory of increasing Public expenditure
7. Empirical Review
8. Conceptual Framework
9. Theories of Government expenditure
10. Public Expenditure Policies in Nigeria
CHAPTER THREE
3.1RESEARCH METHODOLOGY
Building on the existing theoretical and empirical literature, this study perceives a relationship between government expenditure and economic growth in Nigeria. Therefore, exploratory causal study design would be adopted to investigate the impact of government expenditure on economic growth within the context of Nigerian economy. Empirical econometric approach would be adopted in analyzing data considered relevant components of government expenditure and economic growth. The relevant time series data would be extracted from the Statistical Bulletin of the Central Bank of Nigeria. Collection procedure is non probabilistic. Based on the perceived causal relationship between the identified variables of the research interest, a multiple regression model which is stochastic in nature would be specified to forge a link between government expenditure and economic growth. This is to accommodate the possible influence of other variables that may exert effect on economic growth but which are not included in the model. This implies that this study recognizes the influence of such random or intervening variables.
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However, the variables included in the model are considered components of government expenditure adequate enough to explain economic growth. Employing appropriate econometric technique, government expenditure and economic growth data are used to estimate the specified model for numerical values of the coefficients of explanatory variables, and computation of other statistics relevant for evaluation and operationalizing of the study hypothesis. The estimated model would be discussed vis-a-vis stated a priori theoretical expectations about the sign of the numerical values of model coefficients. This provides insight into the nature of the relationship between government expenditure and economic growth, and the effect thereof. Subsequently, the estimated model would be evaluated for statistical significance and explanatory power after testing for co-integration and stability.
Evaluation provides insight into the behavioural characteristics of the various components of government expenditure included in the model the partial and joint effects on economic growth. This provides basis for acceptance or rejection of the research hypothesis, and the impetus for inference on the relevance of government expenditure in growth process of the economy. Variables that will enter the model are gross domestic product (GDP) as explained variable, and government capital and recurrent expenditures on economic services (CEES and REES), social and community services (CESCS and RESCS) and transfers (CETRANS and RETRANS), as explanatory variables. Estimation of the model would be via the ordinary least squares (OLS) techniques facilitated by the application of the software for empirical econometric analysis, E-Views.
The regression output includes other relevant statistics that enhance further analysis and evaluation. Estimates of model coefficients are evaluated for partial and joint significance of their effects on economic growth. Basis of evaluation are the t- and Fstatistics respectively at 0.05 level of significance and relevant degrees of freedom. Explanatory power of the model, as a measure of goodness of fit, would be determined using the coefficient of determination (R-Square and adjusted R-Square).
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These statistics enhance insight into the extent to which the various government expenditures explain economic growth in Nigeria for the period under review.
3.2 Research Hypothesis
Hypothesis One
H01: There is no relationship between government expenditure and economic growth. Hypothesis Two
H02: Government expenditure has no significant effect on economic growth.
3.3 Model Specification
From theoretical perspective, the model says that economic growth (GDP) depends on government expenditure disaggregated into capital and recurrent expenditures on economic services (CEES and REES), capital and recurrent expenditures on social and community services (CESCS and RESCS) and capital and recurrent expenditures on transfers (CETRANS and RETRANS).
This implies that total government expenditure on these services is a composite spending, and that GDP is a weighted disaggregated components of government expenditure, with each weight showing the prospective effect of the respective component on economic growth. This enhances determination of the respective partial relationships with, and effects on, economic growth during the study period. The weights, λi (i = 1, 2, 3, —, 6) are the respective partial effects of the explanatory variables on the explained variable. Thus, the model is linearly expressed as follows: GDP = λ0 + λ1CEES + λ2REES + λ3CESCS + λ4RESCS + λ5CETRANS + λ6RETRANS + μ
where λ0 = Intercept of the regression line. It depicts any level of economic growth that at zero government expenditure level. λi (i = 1, 2, …, 6) = coefficient of weights of the components of government expenditure. It is a measure of the effects of the respective components of government expenditure on economic growth. μ is stochastic variable to accommodate the influence of other determinants of economic growth not included in the model. On estimation, the intercept (λ0) and slope coefficients λ, is expected, a priori, to have positive sign, λi (i = 0, 1, 2, —, 6) > 0, implying that each component expenditure of the government is expected to correlate positively with economic growth.
