The research empirically analysed the impact government expenditures on economic growth of Nigeria. Specifically, the study centred on the impact of government gross capital formation and government final consumption expenditure on gross domestic product of Nigeria from 1996 to 2016. Therefore, data on government gross capital formation and government final consumption expenditure was generated from statistical bulletin of Central Bank of Nigeria (CBN) covering the stated time frame. The generated data was analysed using multiple regression analysis and the result provided the findings that; gross capital formation i.e government expenditure on capital projects has a negative and significant impact on economic growth of Nigeria and government final consumption expenditure has a positive and significant effect on the economic growth of Nigeria. based on the findings, the study recommended that; government annual expenditures on capital project such as the provision of infrastructural facilities should be contracted since increase in capital expenditure will not result in rapid and sustained economic growth; and that government recurrent expenditure should be increased to ensure rapid economic growth, since an increase in recurrent expenditure results in rapid increase or improvement in the state of the economy.
Keywords: Capital formation, final consumption expenditure and GDP
- Background to the Study
It is a proven fact that no society throughout history has ever attained a high level of economic growth without the contribution of government. Where government do not exist anarchy reigned and little wealth was accumulated by productive economy activity.After government took hold of the rule of law and the establishment of private property right,its impact in the growth process of the country is heightened.Underdeveloped nations are keen on rapid economic growthwhich requires huge expenditure to be incurred in the various sectorsof the economy.
Overtime, the relationship between government expenditure and economic growth has continued to generate series of debate among scholars. Government performs two notable functions: protection (providing security) and provisions of certain public goods and services. Protection function consists of the creation of rule of law and enforcement of property rights through the engagement of the services of security personnel. This helps to minimize risks of criminality, protect life and property, and the nation from external aggression (Al-Bataineh, 2012). Under the provisions of public goods are defense, roads, education, health, and power, to mention a 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.
Economic growth represents the expansion of a country GDP or outputs. Growth means an increase in economic activities. Todaro (2015) defines a country’s economic growth as a long term rise in capacity to supply increasing diverse economic goods to is population, this growth capacity is based on advancing technology and the institutional and ideological adjustment that is demand. In a country where government have monopolized the allocation of resources and other economic decisions, societies have been successful in attaining relatively high level of economic growth and affluence.
Anyanwu (2003) opines that in the Nigeria context, the public sectors consist of the federal government, state government and local government. The second national development, just as it considered public enterprise as crucial to growth and self-reliance due to capital scarcity, structural defects in the private sector. Third nation’s development plan(1975 – 1980) advocated some shift in resources allocation in favours of rural areas which were said to have benefited little from the economic growth of the 1970’s. Thus smaller farmer and the rural population were expected to benefit from public expenditure.
The major instruments by which the government can ensure an effective growth in economic activities are;
- Expenditure that induce the firm or workers to produce certain goods and services.
- Taxes that reduce private consumption or investment and thereby free resource for public expenditure.
- Regulation and controls that direct people performance or desist for economic growth to attain economic growth.
These objectives of the above expenditures are summarized as;
- Provision of infrastructural facilities such as good roads, light, water, transport and communication facilities etc in both urban and rural area with the view to adequate support to the productive sector and enhancing private sector participation on the various sectors of the economy.
- Streamlining public expenditure to give priority to the completion of the initial ongoing viable project.
According to Chinweoke et al., (2014), government expenditure in addition to raising the level of economic growth also influences the pattern of production and the component of output. Generally, government expenditure is classified into two which are; current expenditure which involves all expenditure by government for maintenance of existing or new institutions and services, they are salaries, wages of public offers and fringe benefits and expenses for servicing activities which involves administration, defense and other social services like education, health and pension schemes. The other one is capital expenditure, this is the cost of bringing into existence new institutions, services and project. It is simply all government expenses on building road, factories, schools, and equipment requirement for providing social and economic services.
In the 1970s, unprecedented Nigeria’s oil revenue obviously permitted massive federal government expenditure. A dramatic jump in capital expenditure was noticeable between 1974 and 1980, reflecting the significant increase in government revenue following favourable developments in the international petroleum market. The period thus witnessed a boost in the provision of economic and social infrastructure such as highways, air and sea ports, hospitals, schools and housing. However, capital expenditures of the Federal Government as a percentage of GDP decreased steadily from 20.48 per cent in 1980 to 6.27 per cent in 1995. This reflected adherence to the prescriptions of SAP and also the impact of the oil glut of the 1980s on revenue of government and by extension on its expenditure. Between 1999 and 2010, it had fallen to a low of 0.30 per cent, from 5.23 per cent in 2000. In general, the period, 1990 – 1998, was characterised by high growth in capital expenditure in nominal terms, though in real terms, growth was only marginally. The upward trend in nominal capital outlay during the period reflected high rates of inflation and the consequent low value of the naira (Oni, 2014).
Therefore, the study is poised to ascertain the effect of government capital and current expenditure on economic growth of Nigeria.
- Statement of the Problem
It is sad to note that rising government expenditure has not translated to meaningful economic growth, 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, thus, leading to high rate of unemployment in the country.
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.The better reality of the Nigerian situation is not yet that the poverty line is getting worse by the day but more than fourteen of Nigerians live in condition of extreme poverty of less than ₦320 per month which barely provide for a quarter of the nutritional requirement of health living.
The sluggish growth of the Nigerian economy despite the increase in government expenditure has been rather surprising. Since independent according to Kweka (1999), government consumption and investment expenditure in Nigeria has been on the increase. On the other hand, the GDP growth rate of Nigerian economy has not been regular; in fact it has been less static. In order to successfully map out a strategy for accelerating Nigeria’s growth rate in the year ahead it is necessary to full understand the sources of economic growth in Nigeria during the past four decades. One will notice that government expenditure in Nigeria has been on the increase, with little or no significant effect on the economic growth of Nigeria. Therefore, the study will address issues like; impact of government gross capital formation on economic growth of Nigeria,andthe effect of government final consumption expenditure on economic growth of Nigeria.
- Objectives of the Study
The broad objective of the study was to empirically analyse the impact of government expenditure on economic growth of Nigeria. However, the specific objectives the studywere:
- Examine the impact of government grosscapital formation on economic growth of Nigeria.
- Ascertainthe impact of government final consumption expenditureon economic growth of Nigeria.
- Research Hypotheses
The following null hypotheses will be tested in the course of the study:
HO1: Government grosscapital formationdoes not significantly impact on the economic growth of Nigeria.
HO2: Government final consumptionexpenditure does not have any significant effect on economic growth of Nigeria.
- Significance of the Study
The study which will be centred on the impact of government expenditure on economic growth of Nigeria will be of immense importance to Nigeria government, corporate organizations, financial institutions and other related bodies, in that, it will provide detailed and comprehensive information on the impact of government expenditure on economic growth of Nigeria.
On part of the government, the study will ensure that government is better informed on the need to the need to utilize fund generated internally and externally to increase their capital and current expenditures in country. This will attract foreign investors and increase peoples’ standard of living. Thus boosting the economy of the nation.
The financial sector on the other hand, will be exposed to alternative measures or strategies that can be adopted to ensure that funds are made available to government organisations and corporate institutions that may desire to establish or embark on new developmental projects or improve existing ones in most parts of the country.
More so, the study will be of great benefit to academicians in the field of banking and finance, in that, it will provide factual information on the impact of government expenditure on economic growth of Nigeria. It will add to the existing knowledge on the impact of government capital and current expenditure on economic growth of Nigeria. It also serves as a basis for further research work to be carried out on the topic by potential researchers in the field of banking and finance.
- Scope of the Study
The researcher tends to find out the empirically analyse the impact of government expenditure on economic growth of Nigeria. Thus, the study coveredgovernment capital and current expenditure from 1995 – 2015 and their impact on GDP between the stipulated period.
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