The study has investigated the effect of inflation on government spending in Nigeria for a period of 35 years (1981-2015) using the OLS estimation technique and a multiregression framework. The key findings of the study can be summarized as; There is no significant relationship between inflation and government expenditure in Nigeria and there is also unidirectional causal relationship between inflation and government expenditure in Nigeria, flowing from government expenditure to inflation. Based on the findings of this study it is thus recommended that; To control expenditure, the government should regulate inflation by using various monetary policy measures available. And that transparency and accountability of government tax officials at various levels and transparency and fiscal discipline in government should be encouraged by enacting a financial responsibility bill to sensitize and enthrone financial probity in Nigeria.
Keywords: inflation, government spending, economic growth.
1.1 BACKGROUND TO THE STUDY
Inflation is an inevitable property of any economy in the world. It influences every country negatively, whether it is developed or developing country as well. Anyanwu (2011) stated that inflation is an important factor leading to social and economic instability and disorder. It is one of the most largely observed and tested economic variables both theoretically and empirically. Its causes, impacts on other economic variables, and cost to the overall economy are well known and understood. Nigeria, being a developing country, could not overcome the continuously year to year climbing up inflation, and also its causes and consequences.
After remaining relatively low for quite a long time, the inflation rate in Nigeria started to accelerate in late 2003. The role of money supply appears significant in influencing food price inflation in Nigeria (Anyanwu, 2011).which disturbed family budget as well as consumer’s purchasing power. People struggled in order to maintain their living standard but it slumped down gradually. Many authors have written on the impacts of inflation and cost of living on the Nigerian economy, but the authors have different views, nevertheless, one common thing is that all the authors agree that inflation and cost of living have various impacts on the economy of Nigeria. The problem created by the rising prices of goods and services leading to higher cost of living has become too difficult for the government to solve. During inflationary period, fixed amounts of money buy less quantity of goods and services. The real value of money is drastically reduced i.e the purchasing power of consumers are reduced.
Government spending also referred to as government expenditure relationship between inflation has continued series of debate among scholars. Keynes, argues that the solution to economic depression is to induce the firms to invest through some combination of reduction in interest rates and government capital investment including infrastructure. This claim that increasing government expenditure promotes economic development is not supported by all scholars. A number of prominent authors especially of the neoclassical school argue that increased government expenditure may slow down the aggregate performance of the economy because in an attempt to finance raising expenditure, government may have to increase taxes and or borrowing. The higher income tax may discourage or may be a disincentive to additional work which in turn may reduce income and aggregate demand. In the same manner, high corporate tax leads to increase in production costs and reduce profitability of firms and their capital to incur investment expenditure. On the other hand, increased government borrowing (from the banks) required to finance its expenditure may compete and crowds-out private sector and this reduce private investment in the economy.Sachs(2010) argues that among the developed countries, those with high rates of taxation and high social welfare spending perform better on most measures of economic performance compared with countries with low tax low rates of taxation and low social services spending.
According to the Revenue Mobilization Allocation and Fiscal Commission – RMFC (2015) the federal government of Nigeria spends 52.2% of total government revenues. The remaining revenues are shared among the Federating States and Local Government Areas (LGAs) on the basis of detailed sharing formula.
1.2 STATEMENT OF THE PROBLEM
In Nigeria, concerns regarding inflationary effects it has been stressed upon on the fact and tendencies of inflation to induce poverty, food crises, low standard of living and high cost of living (Mahmood, Hafeez and Rasheed, 2009) and this often leads to reduction in the purchasing power of the domestic currency and ridicule government budgeted spending.
The debate on government expenditure growth and inflation nexus is still ongoing. The argument had centred on whether or not the increasing public spending has the potential to induce inflation (Ojarikre and Ezie, 2015). While some scholars are of the belief that increasing public expenditure enhances inflation, others are of the view that, it is inflationary pressure that causes the growth of government spending in both developing and developed countries (Ezirim, Muoghalu, and Elike, 2008).
There is still an unresolved issue theoretically as well as empirically as to the effect of government spending on inflation. Although, the theoretical positions on the subject matter are quite different yet the conventional assumption is that a large government spending can result to price instability. However, empirical research does not conclusively support the conventional wisdom as opined by Mesgbena (2006), in the work of Olaiya et al (2012).
This study therefore, attempts to examine the effect of inflation on government expenditure and also to determine the direction of causation between public expenditure growth and inflation in Nigeria using data spanning 1981 to 2015 and possibly make policy recommendations on the way forward.
The research questions, which would guide this study, are as follows:
- Is there any significant relationship between inflation and government expenditure in Nigeria?
- Is there any causal relationship between inflation and government expenditure in Nigeria?
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to empirically examine the relationship between inflation and government expenditure in Nigeria. The specific objectives of the study are as follows to:
- Examine the effect of inflation on government expenditure in Nigeria.
- Identify if there is any causal relation between inflation and government expenditure in Nigeria.
1.4 RESEARCH HYPOTHESES
The hypotheses that will guide through this research are:
- H0: Inflation has no significant relationship with Government expenditure in Nigeria.
H1: Inflation has significant relationship with Government expenditure in Nigeria.
- H0: There is no causal relationship between inflation and government expenditure in Nigeria
H1: There is a causal relationship between inflation and government expenditure in Nigeria
1.5 SIGNIFICANCE OF THE STUDY
The quality of research work lies on the relevance to the society being studied. The importance is the ability to draw a relationship between inflation and government expenditure in Nigeria, whether inflation has significant impact on government expenditure in Nigeria.
Again, this research will be of immense value to the different sectors of the economy (both public and private) most especially the government.
In conclusion, the study would be of immense help to the government, monetary authority, individuals, economists, students, planners, financial analysts, stock brokers and others who might be interested in researching into the field in the future, by shedding more light into the widely held view about the relationship between inflation and government expenditure in Nigeria.
1.6 SCOPE OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the monetary and fiscal sector). This work cannot cover all the facets that make up the monetary and fiscal sector, but will look at inflation as a positive or negative tool in influencing government expenditure.
The empirical analysis and estimation covers the period between 1981 and 2015. This restriction is unavoidable because of the non-availability of some data.
1.7 LIMITATIONS OF THE STUDY
Finance is one of the elements that assist a good research. Financial constraint created difficulties in the process of this research work, however, it did not hinder the research.
The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of financial literacy on the development of Nigeria economy.
1.8 ORGANISATION OF THE STUDY
This study shall be divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two presents related literature concerning inflation and government expenditure. The research methodology, which includes the theoretical framework, sources of data, model formulation, estimation techniques etc, are stated in chapter three while data presentation, analysis and interpretation of regression result were made in chapter four. Concluding comments in chapter five reflects on the summary, conclusion, recommendations and suggestion for further studies based on the findings of the study.
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