ASSESSMENT THE IMPACT OF GOVERNMENT EXPENDITURE ON GROSS DOMESTIC PRODUCT BETWEEN (2000 -2013).
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
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 Provision of certain public goods (Abdullah, 2000) and (AI – Yousif, 2000). Protection function consists of the creation of rule of law and enforcement of property right. This helps to minimize risk of criminality, protect life and property, and the nation from external aggression. Under the provision of public goods are defenses, roads, education, health and power, to mention few. Some scholars argue that increase in government expenditure on socio – economic and physical infrastructure encourages economic growth. For example, government expenditure on health and education rises to productivity of labor and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power, etc, reduces production, cost, increase private sector investment and profitability of firms, thus fostering economic growth. Supporting this view, scholar such as (Al – Yousif, 2000), (Abdullah HA, 2000), (Ranjan, Sharma, 2008), and (Cooray, 2000) concluded that expansion of government expenditure contributes positively to economic growth. However, some scholar did not support the claim that increasing government expenditure promotes economic growth, instead they are assert that higher government expenditure may slow down overall performance of the economy. For instance, in an attempt for finance rising expenditure, government may increase taxes and/or borrowing. Higher income tax discourages individual from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms. Moreover, if government increases borrowing (especially from the banks) in order to finance its expenditure, it will compete (crowds – out) away the private sector, thus reducing private investment.
Furthermore, in a bid to score cheap popularity and ensure that they continue to remain in power, politicians and government officials sometime increase expenditure and investment in unproductive project or in goods that the private sector can produce more efficiently. Thus, government activity sometimes produces misallocation of resources and impedes the growth of national output. In fact, studies by (Laudau, 1986), (Barro, 1991), (Engen, Skinner, 1992), and (Foister, Henrekson, 2001) suggested that large government expenditure has negative impact on economic growth.
In Nigeria, government expenditure has continued to rise due to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods like roads, communication, power, education and health. Besides, there is increasing need to provide both internal and external security for the people and the nation. Available statistics show that total government expenditure (capital and recurrent) and its components have continued to rise in the last three decades. For instance, government total recurrent expenditure increased from N3,819.20 million in 1977 to N4, 805.20 million in 1980 and further to N36, 219.60 million in 1990. Recurrent expenditure was N461,600.00 million and N1, 589,270.00 million in 2000 and 2007, respectively. In the same manner, composition of government recurrent expenditure shows that expenditure on defense, internal security, education, health, agriculture, construction and transport and communication increased during the period under review. Moreover, government capital expenditure rose from N5, 004.60 million in 1977 to N10, 163.40 million in 1980 and further to N24, 048.60 million in 1990. The valve of capital expenditure stood at N239, 450.90 million .and N759, 323.00 million in 2000 and 2007, respectively. Furthermore, the various components of capital expenditure (that is, defense, agriculture, transport and communication, education and health) also show a rising trend between 1977 and 2007.
3
approach to measuring national income: (Y = C+I+G +(X – M)). This implies that government expenditure is a key determinant of the size of the economy and of economic growth. However, it could act as a two-edged sword: It could significantly boost aggregate output, especially in developing countries where there are massive market failures and poverty traps, and it could also have adverse consequences such as unintended inflation and boom-bust cycles (Wang and Wen, 2013). The effectiveness of government expenditure in expanding the economy and fostering rapid economic growth depends on whether it is productive or unproductive. All things being equal, productive government expenditure would have positive effect on the economy, while unproductive expenditure would have the reverse effect.
According to Bhatia (2008), defines government expenditure as the expense a government incurs in carrying out capital project. According to Oxford Business Dictionary Government expenditure can be defined as any expenditure other than operating expenditure which extends over a period of time exceeding one year. While the Gross Domestic Product also known as “GDP” can be defined as the measure of all the services and goods produced in a country over a period of time making a year.
Keynes (1936), 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 growth 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
4
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 (2006), 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.
Hayek (1989), however countered this argument saying that high levels of government spending in addition to harming, does not, through social welfare engendered fairness, economic equality and international competitiveness. This argument is in line with Sudha (2007), who points out those countries with large public sectors have grown slowly. Thus, there is no general consensus among scholar on the impact of increasing government expenditure on Gross Domestic Product.
Government or public expenditure has served as most commonly used fiscal policy in growth, expansion, structural transformation and diversification of economic base. Public expenditure is used for allocation, stabilization and distribution (Musgrave and Musgave, 2009). Hence, public expenditure programmes is a comprehensive set of expenditure policy measures, designed to achieve a given set of macroeconomic goals including the restoration of equilibrium between aggregate domestic demand and supply (IMF, 2003).
According to Gwartney (2008), while countries have moved towards economic freedom and open markets, government expenditure has increased more and more. Government expenditure
5
can be defined as spending by the national and local government and some government based institutions. Economic growth is an increase in output or income overtime, it is a positive change in the level of production of goods and services over certain period of time. Economic growth is measured using real gross domestic product (G.D.P).
There are few more hoting debased topics in economic that what the government expenditure plays in economic growth. Keyesian argued that government should manage the amount of demand in an economy to maintain full employment. Since the 1950’s there has been growing evidence that government intervention can also be flowed and can be imposed even greater cost in an economy than market failure. There have been growing concerns that government investment expenditure have been, crowding out supervisor private investments.
Government expenditure has continued to increase as a share of GDP within the Organization of Economic Co-operation and Development (OECD) countries, government expenditures amounted for a larger size of GDP in 2002 that in 1999. In Nigeria, as in most countries, this is the case. Why this increase in government expenditure? Is it in the interest of the nation that the share of government expenditure in GDP is increasing? Most growth theories like the big push theory and the balanced growth theory among others aimed at improving the growth rate in developed countries. This need for development is hindered by lies saving which is a result of low aggregation income in most developing countries.
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 by current expenditure which involves all expenditure by government for maintenance of existing or new institutions and services, they are salaries, wages
6
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 are 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. It against this background that this study seek to assess the impact of government expenditure on gross domestic product between (2000 -2013).
1.2 Statement of the Problem
According to Dunnet (1990), economic growth is an increase in real per Capital Gross National Product (GNP). Economic growth is the steady process by which the productive Capacity of an economy is increased over time to bring about rising levels of national output and income. Growth is an engine of development. There can be no development without growth hence; economic growth is desirable since it is associated with an increase in welfare.
At the dawn of this new millennium, Africa in general Nigeria in particular still faces monumental development like new level of living characterized by low per capital income inequality, poor health and inadequate education. All these are consequence of poverty.
Nigeria present a paradox the country is rich but the people are poor. Per capital income today in Nigeria is around the same level as 1970. Meanwhile between 1970 and 2013 over $200 million has been earned from the exploitation of countries resources. Nigeria is rich on land, oil, people and natural Gas Resources, yet Nigeria has been bedeviled with debts problems until just recently when her debt was forgiven.
Nigeria has been classified by the World Bank as a low income developing country. She is characterized by wide spread of poverty not less than 60% of Nigerian population are below
7
development report (UNDP) 1988. The better reality of the Nigeria situation is not yet that the poverty line is getting worse by the day but more than four ten of Nigerians live in conditions 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 Nigeria economy despite the increase in government has been rather surprising since independent according to Kweka, P. J. (1969 – 1986, 1999), government consumption and investment expenditure in Nigeria has been on the increase. On the other hand, has not been regular in fact it has been less static. The decade of 1980’s is generally referred to as Africa “last decade of development opportunities” Nigerian economy crisis in the early 80’s was attributed to several factors including the collapse of price. The rise in international interest rate and domestic policy mistakes.
In order to successfully map out strategy for accelerating Nigeria’s growth rate in the year ahead, it is necessary to fully understand the source of economic growth in Nigeria during the past four decades, one with notice that government expenditure in Nigeria has been on the increase. To what extent does this increase in government spending affect the level of growth in Nigeria? In this work, using data on Nigeria government expenditure from 2000 – 2013, we will try to answer the question; Does government expenditure cause the bring about in economic growth in Nigeria?
1.3 Objectives of the Study
The broad objective of this study is to assess the impact of Government Expenditure on Gross Domestic Product between (2000 -2013).
The specific objectives of the study are :
8
i. To find out if government expenditure significantly affect gross domestic product in Nigeria;
ii. To examine the effects of government expenditure on gross domestic product in Nigeria; and
iii. To identify the causality direction of the relationship between government expenditure and gross domestic product in Nigeria.
1.4 Research Hypotheses
For effective realization of the objectives of this study, the following null hypothesis is postulated for testing and will also be tested at 0.05 level of significance.
HO: Government expenditure does not significantly affect gross domestic product in Nigeria
H1: Government expenditure significantly affect gross domestic product in Nigeria
1.5 Significance of the Study
The result of the study will be of great benefit to the federal republic of Nigeria because gross domestic product is the motor vehicle) of development. Development is the sustained education of an entire society and social activity towards a better tomorrow and more human life. The result of this study will be significant in the following ways: It will help the Nigerian government and her policy makers to restore fiscal discipline in Nigeria. The study will be important in debt management in Nigeria. This includes government restricting expenditure within the constraints imposed by available revenue. It will also have implication for formulating a workable model for Nigeria. The study will also be of great intellectual value to students of economic and other disciplines who would want to make further research and interested members of the public who desirous of knowing how government has gone with it’s public
9
sector reforms effort. And finally, it be of significance given the fact that this study will definitely enrich and update already existing literature on the subject.
1.6 Scope and Limitations of the Study
This study covers the impact of government expenditure on Gross Domestic Product of Nigeria for the period of 14 years (2000 – 2013). To carry out the study, the government expenditure estimate and GDP of Nigeria will be used. This study will also use an empirical analysis of macro-economic environment that prevailed in Nigeria between 2000 and 2013. However, literature especially and notable works and event that relates to the study will be examined.
In the course of this work, many problems will be encountered which will affected the final result. First, the death of required statistics and limited access to literature. Some journals and publications which could have been of immense help to this work are unavailable. Secondly, the result of the fourth chapter will be somehow affected by the problem of the use of secondary data in Nigeria. Most of the estimates are not reliable. Thirdly, there is the limitation of the small sample size which has its attended drawbacks. This research work is limited by a number of constraints; greatest is the absence of vital data that would have boosted its result expectation. There is also lack of strong evidence in the theoretical framework of this topic that would have provided a reliable foundation for us to stem from and particularly Nigeria case. Time constraint is equally one of them. Due to the above constraints the data to be used are mainly secondary data.
10
1.7 Operational Definition of Terms
Economic growth: Increase in real output or in real output per capita. Economic growth: Means increase in an economic variable, normally persisting over successive periods. The variable concerned may be real or nominal GDP.
Economic model: A simplified picture of reality representing an economic situation. Economic policy: Course of action intended to correct or avoid a problem.
Economic resources: Land, labour, capital and entrepreneur which are used in the production of goods and services.
Expanding economy: An economy in which the net domestic investment is greater than zero. Growth model: It is a simplified system used to stimulate some aspects of the real economy. Growth rate: The proportional or percentage rate of increase of any economic variable over a unit period, normally a year.
Government expenditures (G): Refers to the expenses that government incurs for its maintenance, for the society and the economy as a whole. Or spending by government at any level. It consists of spending on real goods, and services purchased from outside suppliers; spending on employment in state services such as administration, defense and education; spending on transfer payment to pensioners; spending on community services; spending on economic services.
Gross Domestic Product (GDP): Refers to the money value of goods and services produced in an economy during a period of time irrespective of the people. Or Gross Domestic Product is defined as the value of all final goods and services produced in a country or area during a certain period of time. A final product is one that is sold in its final form. It is not a smaller part of another product.