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EFFECT OF PUBLIC EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1981-2013)

CHAPTER ONE

 INTRODUCTION 
1.1 BACKGROUND TO THE STUDY 
The subject of government involvement in resource allocation stems from the failure of market mechanism to effectively and efficiently perform this task. From the very inception, government is not to be involved in the day-to-day running of an economy as propounded in the doctrine of laizzez-faire by Adam Smith, but to provide an enabling environment for the economy to operate, while maintaining law and order and protecting the nation from external aggression. The market mechanism could to a greater extent cater for the allocation of private goods based on exchange and competition but certainly not reliable for public goods. Public goods according to Wikipedia encyclopaedia is non-rivalry and non-excludable. Non-rivalry implies consumption of good by one individual which does not reduce its availability for consumption by others; while non-excludability means, no person can be effectively excluded from using the good. In reality, it might be difficult to absolutely come across non-rivalled and non-excludable good, however, economists reason that some goods such as defence, health, roads and others approximate the concept closely enough for analysis to be economically useful. Consequent upon the precedent of Musgrave (1959), governmental activity can be broken into three parts or branches, namely allocation, distribution and stabilization and growth. Broken down further, directly or indirectly, the various governments provide education, health care, national defence, police and fire protection, and provide or support a substantial amount of housing, recreation facilities, and parks. They set health standards and ensure adequate water supplies, transportation and other public facilities. They seek to attain a reasonably equitable distribution of income, to stabilize the economy, and to ensure adequate rate of growth. Therefore, they affect innumerable decisions of individuals by the large amount of revenue they collect in oil proceeds and taxes to finance these various activities. Huge amount of resources are required to fund these activities of government. The size of government expenditures and its effect on long-run economic growth, and vice versa, has been an issue of persistent interest, analysis and debate for decades. Lopzides and Vamvoukas (2005) identified two levels of empirical literature on the subject matter. One set of studies has explored the principal causes of growth in the public sector while the other has been directed towards assessing the effects of the general flow of government services on private decision making and, more specifically, on the impact of government spending on long-run economic growth. In the late 19th century, Adolph Wagner, the German economist made an in-depth study relating to rise in government expenditure. Based on his study, he propounded a law called “The Law of Increasing State Activity”. According to Wagner (1893), as the economy develops over time, the activities and functions of government increase. Wagner’s Law indeed is one of the first efforts at emphasising economic growth as the basic cause of public sector growth. Empirical tests of this hypothesis have yielded diverse results differing from country to country (Eberts & Gronberg, 1992). Concentrating on inter-country cross-section comparison have been bedevilled with shortcomings. Besides the obvious problem of comparability of data, especially between advanced and developing countries, cultural and institutional dissimilarities also compound the analysis. Works that have used either standard regression analysis (Ganti & Kolluri, 1970; Georgakopoulos & Loizides, 1994) or error-correlation regression (Kolluri, Panik, & Wahab, 2000) have not only encountered these but other problems. Evidences from Nigeria show that the total government expenditure in terms of capital and recurrent expenditures have continued to rise in the last three decades. Expenditures on defence, internal security, education, health, agriculture, construction, transport and communication are rising over time. For instance, government total recurrent expenditure increased from N4,846.70 million in 1981 to N36,219.60 million in 1990 and further to N461,600.00 in 2000 and later to N3,310,343.38 in 2010 while government capital expenditure rose from N6,567.00 million in 1981 to N24, 048.60 million in 1990. Capital expenditure stood at N239, 450.90 million and N883,874.50 million in 2000 and 2010 respectively and by 2011, it was N1,934,524.20 (Central Bank of Nigeria Statistical Bulletin, 2012). The various components of capital expenditure have risen between 1981 and 2011. The expanding public expenditures is not peculiar to Nigeria, as it applies to any other country of the world. As Akpan (2005) observes that the perceived growth in government expenditure appears to apply to most countries notwithstanding their level of economic development. Consequently, the need to ascertain whether the behaviour of Nigerian public spending and the economy can be hinged on the Wagner’s (1883) Law of Ever-increasing State Activity, or the Keynesian (1936) theory and Friedman (1978) or Peacock and Wiseman’s (1979) hypotheses. Generally, it is believed that government plays a significant role in the development of a country and public expenditure is a principal means for a government to manage the economy. Economists have been well aware of its impact in promoting economic growth. The general belief is that public expenditure whether recurrent or capital expenditure, notably on social and economic infrastructure can engender growth. In the view of Omoke (2009), an increase in government expenditure will yield a positive increase in the growth of the economy by increasing the national income, especially when it is injected into development programmes. For instance, government expenditure on health and education is capable of raising the productivity of labour and increase the growth of national output (Oni, 2014). Likewise, expenditure on infrastructure such as roads, communications, power, etc., reduces production costs, increases private sector investment and profitability of firms, thus promoting economic growth. Macroeconomics, notably the Keynesian school of thought, upholds that total spending in the economy affects output and inflation. In order words, this school suggests that government spending accelerates economic growth. It is therefore asserted that government expenditure is the exogenous factor that changes aggregate output. On the whole, what has emerged from this investigation is significant as far as the new evidence suggests that public spending (i.e. in whatever form this is envisaged) can also be thought of as a mechanism for the promotion of growth as well as a mechanism for the resolution of social and economic issues such as social cohesion, poverty reduction, social conflicts, income disparities between various groups, regions etc. Creating a stable environment, fuelled by government spending, might be an option for high levels of economic growth (Alexiou, 2009).

Project detailsContents
 
Number of Pages117 pages
Chapter one Introduction
Chapter two Literature review
Chapter three  methodology
Chapter  four  Data analysis
Chapter  five Summary,discussion & recommendations
ReferenceReference
QuestionnaireQuestionnaire
AppendixAppendix
Chapter summary1 to 5 chapters
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