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GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA (1981 - 2015)

ABSTRACT

This study examined government expenditure and Nigeria’s economic growth within the sample period of 1981-2015. The data for this research work (Gross Domestic Product, government recurrent expenditure and government capital expenditure) was obtained from the CBN Statistical Bulletin (2015) and analysed using ordinary least squares (OLS) technique. Gross domestic product was regressed against government recurrent expenditure and government capital expenditure. Certain econometrics tests were conducted such as Unit Root test, Cointegration test, and Vector Error Correction Model. The result showed that government expenditure had negative effect on economic growth of Nigeria for the period under review.  The unit root test indicates that all the variables were stationary at first differencing. The Cointegration test revealed that the variables had a long run relationship with economic growth of Nigeria within the sample period this necessitated the application of Vector Erroe Correction Model, which revealed that government expenditure was statistically significant. Also the R2 was 0.67, showed that 67% of the changes in GDP was caused by changes in the explanatory variables. The f-statistics was statistically significant meaning that the explanatory variables had joint influence on GDP. The Durbin-Watson showed that there is no autocorrelation in the series. Based on this finding the research recommends among others that; government should also restructure its various organs of public administration in order to engender efficiency and effectiveness in service delivery in the cause of its spending.

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND TO THE STUDY

Government expenditure no doubt is an important instrument for a government to control the economy of a nation Economists have been well aware of the effects in promoting economic growth Anyway, the general view is that government expenditure  notably on social and economic infrastructure can be growth enhancing although the financing of such expenditure to provide essential infrastructural facilities including transport, electricity, telecommunication, water and sanitation, waste disposal, education and health can be growth retarding (Olukayode, 2009). Nowadays, the relationship between government expenditure and economic growth has continues to generate sense or controversies among scholars in economic literature (lnuwa, 2012) According to him, the nature of the impact of government expenditure on economic growth is in conclusion, and from the view point of the student researcher is still not incontrovertible As a matter of fact, while some author or researchers believed that the impact of government expenditure on economic growth is negative or non-significant (Tuban, 2010). Others believed that the impact is positive and significant ‘Alexiou. 2009).

The structure of Nigeria government expenditure can bawdily be categorized into capital and recurrent expenditure (Muritala 2011). The recurrent expenditure is basically government expenses on administration such as wages, salaries, interest on loans, maintenance cost. etc However, the expenses on capital project like roads, airports, education, telecommunication, Electricity, generator, etc are generally referred to as capital expenditure (Muritala. 2011). Ironically, the effect of government spending in Nigeria in relation to the economic growth is still a puzzle and an unresolved issue indeed theoretically. it is an unresolved issue Although the theoretical positions on the subject are quite diverse, the conventional wisdom is that or spending is a source of economic instability or stagnation Empirical research does not conclusive support the conventional wisdom, a few studies report position and significant negative relationship between government spending and economic growth while others find significantly negative or no relation between an increase in government spending and growth in real output. It is against this backdrop, the study is undertaken to empirically evaluate the impact of government expenditure on economic growth in Nigeria.

Nigeria is a developing country that has experienced dynamic changes in the trend of government expenditure policy over years. These periodic changes in the administration of fiscal policy are largely reflected from the way governance has been changing hands between civilian and the military. Also trend of expenditure has been changing as the fiscal unit kept changing in the economic system. Nigeria’s economy is characterized by a market economy with government assuming the role of creating enabling environment within which business can flourish and contribute to the development of the country’s economy. Therefore, the primary role of government is to provide extension services and infrastructural facilities, which stimulates investment and augment the productive capacity of the economy.

Over the past decades, government expenditure has been increasing in geometric terms through governments’ various activities and interactions with its Ministries, Departments and Agencies (MDA’s), (Niloy 2003). Although, the general view is that government expenditure either recurrent or capital expenditure, notably on social and economic infrastructure can be growth-enhancing although the financing of such expenditure to provide essential infrastructural facilities-including transport, electricity, telecommunications, water and sanitation, waste disposal, education and health-can be growth-retarding (for example, the negative effect associated with taxation and excessive debt)

The size and structure of government expenditure will determine the pattern and form of growth in output of the economy. The structure of Nigerian government expenditure can broadly be categorized into capital and recurrent expenditure. The recurrent expenditure are government expenses on administration such as wages, salaries, interest on loans, maintenance etc., whereas expenses on capital projects like transport, roads, airports, education, telecommunication, electricity generation etc., are referred to as capital expenditure. One of the main purposes of public spending is to provide infrastructural facilities and the maintenance of these facilities requires a substantial amount of spending. The relationship between government expenditure on infrastructure and economic growth tends to be an important analysis in developing countries, most of which have experienced increasing levels of government expenditure overtime (World Development Report, 1994).

According to Oni and Okanlawon (2010), Nigeria’s economy suggests that transportation costs form significant proportion of the final price of most goods such as agricultural goods, manufactured goods, and mining products. They observed that on the average, transport accounts for more than 30% of the value of the delivered product. The high cost is attributable to the inadequacy and inefficiency in Nigeria’s transport infrastructure. Transport costs on feeder roads to the trunk roads and the railways to the post often cost as much as between 55 and 60 percent of the receipts from these commodities. Also, the price elasticity of demand for transport is very high in Nigeria’s transport system. The more efficient the transportation network is, the lower the transport costs. At present, large productions of the economically important goods are bulk low valued agricultural and mining products (Olanrewaju and Falola, 1986).

The fact remains that transport infrastructure needs to cut across sectors and is central to economic growth and development. The state of infrastructure for economic development in the country is far from meeting the expectations of the average investor in the Nigerian economy. This inhibits investments and increases the cost of doing business. However, economies in transition do spend heavily on physical infrastructure to improve economic welfare of the people and facilitates production of goods and services across all sectors of the economy so as to stimulate rapid growth in aggregate output. Empirical studies (like Ram, 1986; Deverajan 1993; Niloy 2003) have found that there exists positive correlation between economic growth and government spending on infrastructural facilities, especially, the transport sector.

1.2     STATEMENT OF THE PROBLEM

In the transportation sector of Nigeria economy, there are numerous problems which the sector faces. These problems are great source of concern to economists and the government at large. The transport sector virtually serves as sources of foreign earning and equally means of conveying goods and services to the nooks and crannies of the country. Transportation sector encompasses, air, sea and land transportation system with specific reference to Nigeria, the road transportation system is the most widely used of all forms of transportation system. Hence, the federal state and local government have ensured that road transport infrastructure develop in all federation. However, inadequate of credit facilities has been identified as a major obstacle for improving transport in Nigeria. The federal government in its desire to encourage the development of transport sector has put in place certain facilities to the transport sector through various schemes and policy guide lines.

Transportation infrastructures (roads, rail, airports and seaports) are the arteries for the free flow of people, goods and information, three things necessary in a manufacturing and export economy. If eyes are the light to human soul, then the airports and seaports are the eyes that international business travellers see a country with. How important there transportation infrastructures are to the manufacturing economy is as good as anybody can guess. The domestic need for transportation infrastructure brings with the possibility to become an important link in the regional transportation system in the movement of goods manufactured in rural areas. There is a need to revive waterways and railway transportation. A country cannot become a manufacturing giant without well – connected inner perimeter roads, airports, seaports and railroad stations. Some of the problems faced in transportation sector are:-

i. The neglect of rail and waterways for decades has contributed to the nation’s dependence on food importation, as agricultural produce from one part of the country cannot be transported cheaply to other parts.

ii. Lack of cheap means of transportation has discouraged many farmers whose harvests perished because they could not access to markets, so that agricultural produce could be moved cheaply to urban markets.

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