Project Materials

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Government expenditure continues to be an important demand management tool and, if well-managed, it could bounce an economy on a long-term development trajectory and sustainable growth. Prudent government expenditure, through an efficient allocation of its resources to the various sectors of the economy, translates into an inclusive and sustainable growth pattern, which serves as a driver for eradicating poverty and inequality within society.

The pattern of government spending in Nigeria over the years has to a large extent been driven by crude oil endowment, which is reflected in the generated revenue (Akanbi, 2014). The determinants of government expenditure are important factors that are relevant for managing fiscal imbalances in developing countries, Nigeria inclusive.

This becomes more pungent when development challenges such as poor infrastructure, high level of unemployment, insecurity of life and properties are blooming. These developmental challenges persist in Nigeria, despite the huge government expenditure that is budgeted annually to solve them.

Based on this, diverse fiscal policies measures are been adopted by the Nigerian government with the aim of managing public expenditures. Some of these policies include reducing total expenditures, increasing taxes in the society as well as adopting a not fashionable approach of Central Bank financing, which Udoh (2009) has referred to as the devil’s alternative.

Many empirical studies investigated for Nigeria on these determinants of government expenditures (Taiwo, 2011; Babatunde, 2011; Aregbeyen & Akpan, 2013) suggest that per capita income, government revenue, demographics and institutional variables are significant determinants of government expenditure.

The 70s was a period of massive physical construction of infrastructure; there was rise in capital expenditure, getting its apex in 1980 at about a 55 percent share, while recurrent expenditure reduced to about a 45 percent share of overall government expenditure.

Thereafter, a backward trend emerged, with capital expenditure escalating a trough of about 41 percent and recurrent expenditure clinching at about 59 percent. The escalating movement in capital expenditure and falling trend in recurrent expenditure intersect with equal shares, which happened to be the end of the deregulation period.

Earlier intersection in the two components of expenditure was announced in 1976 and 1983, with the latter year almost concur with the commencement of a structural adjustment program (SAP).

Nevertheless, since the homecoming of a democratic dispensation in 1999, there has been a high degree of separation between capital and recurrent expenditure, with capital expenditure reducing to about a 22 percent share, while recurrent expenditure has increased to about a 78 percent share, as at 1999.

The average shares in overall government spending over the period 1970 to 1999 amounts to 42 percent and 58 percent for capital and recurrent expenditure respectively.The factors that are affecting government expenditure growth have been a central focus for economists going back as far as Wagner (1893).

The growth of government expenditure has an impact on the economic growth of a country (Cooray, 2009). Mo (2011) suggests that all other government expenditures, except investment, have a negative impact on economic growth.

The negative impact of the government expenditure could be detrimental to the economy as it could lead to poor economic growth as a result of unemployment and poor levels of investment if there is sluggish growth rate.

Studies have established the determinants of government expenditure as demographic factors such as population growth and urbanization (Shelton, 2011; Kimakova, 2009); and macro-economic variables such as, trade openness and public debt (Rodrik, 2013; Mahdavi, 2011).

Income inequality may lead to demand for more redistribution, thereby leading to a greater government according to Meltzer and Richard (2011). There are numerous literatures on the factors that determine government expenditure, with various methodologies and techniques adopted in the studies.

Globally, for some years, studies on government expenditure have continued to receive attention. Therefore, this study is to examine the determinant of government expenditures: evidence from Nigeria (1990-2018).

STATEMENT OF PROBLEM

Nigeria has consistently had deficit spending over the years without equivalent rate of economic growth. Data show that output of Nigeria has been fluctuating for some years and the sources of these shocks may not be clear.

The growth rate (real GDP growth) of output was 3.2, 2.4, 2.8, 3.8 and 4.7 respectively, in 1997, 1998, 1999, 2000 and 2001, while the total expenditure growth was 12.1, 15.6, 28.1, 15.6, and 19.3 per cent in 1997, 1998, 1999, 2000, and 2001, respectively (CBN, 2001).  This implies that the growth rate of public expenditure was far higher than that of economic growth.

The data speaks volume that the economy does not grow at a fast rate as the growth rate of government expenditures. It is expected that as the public expenditure expands output is expected to expand also, because public expenditure should be translated into output growth.

Or does it imply that much of the public expenditure find their ways into some other paths different from the intended routes? In 2010, the aggregate expenditure of general government increased by 15.3% from the level in 2009.

As a proportion of GDP, it represented 28.4% as compared with 28.8% in 2009, while the growth rate of GDP was 7.9%, which exceeded the 7.0% recorded in 2009 and the average annual growth rate of 6.7% but lower than the target growth rate of 10% for the year (Central Bank of Nigeria [CBN], 2010).

From these data, the rate at which the output grows has been lower than that of the growth of public expenditure. This simply means that there is need to investigate whether the rises in public expenditure have been accompanied by rise in the output of Nigerian economy.

The data on the fluctuations of the GDP and public (government) expenditure are inexhaustible. This makes it expedient to understand the nature of such fluctuations in the macroeconomic variables and how they impact on the output of the Nigerian economy. In 2014, Edame studied the determinants of public infrastructure spending in Nigeria, using error correction mechanism (ECM).

He found that rate of urbanization, government revenue; population density, external reserves, and type of government jointly or individually influence public expenditure on infrastructure in Nigeria. Adebayo, Adebusuyi, and Ishola (2014) investigated the effect of public expenditure on industrial growth of

Nigeria and realized that government expenditure on administration, economic services, and transfers maintained a negative long-run relationship with industrial growth in Nigeria while public expenditure on social services maintained a positive long-run relationship.

They concluded therefore that there is no crowding-out effect. It is then necessary to investigate the determinants of public expenditure in Nigeria and its effect. This research work is poised to investigate the determinants of the rising tide in government expenditure in Nigeria.

AIMS OF THE STUDY

The major aim of the study is to examine the determinant of government expenditures: evidence from Nigeria (1990-2018). Other specific objectives of the study include;

1. To examine government expenditure profile in Nigeria.
2. To examine the components government expenditures in Nigeria.
3. To examine the relationship between government expenditure and economic growth in Nigeria.
4. To examine the relationship between government expenditure and population growth in Nigeria.
5. To examine the relationship between government expenditure and inflation in Nigeria.
6. To examine the relationship between government expenditure and public revenue in Nigeria.

RESEARCH QUESTIONS

1. What is government expenditure profile in Nigeria?
2. What are the components of government expenditures in Nigeria?
3. What is the relationship between government expenditure and economic growth in Nigeria?
4. What is the relationship between government expenditure and population growth in Nigeria?
5. What is the relationship between government expenditure and inflation in Nigeria?
6. What is the relationship between government expenditure and public revenue in Nigeria?

RESEARCH HYPOTHESIS

H0: there is no significant relationship between government expenditure and revenue generation in Nigeria.

H1: there is a significant relationship between government expenditure and economic growth in Nigeria.

SIGNIFICANCE OF THE STUDY

This study will provide an overview of existing knowledge and to review the empirical literature on the determinants of government expenditure in recent years (1990 to 2018).

Furthermore, the study will assist with the future research on the determinants of government expenditure.This study would also be of immense benefit to students and scholars who are interested in developing further studies on the subject matter.

SCOPE AND LIMITATION OF THE STUDY

The study is restricted to determinant of government expenditures: evidence from Nigeria (1990-2018).

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

DEFINITION OF TERMS

Determinant: a factor which decisively affects the nature or outcome of something.

Government: A government is the system or group of people governing an organized community, often a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary.

Expenditure: the action of spending funds.