THE SIZE OF GOVERNMENT EXPENDITURE THAT ENHANCES ECONOMIC GROWTH IN NIGERIA FROM 1970 – 2017
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The impact of government size on economic growth has been the focal point of academic research for some time now. Some viewed a large government size as harmful to economic growth due to inefficiencies inherent in government, while others argued that a larger size of government is likely to enhance economic growth. Economists such as John Maynard Keynes and John Kenneth Galbraith have argued that an economy needs to be continually fine-tuned by an activist government to operate efficiently.
This school of thought grew primarily out of the Great Depression (1929-1939), when markets seemed to fail and government intervention was viewed as the means to restore economic stability. The concept of state intervention to correct inefficiencies stresses that government activities contribute to the provision of vital public goods such as education, health, defense, security and infrastructure. Thus, as an economy grows, a growing government expenditure is also necessary to correct private-sector inefficiencies
(Garrett and Rhine, 2006; Gunalp and Dincer, 2010).Similarly, Grossman (1988) and Dalamagas (2000), posited that government provides defense, social security, judiciary, property rights, regulations, infrastructure development, workforce productivity, community services, economic infrastructure, regulation of externalizes, and marketplace. To this end, when both public and private capital formations are complementary to each other, government activities may encourage the private sector to increase their investment which consequently boosts economic growth.
Conversely, other 20th century economists, such as Frederick von Hayek and Milton Friedman, have argued that an activist government is the cause of economic instability and inefficiencies in the private sector. Government should exist to ensure that a private market operates efficiently; it should not act to replace the market mechanism as large government spending may have negative spillover effects on the economy.
Therefore, an optimal level of government spending which maximizes growth exists, in view of the fact that if government spending is very small, or even equal to zero, the economic growth would be very limited due to difficulties in the provision of public goods(Ram,1986; Garrett and Rhine, 2006; Asimakopoulos and Karavias,2015; Munene,2015)).
One measure of the role of government is the size of government spending relative to the economy. The size of government could be seen as the degree of participation of the government in provision of goods and services. It can be measured by looking at government’s spending or revenues relative to the size of the country’s economy measured by the Gross Domestic Product and changes in real GDP over time reflect the pace of economic growth or economic performance (Chobanov and Mladenova,2009).
Therefore, comparing the amount of government expenditure to the GDP gives a lot of useful information such as measuring whether spending, borrowing and revenues are affordable. An increase in spending is considered affordable if economic growth outpaces the growth in spending.
Government as an institution, is an arrangement that people have for dealing with one another. It is an institution that provides for collective decision making and exercises influence and authority over people in the economy through the mechanisms of taxation, spending, regulation, and borrowing(North, 1987). Government is the single most pervasive institution of modern life, with all facets affected by public sector activities.
Over the last 100 years, government spending around the world has grown in terms of both spending per capital and share of national output(Livio, 2013).With higher GDP, developed countries on the average spend a higher percentage of their GDP on provision of facilities such as health and social services than the developing countries.
Government expenditure is often regarded as a crucial stimulant of economic activities. In Nigeria, government expenditures enhance the operations of various economic agents and increase economic activities. Theoretically, the causes of government expenditure growth are as a result of increased need in the transport and education sectors, the introduction of welfare programmes and the rise in defence spending (Musgrave and Musgrave, 1982).
It is presumed that government performs two basic functions – protection (security) and provision of public goods. The protective function entails creation of rule of law and enforcement of property rights which helps to minimize risks of criminality, protect life and property, and the nation from external attacks; while defence, roads, education, health, and power, among others, are goods provided by government.
The annual budget of government spells out the direction of the expected expenditure, as it contains details of the proposed expenditure for each year, though the actual expenditures may differ from thebudget figures due to extrabudgetary expenditures or allocations during the course of the fiscal year (Oziengbe, 2013).
Forte and Magazzino(2011), stressed that government, at various levels, provide both intermediate public goods (that can be considered as factors of production and as factors for the private consumption) and goods for final consumption or/and for redistribution purposes.
While public expenditure is necessary to have a functioning market economy and to promote GDP growth, its expansion cannot necessarily be consistent with the maximization of the long-run GDP growth rate. Therefore, an equilibrium among them has to be found.
The role of government expenditure size in inflationary movements is particularly of relevance considering the mode of financing the high and often arbitrary government spending in Nigeria. In the past years, excess revenue sharing has become the practice among the tiers of government and this has significantly increased the size of government expenditure(Egbe, 2015).
Indeed, this has increased money supply and the attendant inflationary implications. Also, the increase in government expenditure financed by monetization of oil revenue and credit from the banking system were responsible for the expansion of money supply which in turn with a lagged-in-effect contributed immensely to inflationary tendencies.
However, complementary fiscal policy measures have often been advocated by policy advisers in curbing the inflation menace. It has been argued that one of such fiscal measures is the reduction in government fiscal activities which would directly reduce domestic absorption and push down the price level. Rapid output growth and low inflation are the most common objectives of macroeconomic policy in both developed and developing economies.
However, most policymakers agree that inflation should not be allowed to fall below zero because the costs of deflation are thought to be high (Billi and Khan,2008). More ever, studies such as Mubarik (2005) and Bassey(2010), suggested that moderate inflation helps in economic growth, while high inflation rate is inimical to growth. To this end, policymakers support a low rate of inflation that maximizes general economic well-being.
According to Bhatia (1982), the critical-limit hypothesis which is credited to Collin Clerk (1943), contended that when the share of the government sector activity (represented by its expenditure) exceeds 25 per cent of the total economic activity of the country, inflation would be the natural result; and this would be so even when the county is operating under a balanced budget.
Thus, when the government’s share of the aggregate economic activity reaches the critical limit of 25 per cent, the income earners would be affected by reduced incentives (owing to apparent high tax incidence), and this would jeopardize their level of productivity. The result is that they would produce less than what their capabilities and potentials can support.
This would bring about reduced supply. On the other hand, the demand-effects to the government financing (i.e. expenditure) would become quite strong even when the budget remains balanced. This maladjustment between demand and supply would breed inflationary spirals in the economy as a net result (Ezirim and Muoghalu, 2006; Ezirimet al., 2008).
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THE SIZE OF GOVERNMENT EXPENDITURE THAT ENHANCES ECONOMIC GROWTH IN NIGERIA FROM 1970 – 2017
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