GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA

Chapter one

INTRODUCTION

1.1 Background of the Study

The relationship between government spending and economic growth has sparked ongoing debate among researchers. The government has two functions: protection (and security) and the provision of certain public goods (Abdullah, 2000; AI-Yousif, 2000). The protection function consists of establishing the rule of law and enforcing property rights.

This serves to reduce the risk of criminal activity, safeguard life and property, and defend the nation against external assault. Public goods include defences, roads, education, health, and power, to name a few. Some experts claim that more government spending on social and physical infrastructure promotes economic growth.

For example, government spending on health and education increases labour productivity and contributes to national production growth. Similarly, spending on infrastructure such as roads, communications, and power reduces production costs while increasing private sector investment and company profitability, so promoting economic growth.

Scholars such as (Al-Yousif, 2000), (Abdullah HA, 2000), (Ranjan, Sharma, 2008), and (Cooray, 2000) support this approach, concluding that increased government spending promotes economic growth.

 

Some scholars, however, disagree with the claim that greater government spending fosters economic growth, arguing that higher government spending may slow the economy’s overall performance.

For example, in an attempt to finance rising expenditures, the government may raise taxes and/or borrow. Higher income taxes discourage individuals from working long hours or even looking for work

. This reduces both income and aggregate demand. Similarly, greater profit taxes tend to raise production costs, restrict investment expenditure, and lower business profitability.

Furthermore, if the government borrows more (particularly from banks) to fund its expenditures, it will compete with the private sector, limiting private investment.

Furthermore, in an effort to gain cheap popularity and maintain power, politicians and government officials may boost spending and investment in useless projects or items that the private sector can produce more efficiently. Thus, government activities can lead to resource misallocation and limit national output growth. In fact, studies by (Laudau, 1986), (Barro, 1991), (Engen, Skinner, 1992), and (Foister, Henrekson, 2001) have shown that substantial government spending has a detrimental influence on economic growth.

Nigeria’s government expenditure has continued to climb due to large receipts from crude oil production and sales, as well as increased demand for public (utilities) products such as roads, communication, power, education, and health. Furthermore, there is a growing need to guarantee internal and external security for the people and the country. According to available figures, total government expenditure (capital and recurrent) and its components have increased during the last three decades. For example, the government’s total recurrent expenditure climbed from N3,819.20 million in 1977 to N4,805.20 million in 1980, and then to N36,219.60 million in 1990. Recurrent spending was N461,600.00 million in 2000 and N1, 589,270.00 million in 2007. Similarly, the composition of government recurrent expenditure reveals that spending on defence, internal security, education, health, agriculture, building, transportation, and communication increased during the period under consideration. Furthermore, government capital expenditure increased from N5, 004.60 million in 1977 to N10, 163.40 million in 1980, and then to N24, 048.60 million by 1990. In 2000, capital expenditure was N239,450.90 million, but in 2007, it was N759,323.00 million. Furthermore, the major components of capital expenditure (defence, agriculture, transportation and communication, education, and health) indicate an upward trend between 1977 and 2007.

1.2 Statement of the Problem

Unfortunately, increased government spending has not resulted in real growth and development, with Nigeria ranking among the world’s poorest countries (Nurudeen and Usman, 2010). Furthermore, many Nigerians remain impoverished, with more than half living on less than US$2 a day. Coupled with this is outdated infrastructure, particularly roads and power supplies, which has resulted in the collapse of numerous industries and a high degree of unemployment. Furthermore, macroeconomic indices such as balance of payments, import obligations, inflation rate, exchange rate, and national savings show that Nigeria has not performed well in recent years.

This research was motivated by different opinions on the impact of government spending on economic growth. The uncertainty of public spending on economic growth causes a variety of issues, including, but not limited to, resource misallocation, the establishment of businesses with negative externalities, partial implementation of development plans, the existence of white elephant projects, and the prevalence of imperfect markets (e.g., monopolistic competition), which leads to continuous exploitation of the masses. As a result, understanding the growth effect of public expenditure components would help to prevent the aforementioned problems from occurring. As a result, the achievement of developmental goals such as the Millennium Development Goals (MDGs), seven-point agenda, and Vision 2020 would not be completely dismissed as a phantom.