IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH (1981 – 2016).
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IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH (1981 – 2016).
Chapter one
INTRODUCTION
1.1 Background of the Study
The relationship between government spending and economic growth has been the subject of ongoing academic discussion. Keynes (1936) believes that the cure to economic depression is to encourage enterprises to invest through a mix of interest rate cuts and government capital investment, especially infrastructure.
Not all researchers agree that increased government spending supports economic progress. A number of famous scholars, particularly those of the neoclassical school, claim that higher government spending may hinder the economy’s overall performance because, in order to fund increased spending, the government may have to raise taxes or borrow more.
Higher income taxes may discourage or disincentivize extra effort, resulting in lower income and aggregate demand. Similarly, excessive corporation tax increases production costs and reduces the profitability of enterprises and their capital to incur investment expenditure.
On the other hand, higher government borrowing (from banks) to support its expenditures may compete with and push out the private sector, reducing private investment in the economy.
According to Sachs (2006), industrialised countries with high rates of taxation and large social welfare spending outperform those with low tax rates and low social service spending on most economic performance indicators.
Hayek (1989) rejected this notion, claiming that excessive amounts of government spending, while harmful, do not promote fairness, economic equality, or international competitiveness through social welfare.
This thesis is strongly related to Sudha (2007), who states that nations with big public sectors have progressed slowly. Thus, there is no universal agreement among scholars about the impact of increased government spending on economic progress.
According to the Revenue Mobilisation Allocation and Fiscal Commission (RMFC) (2011), Nigeria’s federal government spends 52.2% of total government income. The remaining revenues are distributed to the Federating States and Local Government Areas (LGAs) according to a defined sharing mechanism.
Over the years under review, the degree of increase in government revenue from oil and non-oil revenues, as well as borrowing from internal and external sources, has had a substantial impact on Nigeria’s level of government expenditure.
The amount of rise in external loans has hastened the debt overhang issue and other problems. The difficulties were so serious that the economy had to be restructured. As a result, a thorough economic reform strategy was implemented in 1986.
Between 1988 and 1997, a time of structural adjustment and economic liberalisation, GDP responded to economic adjustment policies by growing at a positive rate of 4% (Onakoya et al, 2013).
The real GDP development reveals that on an aggregate basis, the Real Gross Domestic Product (RGDP) increased by 7.8% in 2010 (NBS, 2010; CBN, 2010, 2012).
The mismatch between Nigeria’s economic success and the significant increase in government overall expenditure over the years calls into question the government’s role in encouraging economic growth and development.
Some writers argue that the link between public expenditure and economic progress is weak, while others report varied degrees of causality in Nigeria (Onakoya et al, 2012).
1.2 Statement of the Problem
The relationship between government spending and economic growth has sparked ongoing debate among researchers. The government serves two functions: protection (and security) and the supply of certain public goods (Yousif, 2000; Nurudeen and Usman, 2008).
The protection function consists of establishing the rule of law and enforcing property rights. This reduces the risk of criminal activity, protects life and property, and protects the nation from external threats, among other things.
Some experts claim that increased government spending on socioeconomic and physical infrastructure promotes economic development.
For example, government spending on health and education increases workforce productivity and contributes to the growth of national GDP.
Similarly, spending on infrastructure such as roads, communications, and power reduces production costs, improves private sector investment, and firms’ profitability, so promoting economic development. Scholars such as Keynes (1936), Sachs (2006), and Cooray (2009) agree that more government spending helps to boost economic growth.
Nonetheless, some scholars disagree with the claim that increasing government spending promotes economic development, arguing that high government spending may slow overall aggregate economic performance by forcing the government to raise taxes and/or borrow more money.
Higher income taxes may discourage or disincentivize individuals from working long hours or seeking more work, lowering income and aggregate demand. Similarly, increased corporate tax (profit tax) tends to raise production costs and lower enterprises’ profitability and ability to invest.
Furthermore, if the government borrows more (particularly from banks) to fund its expenditures, it will compete with (crowd out) the private sector, limiting private investment.
It was also stated that in order to gain cheap popularity and maintain power, politicians and government officials occasionally raise spending and investment on wasteful projects or items that the private sector can produce more efficiently.
Thus, government activities can lead to resource misallocation and inhibit the development of national output. In fact, Mitchell (2005) and Sudha (2007) found that excessive government expenditures have a negative impact on economic development.
Nigeria’s government expenditure has continued to climb as a result of receipts from oil revenue (Petroleum profit tax and royalties) and non-oil revenue (corporate income tax, customs and excise charges, value added tax [VAT] and others) (CBN 2012).
Increased demand for public (utility) commodities such as roads, communication, power, education, and health. Furthermore, there is a rising need to guarantee internal and external security for the people and the country.
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