IMPACT OF GOVERNMENT EXPENDITURE ON INFLATION IN NIGERIA.
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IMPACT OF GOVERNMENT EXPENDITURE ON INFLATION IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background of the Study.
Government Expenditure refers to the amount of resources spent by a certain government to fund all of its operations and deliver public amenities.
According to Oyinlola (2010), the size of government spending and its impact on economic growth have emerged as a critical fiscal management challenge for transitioning economies.
Singh and Sahini (2014) argue that a large and expanding government is not conducive to improved economic performance. Nigeria, like every other country in the globe, has seen public spending increase over the last several decades.
According to Akpan (2015), the observed increase in public spending appears to apply to the majority of countries, independent of economic progress.
Over the years, rises in government finances have prompted a number of theoretical and empirical inquiries into the causes of such increases. Researchers have specifically questioned whether increases in the size of the federal budget are launched by changes in expenditure followed by revenue adjustments, or by the reverse sequence (Baghestani & Mcnown, 2004; Akpan, 2015).
Growing government expenditure is detrimental to a government’s economic interests since the various methods of supporting government, such as taxes, borrowing, and printing money, have negative consequences. Government expenditure is often economically damaging, regardless of how it is financed. Kneller (2009).
Governments require funding to fulfil their societal obligations. To deliver all public benefits, a government needs funds, which are mostly obtained through taxes, grants, and loans. Tanzi (2004).
In Nigeria, governments rely heavily on oil earnings and taxes to fund their operations, and they frequently borrow and receive subsidies to cover budget deficits.
Inflation, on the other hand, determines the value for money that a government can obtain from its expenditures. One of the most important macroeconomic objectives of any country is to maintain high economic growth while keeping inflation low.
Liu, (2008). Inflation causes negative externalities on the economy by interfering with its efficiency. It may also diminish a country’s international competitiveness by making its exports substantially more expensive than its imports, so affecting the balance of payments. Koiman (2007). Inflation and government spending each have an impact on economic growth.
Government spending has a significant long-term impact on physical and human capital formation. The government performs two functions: protection and provision of specific things.
Abdullah (2010); Fasta, Hagen, Hughes, Siebert, & Strauch (2003). The protection function consists of establishing the rule of law and enforcing property rights, which help to reduce the risk of criminality and external hostility.
Public goods include health, education, power, agriculture, and transportation. Many political thinkers, including Hobbes and Locke, examined the hypothetical disadvantages of living without government (Devarjan, Swaroop, & Zou, 2006).
The appropriate size of government is not a problem for economic theory. However, economic theory instructs us to weigh cost and benefit to decide if resources are allocated in a way that promotes or hinders economic progress.
The core economic policy of a good society is public spending that is consistent with future economic growth and wellbeing. For example, spending on health and education increases worker productivity and contributes to national production growth.
Similarly, spending on infrastructure such as roads, communication, and power reduces production costs while increasing private sector investment and company profitability, hence stimulating economic growth.
Scholars such as Abdullah (2010) found that an economy’s inflation rate is determined by the expansion of government expenditures. In Nigeria, for example, the public sector includes Federal, State, and Local Government firms. Some government financial operations operate totally outside of the budget and are supported through supplementary budgetary accounts.
As a result, the impact of spending on economic growth could be a complete indication of public productivity. However, governments have traditionally been quite diligent in budgeting their spending using government budgets and national income.
The government, in its many economic operations and policy formulations, whether short-term or long-term, frequently encounters challenges that must be addressed.
Without addressing these issues, the government may be unable to devise and implement policies capable of propelling the economy towards long-term economic growth and development.
This study will attempt to address the problem of understanding the effects of public spending on economic growth and applying that knowledge to the solutions of some problems encountered by various policymakers in their short- or long-term economic activities in order to arrive at a specific and active policy.
In light of this, the current study will investigate the relationship between government expenditure and inflation in Nigeria between 1981 and 2017.
1.2 Significance of the Study
The importance of conducting research on government spending and its impact on inflation in Nigeria cannot be overstated. Inflation has become a terrible burden for emerging countries like Nigeria.
It is like a blight on Nigeria’s economy, reducing people’s purchasing power while also restricting investment and savings, hence increasing poverty in Nigeria, primarily hurting the middle and low income groups, particularly salary earners.
Again, the conduct of this research is critical because it will help the following stakeholders in making decisions that will mitigate the negative effects of inflation on government spending.
The study will also demonstrate how the government can successfully organise and manage state funds during inflation. There hasn’t been much research on the examination of government expenditure and its impact on inflation in Nigeria, so I am confident that the findings will add significantly to existing knowledge on the subject.
The contents of the research work would also bridge the information gap created as a result of insufficient statistics relating to government expenditure and its effect on the rate of inflation in Nigeria.
Additionally, the research work’s findings and recommendations will suggest ways to address the challenges that Nigerians face as a result of inflation.
1.3 Statement of Problem
Price stability, or maintaining relatively low inflation rates that allow for employment and output expansion, is one of the most important macroeconomic goals that all economies strive for. Nigeria continues to experience pricing instability due to its double-digit inflation rate.
According to the Keynesians, one of the primary reasons of high inflation in developing economies is excessive government expenditure. Excessive government spending elevates aggregate demand over supply, causing prices to increase.
Furthermore, Nigerian governments at all levels frequently spend money on wasteful and growth-enhancing initiatives, which increases inflationary pressure on the economy.
The government’s inability to spend prudently has led to Nigeria’s high inflation rate. Fiscal recklessness has prevented Nigeria’s economy from maintaining a low rate of inflation, which promotes economic growth. Thus, in order to keep inflation to a low, it is necessary to carefully monitor how government monies are used.
1.4 Objectives of the Study
The primary goal of the study would be to investigate the impact of government spending on inflation in Nigeria. The study’s particular aims are:
To assess the effect of government capital expenditures on inflation in Nigeria.
To determine the impact of government recurrent expenditure on inflation in Nigeria.
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