CHAPTER ONE

1.0         INTRODUCTION

1.1         BACKGROUND OF THE STUDY

It is widely known that public expenditure is an important determinant of economic growth. Prominent classical and neo-classical economists such as, Romer, Lucas and Solow emphasized the contribution of public expenditure in their economic growth theories and models.

Some scholars have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programmes. High levels of government consumption are likely to increase employment and stimulate growth. Thus, government expenditure, even of a recurrent nature, can contribute positively to economic growth. On the other hand, endogenous growth models such as Barro (1990), predict that only those productive government expenditures will positively affect the long run growth rate.

In the neoclassical growth model of Solow (1956), productive government expenditure may affect the incentive to invest in human or physical capital, but in the long-run this affects only the equilibrium factor ratios, not the growth rate, although in general there will be transitional growth effects.

Others have argued that increase in government expenditures may not have its intended salutary effect in developing countries, given their high and often unstable levels of public debt. . Vedder and Gallaway (1998) argued that as government expenditures grow incessantly, the law of

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diminishing returns begins operating and beyond some point further increase in government expenditures contributes to economic stagnation and decline.

Various empirical studies on the relationship between government expenditure and economic growth also arrived at different and even conflicting results. Some studies suggest that increase in government expenditure on socio-economic and physical infrastructures impact on long run growth rate. For instance, government expenditure on health and education raises the productivity of labour and increases the growth of national output. Similarly, expenditure on infrastructure such as road, power etc. reduces production costs, increase private sector investment and profitability of firms, thus ensuring economic growth (Barro, 1990; Barro and Sali-i-Martin, 1992; Roux, 1994; Okojie, 1995; Morrison and Schwartz, 1996). On the other hand, observations that growth in government spending, mainly based on non-productive spending is accompanied by a reduction in income growth, has given rise to the hypothesis that the greater the size of government intervention the more negative is its impact on the economy. (Glomm and Ravikumar, 1997; Abu and Abdullah, 2010).

In Nigeria, recurrent expenditure accounted for a greater proportion of total expenditure than the capital expenditure. For most of the years between 1960 and 1974, recurrent expenditure accounted for at least 60 percent of the total expenditure. However, from 1974, the reverse has been the case. Coincidentally, the first year of reversal also marked the year when government revenue experienced a phenomenal increase. That year is usually referred to as the peak of the oil boom era. Total federal government expenditure rose from N164.0 million in 1961 to N5826.8 million in 1977, The growth rate accelerated during the period of civil war when total expenditure rose by 229percent :from the N225.1million in 1966 to N838.9million at the end of the war in 1970. The rate of increase in government was highest in the 1970s when total expenditure increased from N838.9 million in 1970 to N6826.8million in 1977, recording over 700 percent increase during the period.

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From 1978 to 1982, the capital expenditure was higher than recurrent expenditure in terms of the percentage of total expenditure. Between 1983 and 1995 except in 1986 (the year structural adjustment program (SAP) became operational) recurrent expenditure was higher than capital expenditure. This had a serious implication for capital formation and the real growth rate of the economy.

From the year 2000 till date, recurrent expenditure, was on the higher trend than the capital expenditure revealing the burden of the federal government in terms of salaries, duplication of parastatals, transfer payment and excessive carrying capacity of the public sector.

Despite the rise in government expenditure in Nigeria over these years, there are still public outcries over decaying infrastructural facilities. Also, merely few empirical studies have taken holistic examination of the effect of government expenditure on economic growth regardless of its importance for policy decisions. More so, for Nigeria to be ready in its quest to become one of the largest economies in the world by the year 2020, determining the effect of public expenditure on economic growth is a strategy to fast-track growth in the nation‟s economy.

Equally of empirical importance is the implication of public debt on government spending patterns and economic growth. In Nigeria, several factors have been advanced to explain the changing domestic debt profile between the1960s to date. The major factors include – high budget deficits, low output growth, large expenditure growth, high inflation rate and narrow revenue base witnessed since the 1980s. However, growth was recorded in 2003. Public expenditure as a percentage of GDP increased from 13% in the 1980 – 1989 periods to 29.7% in the 1990–1994 periods. This increased public expenditures to GDP ratio resulted from fiscal policy expansion

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embarked upon during the oil boom era of the 1970s. However, as the oil boom declined in the 1980s, priorities of government expenditure did not change.

Against this background, this study aims at examining the relationship between public expenditure and economic growth in Nigeria covering the period 1981-2010, this will assist the policy makers on the nature of relationship between public expenditure and economic growth in Nigeria.

1.2         STATEMENT OF THE PROBLEM

Policymakers are divided as to whether government expansion aid or slow down economic growth. Advocates of bigger government dispute that government programmes supply useful “public goods” such as education and infrastructure; they also declare that expansion in government spending can increase economic growth by increasing the wellbeing of the people. Proponents of smaller government have the contrary perspective; they describe that government is too large and that higher spending reduce economic growth by transmitting additional resources from the productive sector of the economy to government, which uses them less efficiently.

Various researchers have as shown divergent opinions on the effect of government expenditure on economic growth. While some are of the opinion that there is a positive relationship between government expenditure and economic growth, others have shown that government expenditure has a negative relationship with economic growth. The nature of the impact of government expenditure on economic growth is inconclusive; some authors believed that the impact of government expenditure on economic growth is negative or non-significant (Taban,2010; Vu Le and Suruga, 2005), others believed that the impact is positive and significant (Alexiou, 2009; Belgrave and Craigwell, 1995).

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This study however will aim to examine the impact of public expenditure on economic growth in Nigeria by analyzing the impact of both capital and recurrent expenditures on economic growth. It will also analyze the impact of government expenditure in its functional dimensions in the economy namely: General Administration and Social Services.

1.3         OBJECTIVES OF THE STUDY

The main objective of this study is to evaluate the relationship between government expenditure and economic growth over the 1981 to 2011. The specific objectives of the study shall include:

(i)     To analyze of the trend of public expenditure in the Nigerian economy.

(ii)