PUBLIC EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA PROBLEMS AND PROSPECT

Abstract

The link between public expenditure and economic growth has attracted considerable interest on the part of both economic researchers and policy makers both at the theoretical as well as empirical levels. Two strong but opposing views exist in the public expenditure literature, namely, the Keynesians – government spending is an important policy tool to be used to ensure a reasonable level of economic activity, correct short-term cyclical fluctuations in aggregate expenditure, and the opposite view – that excessive government intervention in economic activities crowds out and distorts the activities of other economic agents. The size of the public sector keeps expanding day by day and one wonders if such continuous expansion is accompanied by expansion and growth of national output. This research work is set out to estimate the determinants of public expenditure; determine the impact of public expenditure on output growth

in Nigeria; determine the direction of causality between public expenditures and output growth; investigate if output growth responds significantly to public expenditures shocks in Nigeria; determine the impact of public expenditure by sector on economic growth. To achieve these, four models were applied both for the short run dynamics and the long run relationships. From the results, it was found that the size of revenue, national output growth (national income), external debts and domestic debts are the determinants of the size of public sector in Nigeria. The result also showed that public expenditure has strong (but positive) and significant impact on output growth in the short run but insignificant in the longer period. It was also found that both the recurrent and capital expenditures granger cause output changes, and also that the shocks from them cause fluctuation in output of Nigeria. This research discovered that, in the short run, public expenditures on education, agriculture, all have both positive and significant impact on output growth, while expenditures on health and building and construction have negative and significant relationship and defence has both positive and insignificant link with output growth. In the long run, however, defence, education and agriculture expenditures are positive and significant, whereas health and building and construction are negative and significant. The recommendations in this research are that public debts should be curtailed, revenue base should be expanded, price moderation is important, more social infrastructures should be provided to create avenues for private investment to increase, restraining from the use of recurrent expenditure because it is inflationary and can worsen the economic situation, policies for the health and building and construction sectors should be reviewed to check why they retard economic growth of Nigeria.

                                        CHAPTER ONE

                                        INTRODUCTION

1.1 Background of the study

Many developing countries are currently undergoing substantial macroeconomic adjustment. It is not clear how such programmes are affecting government expenditures and hence longer-term economic growth and poverty reduction. Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future.

The link between public expenditure and economic growth has attracted considerable interests on the part of economic researchers both at the theoretical as well as empirical level. Roughly speaking, one may distinguish between two opposing views: On the one hand, there is the Keynesian approach according to which government spending is an important policy tool to be used to ensure a reasonable level of economic activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh and Sahni, 1984); and secure an increase in productive investment, thus providing a socially optimal direction for growth and development (Ram, 1986). The opposite view is that excessive state intervention in economic life affects growth performance in a negative way for two reasons: first, because government operations are often conducted less efficiently, they reduce the overall productivity of the economic system, second, because excessive government expenditure (usually accompanied by high taxation levels) distorts economic incentives and results in suboptimal economic decisions (Barro 1990; King and Rebelo 1990).

Those who support larger size of the government give credence to the provision of certain goods and services that would otherwise not be provided by the private sector. They assert that government comes into economic activities due to failure of the market and externalities to establish a predetermined growth path. Government exists so as to provide social and physical infrastructure, by undertaking some investment and expenditures. By these ways, the government can directly or indirectly improve the productivity of the private sector by efficient and effective allocation of resources. The existence of government is correctly justified when one looks at the legal functions of the government, in terms of property rights (Atkinson and Stiglitz 1980:5), provision of security, maintenance of law and order, etc. In this sense, government expenditures have become expedient and necessary to overcome the obstacles of economic development.

However, when the size of the public sector becomes very large it can impinge on economic growth and development (Peden and Bradley (1989: 239), Vedder and Gallaway (1998), Folster and Henrekson (2001), etc). The larger the size of the public sector, the more difficult it becomes to coordinate the activities of the key players in the system. Larger governments tend to crowd out private investment, which invariably impinges on domestic output (Ahmed and Miller, 1999). Larger sizes of government can also create output volatility (Acemoglu and Ziliboti, 1997; and Koskela and Viren, 2003).

Maintaining law and order, in particular, securing property rights is probably the most acceptable rationale for government intervention. Theoretically, it is argued that enforcement  of  property  rights  being  a  public  good,  its  provision  can  only  be materialized through collective action (Gradstein, 2004). The rationale for the existence of government anywhere, including Nigeria, can be viewed from the perspective of the institutions of property rights, rule of law, governance, security, enforcement of the rule of law, etc. Nigeria is a Federal state with three tiers, with multiple and diverse ethnic and other socio-political differences, which most often determine the volume and rate of spending. The nature of public spending (in Nigeria) depends majorly on the revenue – of which oil controls a greater percentage – and which is also determined by the vagaries of world market interactions. The other institutional factors which can influence the public spending and economic growth include institutional quality (the enforcement of property rights), political instability (riots, coups, civil unrests, civil wars, etc), characteristics of political regimes (elections, constitutions, executive powers), social capital (the extent of civic – private

• activity and organizations) and social characteristics (differences in income and in ethnic, religious, and historical background) (Aron, 2000:100). All these affect nations’ investment directly as they create harsh environment and insecurity, which increases transaction costs and mar the private investment for growth.

According to North (1990:110), “Third World countries are poor because the institutional constraints define a set of payoffs to political/economic activities that do not encourage productive activity”. Such rules affect both individuals and organizations, defined as political organizations (city councils, regulatory agencies, political parties, tribal councils), economic organizations (firms, trade unions, family farms, cooperatives, etc), educational bodies (schools, universities, vocational training centres), and social organizations (churches, clubs, civic associations) (Aron, 2000). The inability of the government to enforce the rule of law affects the economies of developing  countries,  including  Nigeria,  and  as  such,  rent-seeking  behaviors corruption, bribery and protection of individuals and organizations connected with highly placed people become the common phenomenon. These behavioural attitudes raise the transaction costs and costs of information in the production process and make the rule of law unreliable.

Bearing all these in mind, it is necessary to verify the impact of the growth of government expenditure. Research is therefore needed to examine the source of shocks and how they influence the economy. Output volatility in Nigeria is another area that we need to find whether it is caused by public expenditure rise.

1.2   Statement of the Problem

It is a fact that no society throughout history has ever obtained a high level of economic affluence without a government. Government is a necessary, though by no means sufficient, condition for prosperity (Vedder and Gallaway, 1998). Where governments did not exist, anarchy reigned and little wealth was accumulated by productive economic activity. We should note, however, that where governments, on the other hand, have monopolized the allocation of resources and other economic decisions, societies have not been successful in attaining relatively high levels of economic affluence. Economic progress is limited when government is zero percent of the economy, and also when it is at or near 100 percent. Too much government stifles the spirit of enterprise and lowers the rate of economic growth. The recent revival of interest in growth theory has also revived interest among researchers in verifying and understanding the linkages between fiscal policies and economic growth. Government spending can stimulate particular sectors as well as increase aggregate demand taken globally. Over some past two decades, a substantial volume of empirical research has been directed towards identifying the elements of public expenditure (at its aggregate and disaggregate levels) that bear significant association with economic growth. Recent literature on endogenous growth theory predicts that fiscal policy changes can affect the long-term growth rate by influencing the determinants of growth (physical and human capital, technological changes, employment and savings) (Hjerppe, et. al. 2006). The relationship between economic growth and government spending, or more generally the size of the public sector, is an important subject of analysis and debate. A central question is whether or not public sector spending increases the long run steady state growth rate of the economy. This simply means that there is need to investigate whether the rises in public expenditure have been accompanied by rise in the output of Nigerian    economy.  The   data  on     the    fluctuations of the       GDP  and   public (government) expenditure are inexhaustible. This makes it expedient to understand the nature of such fluctuations in the macroeconomic variables and how they impact on the output of the economy.

1.3 OBJECTIVE OF THE STUDY

The broad objective of the research work is to determine the macroeconomic impact of the Nigerian public (government) expenditures. It is also of interest to ascertain which expenditure item of the government affects the output. However, the specific objectives are as follows:

1. To estimate the determinants of public expenditure
2. To determine the impact of public expenditure on output growth in

iii.     To determine the direction of causality between public expenditures         and output growth.

1.4 RESEARCH QUESTION

The following research questions formed the central focus of this study:

1. What are the determinants of public expenditures?
2. What is the impact of the public expenditures on economic growth of Nigeria?

• Are public expenditures causing the output changes?

1. Are shocks from public expenditures distorting the output growth in Nigeria?
2. What are the impacts of sectorial public expenditures on the output growth in Nigeria?

1.5 RESEARCH HYPOTHESES

The hypotheses of this research work are tacitly stated as follows:

H₀: The determinants of the public expenditures cannot be determined.

H₀: The Public expenditure has no significant impact on economic growth in Nigeria.

H₀: Public expenditures do not Granger cause output changes.

H₀: The shocks from public expenditures do not significantly affect output growth in Nigeria.

H₀: The sectorial spending of the government does not impact significantly on output growth.

1.6 SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the ministry of budget as the findings will help in policy formulation and implementation on public expenditure in Nigeria, the study will also be of great importance to the three tiers of government as the study seek to enumerate the importance of public expenditure on the economic growth of Nigeria, the study will also be of great importance to researchers, academia's teachers, student and the general public as the study will contribute to the pool of existing literature and also add to knowledge on the subject matter.

1.7 SCOPE OF THE STUDY

The research is basically for the economy of Nigeria. The study dwelt mainly on the public expenditure of Nigeria – aggregate expenditure of all tiers of government in Nigeria; output growth – measured from the supply side and not from the demand side. In some of the analysis, there was the need to divide the aggregate expenditure into capital and recurrent and in some others, the disaggregation of public expenditure into sectors became germane (the sectors include defence, health, education, agriculture, building and construction, transport and communication). Where it became necessary, other macroeconomic variables were introduced as may be required at a particular point in time.

1.8 CONCEPTUAL FRAMEWORK

The concept of public expenditures arises from the thinking that expenditures undertaken by the government is public. Government expenditures are also called public sector spending or government purchases. Government expenditure has been growing over the years and is very large. Therefore, the determination of the size of the public sector is done by dividing the total expenditures of government by the total national output (GDP). This ratio is defined as the size of the public sector; it is this ratio that was used in this thesis. Also, the data for public expenditures used in this research was the expenditures of all the three tiers of government in Nigeria. Public expenditures can be disaggregated or classified into subheadings, such as recurrent expenditures and capital expenditures. The recurrent expenditures are expenditures or purchases of stationeries, wages and salaries of workers, fuel, electricity bills and other bills, etc. Capital expenditures are constructions undertaken by the government on roads, bridges, health centres, military installations and hardware, etc.