ABSTRACT
This study investigates the impact of public expenditures of government on the economic growth of
Nigeria using the ordinary least square method for estimating multiple regression models covering
1981-2011 time period. The regression results showed that both capital and recurrent expenditures
impacted positively on economic growth during the period of study. The recurrent expenditure has a
stronger and more accelerating effect on growth than capital expenditure. This is attributed to the
fact that capital expenditure which is not meant for immediate consumption is more prone to misuse
and embezzlement, and also could make it to be less growth enhancing. . We can also conclude from
F-statistics that the overall model is adequate in explaining the output growth. Johanssen cointegration tests also reveal long run relationships between the variables. Government expenditure
on administration and social and community services positively affect economic growth. The study
therefore, among others recommends that government should place more emphasis on the capital
expenditures so as to accelerate economic growth of Nigeria and that Government should direct its
expenditure towards the productive sectors like education as it would reduce the cost of doing
business as well as raise the standard living of poor ones in the country.
KEYWORDS: public expenditure, capital expenditure, recurrent expenditure, co-integration.
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TABLE OF CONTENTS
TITLE PAGE…………………………………………………………………………………………………………………………i
CERTIFICATION …………………………………………………………………………………………………………………ii
DEDICATION……………………………………………………………………………………………………………………..iii
ACKNOWLEDGEMENT……………………………………………………………………………………………………..iv
ABSTRACT………………………………………………………………………………………………………………………….v
TABLE OF CONTENTS……………………………………………………………………………………………………….vi
CHAPTER ONE……………………………………………………………………………………………………………………1
1.0 INTRODUCTION …………………………………………………………………………………………………..1
1.1 BACKGROUND OF THE STUDY…………………………………………………………………………1
1.2 STATEMENT OF THE PROBLEM …………………………………………………………………………..4
1.3 OBJECTIVES OF THE STUDY ………………………………………………………………………………..5
1.4 RESEARCH QUESTIONS………………………………………………………………………………………..5
1.5 RESEARCH HYPOTHESES …………………………………………………………………………………….6
1.6 SIGNIFICANCE OF THE STUDY…………………………………………………………………………….6
1.7 SCOPE AND LIMITATION OF THE STUDY……………………………………………………………7
1.8 RESEARCH METHODOLOGY………………………………………………………………………………..7
1.9 ORGANISATION OF THE STUDY ………………………………………………………………………….8
1.10 DEFINITION OF TERMS ……………………………………………………………………………………..8
CHAPTER TWO …………………………………………………………………………………………………………………10
2.0 LITERATURE REVIEW AND THEORETICAL FRAMEWORK …………………………………10
2.1 INTRODUCTION…………………………………………………………………………………………………..10
2.2 CONCEPTUAL CLARIFICATION………………………………………………………………………….10
2.2.1 PUBLIC EXPENDITURE…………………………………………………………………………………10
2.1.2 THE DIMENSIONS AND IMPORTANCE OF THE QUALITY OF PUBLIC ……….13
EXPENDITURE…………………………………………………………………………………………………………..13
2.1.3 THE COMPOSITION OF SPENDING……………………………………………………………….14
2.1.4 THE EFFECTIVENESS OF PUBLIC POLICES. ………………………………………………..15
2.1.5 ECONOMIC GROWTH……………………………………………………………………………………17
2.1.6 ASSESSING PUBLIC EXPENDITURE AND ITS IMPACT ON ECONOMIC………18
GROWTH……………………………………………………………………………………………………………………18
2.3 THEORETICAL FRAMEWORK …………………………………………………………………………….20
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2.3.1 LAW OF INCREASING PUBLIC EXPENDITURE ……………………………………………20
2.3.2 KEYNESIAN ECONOMIC MODEL…………………………………………………………………23
2.3.3 ENDOGENOUS GROWTH MODEL ………………………………………………………………..23
2.4 EMPIRICAL REVIEW……………………………………………………………………………………………24
2.4.1 PUBLIC EXPENDITURE…………………………………………………………………………………24
CHAPTER THREE ……………………………………………………………………………………………………………..31
3.0 RESEARCH METHODOLOGY…………………………………………………………………………………..31
3.1 INTRODUCTION…………………………………………………………………………………………………..31
3.2 MODEL SPECIFICATION ……………………………………………………………………………………..31
3.2.1 Economic a-priori expectation……………………………………………………………………………….33
3.3 ESTIMATION TECHNIQUES ………………………………………………………………………………..33
3.3.1 Unit root / Stationary tests …………………………………………………………………………………34
3.3.1 Co integration test…………………………………………………………………………………………….35
3.3.2 Error Correction Model……………………………………………………………………………………..35
3.3.3 Model Evaluation Criteria………………………………………………………………………………….36
3.5 Sources of data…………………………………………………………………………………………………….37
CHAPTER FOUR………………………………………………………………………………………………………………..39
4.0 DATA ANALYSIS AND THE ESTIMATED RESULTS …………………………………………………39
4.1 INTRODUCTION ………………………………………………………………………………………………………39
4.2 ESTIMATED RESULTS……………………………………………………………………………………………..39
4.2.1 Unit root test ………………………………………………………………………………………………………..39
4.2.2 Co-integration results for the long-run relationships criterion of the variables……………..40
4.2.3 OLS for Testing the Impact of Public Expenditure on Economic Growth in Nigeria…….42
4.2.4 OLS Results for General administration and Social service Expenditure and Economic
Growth in Nigeria …………………………………………………………………………………………………………44
CHAPTER FIVE …………………………………………………………………………………………………………………48
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS…………………………………………48
5.1 SUMMARY……………………………………………………………………………………………………………….48
5.2 CONCLUSION…………………………………………………………………………………………………………..50
5.3 RECOMMENDATION……………………………………………………………………………………………….51
RFERENCES………………………………………………………………………………………………………………………53
APPENDIX…………………………………………………………………………………………………………………………60
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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) To examine the impact of public expenditure on economic growth in Nigeria.
(iii)To examine the impact of recurrent and capital expenditure on the economic growth in
Nigeria.
(iv)To evaluate the impact of general administration AND social services expenditures on
economic growth in Nigeria.
1.4 RESEARCH QUESTIONS
Given the background of this study, it is pertinent to state explicitly, the research questions which it
seeks to answer. These include:
(i) How does public expenditure affect economic growth in Nigeria?
(ii) How does the public expenditure impact on economic growth in Nigeria?
(iii) Does recurrent and capital expenditure have any impact on the economic growth in Nigeria?
(iv) What is the impact of general administration expenditure and social services on the Nigerian
economy?
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1.5 RESEARCH HYPOTHESES
The hypotheses for this study are all stated in the null form as follows:
H0: Government expenditure has no significant impact on economic growth in Nigeria.
H0: Capital expenditure and capital expenditure has no significant impact on economic growth in
Nigeria.
H0: General administration expenditure and social services has no significant impact on economic
growth in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
Whilst acknowledging the fact that this study is not the first of its kind using Nigerian data,
however, it shall go a little further than earlier works to correctly capture all known composition of
public expenditure during the years under review to assess the impact of public expenditure on
economic growth.
The relationship between government spending and growth is especially important for
developing countries, most of which have experienced increasing levels of public expenditure over
time. This has tended to be associated with rising fiscal deficits, suggesting their limited ability to
raise sufficient revenue to finance higher levels of expenditure. Rising deficit tends to retard
economic growth in developing countries because of the inability of such countries to check inflation
during deficit years. Thus, this study gives a good insight into problems created by rising government
expenditure and how the same impacts on growth.
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Also, this study will enable policy makers to promote economic growth without recourse to
huge deficit finance. This often results in inflation particularly when increase in government
expenditure is not matched by corresponding increase in output.
1.7 SCOPE AND LIMITATION OF THE STUDY
The scope of the study shall cover the public expenditure of Nigeria from 1981 to 2010.
However, the main focus of this study is an x-tray of the effect of public expenditure on the growth
of Nigerian economy as measured by Gross Domestic Product.
One major limitation of the study is that the secondary data to be used for the empirical
analysis may be porous as such data are often manipulated for political reasons. Besides, the study
shall cover a limited number of years in the post structural adjustment era. This might not permit the
researcher to draw conclusions on the implications of the structural adjustment programme the nexus
between government spending and economic growth in Nigeria.
1.8 RESEARCH METHODOLOGY
Secondary data shall be the basis of this study. The relevant data to be used would be sourced
from the central bank of Nigeria‟s statistical reports, annual and statement of account from 1980 to
2011 under review. The test of hypotheses earlier stated would be done at 5%level of significance
and as such the generalization of the study findings would be limited to this extent.
The econometric procedure that would be adopted to examine the effect of public expenditure
on the economic growth of Nigeria shall be the Ordinary Least Square (OLS) method. This
econometric method would be used because it is very reliable and widely used in researches one
multiple regression model would be adopted to capture the effect of public expenditure on Nigeria
economic growth. The effect of other macro economic factors such as; public debt, money supply,
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interest rate, inflation would also be considered. This would enable us to judge the relevance of
public expenditure. If government spending had adverse effect on the economy, then the public
expenditure would contribute to the growth of the economy.
1.9 ORGANISATION OF THE STUDY
This study shall contain five chapters. The first chapter shall contain the background of the
study, the statement of the research problem, the objectives of the study, the research questions etc
that guide the study. Chapter two would summarize the opinions of authorities on the subject of the
matter. Chapter three shall state the methodology to be adopted in the study. Chapter four shall focus
on the data presentation and interpretation of the regression result. The last chapter- chapter five
would present the summary of the findings, conclusion and appropriate recommendations.
1.10 DEFINITION OF TERMS
Public expenditure: Refers to government spending .it is incurred by central, state and local
government of a country. is the spending made by the government of a country on collective needs
and wants such pension, provision, infrastructure, etc.
Capital Expenditure: Capital expenditure is the money spent on long term projects that helps in
development of the economy such as investment in the industry and technology development,
agriculture, works and housing, power and steel etc. it could also be expenditure of acquisition of
various assets like land, building, plant and machinery etc.
Recurrent Expenditure: Recurrent expenditure is the money spent on services sector such as
maintenance of existing facilities, interest payment, payment of wages and salaries etc. it is also a
payment made on goods and services as well as interest and subsides.
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General Administration: Is the expenditure to day to day operations of a business. General
administration expenses pertain to operation expenses rather that to expenses that can be directly
related to the production of any goods or services. Examples are utilities managerial salaries etc.
Social Services: Social services are government services provided for the benefit of the community
such as education, medical care and housing.
Economic growth: is an increase in the amount of goods and services produced per head of the
population
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