Project Materials

ASSESSMENT THE IMPACT OF GOVERNMENT EXPENDITURE ON GROSS DOMESTIC PRODUCT BETWEEN (2000 -2013).

Chapter One

Introduction

1.1 Background of the Study

The relationship between government spending and economic growth has sparked ongoing debate among scholars. The government has two functions: protection (and security) and the provision of certain public goods (Abdullah, 2000; AI-Yousif, 2000).

The protection function consists of establishing the rule of law and enforcing property rights. This serves to reduce the risk of criminal activity, safeguard life and property, and defend the nation against external assault. Public goods include defences, roads, education, health, and power, to name a few.

Some experts claim that more government spending on social and physical infrastructure promotes economic growth. For example, government spending on health and education increases labour productivity and contributes to national production growth.

Similarly, spending on infrastructure such as roads, communications, and power reduces production costs while increasing private sector investment and company profitability, so promoting economic growth. Scholars such as (Al-Yousif, 2000), (Abdullah HA, 2000), (Ranjan, Sharma, 2008), and (Cooray, 2000) support this approach, concluding that increased government spending promotes economic growth.

Some scholars, however, disagree with the claim that greater government spending fosters economic growth, arguing that higher government spending may slow the economy’s overall performance. For example, in an attempt to finance rising expenditures, the government may raise taxes and/or borrow.

Higher income taxes discourage individuals from working long hours or even looking for work. This reduces both income and aggregate demand. Similarly, higher profit taxes tend to raise production costs, reduce investment expenditure, and lower firm profitability.

Moreover, if government raises borrowing (particularly from the banks) in order to finance its expenditure, it would compete (crowds – out) away the private sector, thus lowering private investment.

Furthermore, in an effort to gain cheap popularity and maintain power, politicians and government officials may boost spending and investment in useless projects or items that the private sector can produce more efficiently.

Thus, government activities can lead to resource misallocation and limit national output growth. In fact, studies by (Laudau, 1986), (Barro, 1991), (Engen, Skinner, 1992), and (Foister, Henrekson, 2001) have shown that substantial government spending has a detrimental influence on economic growth.

Nigeria’s government expenditure has continued to climb due to large receipts from crude oil production and sales, as well as increased demand for public (utilities) products such as roads, communication, power, education, and health.

Furthermore, there is a growing need to guarantee internal and external security for the people and the country. According to available figures, total government expenditure (capital and recurrent) and its components have increased during the last three decades.

For example, the government’s total recurrent expenditure climbed from N3,819.20 million in 1977 to N4,805.20 million in 1980, and then to N36,219.60 million in 1990. Recurrent spending was N461,600.00 million in 2000 and N1, 589,270.00 million in 2007.

Similarly, the composition of government recurrent expenditure reveals that spending on defence, internal security, education, health, agriculture, building, transportation, and communication increased during the period under consideration.

Furthermore, government capital expenditure increased from N5, 004.60 million in 1977 to N10, 163.40 million in 1980, and then to N24, 048.60 million by 1990. In 2000, capital expenditure was N239,450.90 million, but in 2007, it was N759,323.00 million.

Furthermore, the major components of capital expenditure (that is, defense, agriculture, transport and communication, education and health) likewise indicate a rising tendency between 1977 and 2007.

The formula for estimating national income is (Y = C + I + G + (X – M)). This means that government spending has a significant impact on the size and growth of the economy. However, it could be a double-edged sword:

it could considerably increase aggregate output, particularly in developing countries with large market failures and poverty traps, but it could also have negative repercussions such as unintended inflation and boom-bust cycles (Wang and Wen, 2013).

The effectiveness of government spending in expanding the economy and stimulating rapid economic growth is determined by whether it is productive or unproductive.

All else being equal, productive government expenditure would benefit the economy, whereas unproductive expenditure would have the opposite impact.

According to Bhatia (2008), government expenditure is the expense incurred by the government in carrying out capital projects. According to the Oxford Business Dictionary, government spending is defined as any expenditure other than operational expense that lasts more than one year.

While the Gross Domestic Product, often known as “GDP,” can be defined as the total amount of services and goods generated in a country during a given period of time, a year.

Keynes (1936) contends that the cure to economic depression is to encourage enterprises to invest through a mix of interest rate cuts and government capital investment, particularly infrastructure.

The assumption that increased government spending fosters economic growth is not accepted by all researchers. Some famous scholars, particularly from the neoclassical school, claim that higher government spending may negatively impact the economy’s overall performance.

This is because the government may need to raise taxes or borrow to support the spending. Higher income taxes may discourage or disincentivise extra effort, resulting in lower income and aggregate demand.

Similarly, excessive corporation taxes raise production costs and lower the profitability of enterprises and their capital for investment spending.

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 consistent with Sudha (2007), who notes that nations with big public sectors have progressed slowly. Thus, there is no universal agreement among scholars on the impact of increased government spending on GDP.

Government or public expenditure has been the most often adopted fiscal policy in terms of growth, expansion, structural reform, and economic diversification.

Public funds are employed for allocation, stabilisation, and distribution (Musgrave & Musgave, 2009). As a result, public expenditure programmes are a comprehensive set of expenditure policy measures meant to achieve a specific set of macroeconomic goals, such as restoring aggregate domestic demand and supply equilibrium (IMF, 2003).