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Chapter one


1.1 Background of the Study

The most important function of government spending is to maintain a reasonable level of price level stability and appropriate stable economic growth, which will enable the economy to reach its full development potential and stabilise (Musgrave, 1989).

Economic stabilisation occurs when government spending, through its fiscal role, successfully maintains high employment, a reasonable degree of price level stability, and an appropriate rate of economic growth, while accounting for positive effects on trade, balance of payment, savings, investment, and productivity (Noko, 2013).

As long as markets are imperfect, changes in macroeconomic financial variables need adjustments to government fiscal activities, as well as fluctuations in price level and growth rate.

Government expenditure (spending) is responsible for maintaining price stability and reducing growth rate fluctuations through the budgetary mechanism. When the economic growth rate increases and the price level remains relatively stable, the effect of government spending on the economy is more positive (Noko, 2013).

Thus, government spending is a subset of public finance concerned with how the government spends money generated to meet the needs of the general public (Noko, 2013).

Some scholars have argued that increased government spending can be an effective tool for stimulating aggregate demand in a stagnant economy and creating crowding-in effects in the private sector.

According to Keynes’ theory, the government may cure economic downturns by borrowing money from the private sector and then returning it to the private sector through various expenditure programmes.

High levels of government consumption are likely to boost employment, profitability, and investment through multiplier effects on aggregate demand (Abdullahi 2010).

For example, Lipsey and Crystal (2007) argue that government spending through fiscal operations has a significant impact on the level of GDP in both the short and long run.

It has also been proposed that when the government spends too much or too little money relative to the availability of goods and services in the economy, there will be corresponding pressures (increase or decrease) on prices, potentially leading to inflation, deflation, or stagnation.

Endogenous growth models, such as Barro (1990), predict that only productive government expenditures will have a positive effect on long-run growth rates.

The conceptual foundation of this study is based on Wagner’s law of growing state activities, which describes the causal relationship between federal government expenditure recurrent and capital on the one hand and GDP on the other.

For the purposes of this paper, government spending is defined as the total cash or ‘cheque’ terms of federal, state, and local government spending, as well as financial transfers to ‘parastatals’ at the three levels of government. It is the amount spent on the performance of government functions during a set period of time. It includes recurrent expenditure and capital expenditure.

Government capital expenditure refers to spending on capital projects like roads, airports, education, telecommunications, power and the acquisition of investment commodities like equipment and machinery and other products with an estimated working life of more than one year (Anyafo, 1996).

GDP is here defined as the entire monetary worth of all products and services generated in an economy during a specified period of time, usually one year. The magnitude and direction of the effects of government spending on the economy determine how GDP reacts.

Economic growth refers to the increase of a country’s potential GDP or output of goods and services, whereas price stability refers to a situation in which the prices of goods and services remain relatively stable (not changing or being disturbed) over time.

1.2 Statement of the Problem

The Nigerian economy’s underdevelopment is a result of irregular government spending and the misallocation of government funding to development initiatives, which has forced the Nigerian government to rely on oil for more than 80% of its earnings.

Nigeria government spending over the year have sky-rocketed but the problem here is inefficient channelling of the fund to key priority area of the economy, or the case of embezzlement.

Available CBN statistical data reveal that total government expenditure (capital and recurrent) continued to climb over the year. For example, overall government capital expenditure on economic, social, and community services, as well as transfers, increased from N110,163.10 million, N150,034 million, and N280340 million in 1980, 1989, and 1991, respectively.

In 2010, it climbed to N883874.5 million, followed by N918548.9 million in 2011. While recurrent expenditure increased from N4805 million, N25994 million, and N38243 million in the same period, it decreased to N33103430.38 billion and N305433300 billion in 2010 and 2011 (CBN Statistical Bulletin, 2011).

A view of the growth pattern of the government spending shows that government spending has risen more proportionately than the crowding effect of growth in the economy.

Government expenditures on these and other services or industries would be anticipated to generate a commensurate growth trend in the economy. This forced the researcher’s quest for empirical quantitative assessment of effect of government spending on growth of the economy.

In addition, many Nigerians have continued to wallow in abject poverty, while more than 50 percent survive on less than US$2 per day. In addition, the outdated infrastructure (particularly roads and electrical supply) has resulted in the collapse of numerous industries, as well as a high rate of unemployment.

Furthermore, macroeconomic indices such as balance of payments, import obligations, inflation rate, exchange rate, and national savings show that Nigeria has not performed well in recent years.

Therefore, the goal of this study is to evaluate government expenditure and economic growth in Nigeria using a disaggregated approach.


The following research questions shall help in actualizing the aims of this research work;

v To what extent has government expenditure impacted on economic growth in Nigeria?

v Is there any observed long run relationship between government expenditure and economic growth in Nigeria?


The overall goal of this research is to investigate the relationship between government expenditure and the Nigerian economy. Specific aims include the following:

v Examine the impact of government spending on Nigerian economic growth.

v To investigate the long-term relationship between government spending and economic growth in Nigeria.

1.5 Statement of Hypothesis

The following null and alternative hypotheses will be evaluated at a 5% level of significance:

v H0: Government expenditure has no substantial impact on economic growth in Nigeria.

v H0: There is no substantial long run association between government expenditure and economic growth of Nigeria.

v H0: There is a considerable long-term association between government expenditure and economic growth in Nigeria.

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