Project Materials

IMPACT OF INFLATION ON GOVERNMENT SPENDING IN NIGERIAN ECONOMY (1981-2013)

Chapter one

INTRODUCTION

1.1 Background of the Study

Inflation is an unavoidable feature of every economy in the globe. It has an impact on all countries, whether developed or developing, both favourably and badly. According to Anyanwu (2011), inflation is a significant component in causing social and economic instability and chaos.

It is one of the most extensively studied and tested economic variables, both theoretically and practically. Its sources, consequences for other economic variables, and cost to the entire economy are well known and understood.

Nigeria, as a developing country, was unable to resist the continuously rising inflation rate, as well as the underlying reasons and repercussions.

After maintaining relatively low for a long period, Nigeria’s inflation rate began to rise in late 2003. The money supply appears to have a major impact on food price inflation in Nigeria (Anyanwu, 2011). This had an impact on both family budgets and consumer purchasing power.

People battled to preserve their living standards, which eventually declined. Many authors have written about the effects of inflation and the cost of living on the Nigerian economy, but they all agree on one thing: inflation and the cost of living have different effects on the Nigerian economy.

The problem generated by growing costs of goods and services, resulting in a higher cost of living, has proven too tough for the government to address.

During an inflationary period, fixed quantities of money buy a smaller quantity of goods and services. The real worth of money is dramatically diminished, reducing customers’ purchasing power.

The relationship between government spending, sometimes known as government expenditure, and inflation has been the subject of ongoing discussion among researchers.

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. Not all researchers agree that increased government spending supports economic progress.

A number of famous scholars, particularly those of the neoclassical school, claim that higher government spending may hinder the economy’s overall performance because, in order to fund increased spending, the government may have to raise taxes or borrow more.

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.

According to the Revenue Mobilisation Allocation and Fiscal Commission (RMFC) (2011), Nigeria’s federal government spends 52.2% of total government income.

The remaining revenues are distributed to the Federating States and Local Government Areas (LGAs) according to a defined sharing mechanism.

1.2 STATEMENT OF THE PROBLEM

As far as Nigeria concerned with inflationary effects it has been suffered worst results indicated by poverty, food crisis, price hike etc. Mahmood, Hafeez and Rasheed(2009) concluded that inflation causes poverty.

Day to day increase in prices of commodities especially of non-food items like oil and gas snatch money from savings of consumers and uncertainty of prices, both food and non-food items, generate enthusiasm among people toward earn more and more therefore, people prefer to work over recreation underestimating their Health.

Muoghalu et al. (2010) discovered that inflation has a negative impact on the Nigerian economy, whereas exports and investment have a positive impact, and proposed that we encourage a larger scale of export promotion activities to boost economic growth. It will generate numerous job opportunities, raising per capita earnings and standard of living.

The relationship between government spending and economic progress has sparked controversy among academics. The government serves two functions: protection (and security) and the provision of certain public goods (Nurudeen and Usman, 2008).

The protection function consists of establishing the rule of law and enforcing property rights. This reduces the risk of criminal activity, protects life and property, and protects the nation from external threats, among other things.