IMPACT OF FEDERAL GOVERNMENT BUDGET ON DIFFERENT SECTORS OF NIGERIA ECONOMY

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IMPACT OF FEDERAL GOVERNMENT BUDGET ON DIFFERENT SECTORS OF NIGERIA ECONOMY

CHAPTER ONE

1.0 Introduction

1.1 Background of the Study

The expenditures executed by the Federal Government play a critical role in the operation of all economies activities. It refers to expenses incurred by the government for the statutory maintenance and provision of public welfare, goods, services and works needed to foster or promote economic growth and improve the well being of its citizens in the society. Federal Government expenditures are majorly categorized into expenditures on administration, economic service, social service, transfers and others which have both capital and recurrent components. Capital expenditure refers to the amount spent in the acquisition of fixed (productive) assets (whose useful life extends beyond the accounting or fiscal year), as well as expenditure incurred in the upgrade/ improvement of existing fixed assets such as lands, building, roads, machines and equipment, etc., including intangible assets. Federal Government Expenditure in research also falls within these components of these

expenditures.

Capital expenditure is usually seen as expenditure creating future benefits, as there could be some lags between when it is incurred and when it takes effect on the economy.

Recurrent expenditure on the other hand refers to expenditure on purchase of goods and services, wages and salaries, operations as well as current grants and subsidies (usually classified as transfer payments). Recurrent expenditure, excluding transfer payments, is also referred to as government final consumption expenditure.

The annual budget spells out the direction of the expected expenditure, as it contains details of the proposed expenditure for each year, though the actual expenditures may differ from the budget figures due, for example, to extrabudgetary expenditures or allocations during the course of the fiscal year. Oziengbe (2013) suggested that government expenditure is a major component of national income as seen in the expenditure approach to measuring national income: (Y = C+I+G +(X – M)). It implies that government expenditure (G) is a key determinant of the size of the economy and of economic growth. However, it could act as a two-edged sword: It could significantly boost aggregate output, especially in developing countries where there are massive market failures and poverty traps, and it could also have adverse consequences such as unintended inflation and boom-bust cycles (Wang and Wen, 2013). The effectiveness of government expenditure in expanding the economy and fostering rapid economic growth depends on whether it is productive or unproductive. All things being equal, productive government expenditure would have positive effect on the economy, while unproductive expenditure would have the reverse effect.

The issue of the relationship between government capital expenditure and economic growth has been discussed extensively. Oyinlola and Akinnibosun (2013) have carefully traced back theoretical foundation of this relationship to the days of such scholars like Wagner (1883) and Keynes (1936). While Barro (1990) suggests that government spending on investment and productive activities should add positively to economic growth whereas government consumption spending is anticipated to be growth-retarding. The major problem with this statement of reasoning stems from the unlikely difficulty associated with the empirical determination of which particular items of expenditure should be labeled as investment and others as consumption.

Generally, most governments all over the world embark on public expenditure to stimulate the economy. They believe the economy cannot grow unless with government intervention and government expenditures are instrument for controlling the economy. Scholars have argued that public expenditures on socio-economic and physical infrastructure enhance economic growth. Okoro (2013), for instance, has argued that government expenditure on education and health increases the productivity of labour and by extension increases the growth of national output. Again, expenditures on infrastructure like roads, communications, and power reduce production costs which in turn increase private sector investment and profitability, and by extension enhance economic growth (Okoro, 2013).

In the past years, it has been an unhealthy state for the federal government taking full charge of its capital expenditure in the economy. The challenges faced by both the federal and state government in recent years have being the issue of finances to execute their expenditures. Infrastructures, social amenities, health, education are prescribed to be the major capital expenditure expected to be taken and maintained by the federal government which are supposed to serve as a return to the federal government purse for more execution of projects through its capital expenditure components. Many have investigated on the effectiveness of government expenditure on the Nigerian economy but yet to actualize the single fact that capital expenditure by the federal government have been on the decline and neglect in the past years and yet to profound a suitable ideal on how this demise could be sorted out for the growth of the Nigerian economy.

1.2 Statement of the Problem

The achievement of sustainable economic growth conveys to the citizens, is a privilege of an improved standard of a living, high level of literacy and employment, improved healthcare and infrastructure, including adequate protection of life and property within the domain. It is known fact that all these involve a whole lot of processes, just as no amount of economic growth can be achieved without commensurate conscious efforts on the part of individuals, government and its agencies.

While some societies prefer to pursue such initiatives through private-oriented (market mechanism) programmes, some others may go for government efforts with others caught in between the two. (It is however, instructive to note that there is a strong division in opinion as to whether government expenditure helps or hinders economic growth). Advocates of bigger government argue that government programmes provide valuable “public goods” such as education and infrastructure. It is also their claim that increases in government spending can bolster economic growth by making more money available to individuals. On the other side of the divide, however, are those who contend that government’s big spending undermines economic growth by transferring additional resources from the productive sector of the economy to the government, which uses them less efficiently.

In fact, there have been quite a number of studies all trying to determine the effects of capital expenditure on economic growth. At the international arena, these include the works of Folster and Henrekson (1999), where they argued that the relationship is negative; Agell (1999), response is that it is not significant; Kneller (1998) contend that rising deficits tend to have an adverse effect on growth in Organization for Economic Cooperation and Development (OECD) countries while Baro (1990), is of the view that to the extent that public services are considered an input to production, a positive linkage arises between the size of government and economic growth. Kweka and Morrissey (2010) have summarized these divergent views thus: while numerous studies have been conducted, no consistent evidence exists for a significant relationship between public spending and growth, in a positive or negative direction.

The consensus between Kweka and Morrissey (2010) and Tullock (1989) is that the actual relationship between public spending and growth is far from being understood and therefore calls for more empirical research. The above view has further been amplified by Fan and Rao (2013) as they lend their support thus: many developing countries are currently undergoing substantial macroeconomic adjustments. It is not clear how such programs are affecting government expenditure and hence long-term economic growth and poverty reduction. Fan and Rao (2013) emphasize more on this thus: it is important to monitor trends in the levels and composition of government expenditures, and 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 future.

Therefore, in the last decade Nigeria has metamorphosed from the level of Billions in naira to trillions in naira on the expenditure side of the budget. The effects of this expenditure are largely unnoticeable on the citizenry (Muretola, 2011).

Although, this problem of cross-sectional analysis appears to have been addressed by the study conducted on budget and public expenditure across Nigerian states by Eboh, Amakom and Oduh (2014) its greatest pitfall lies with the fact that it concentrated on selected states of Nigeria and again appear to be more of a study on expenditure/revenue sources that the effect of public expenditure on economic growth. Hence Eboh, Amakom et al (2014) have this to say: However, the functional distribution of capital budget estimates is generally aligned to economic and social services, it is not clear how and to what extent public spending leads to concrete effective results in human, social and economic growth. Additional research is needed to find out whether and: how budgets and public spending have translated to public goods and services and the extent to which they impact upon the investment climate in the states. It will suffice therefore, that this observation by Eboh et al (2014), is not only limited to the relationship between public expenditure and economic growth in Nigeria, but has actually ascended a general out-look just as Tullock (1989) and Kweka and Morrissey re-echo.

Empirically, while a positive and significant relationship between government spending and economy growth have been established, there are much significant negative or no relationship between an increase in government expenditure and economic growth. That is; the actual relationship between public spending and growth is far from being understood and therefore call for more empirical research. Following these mixed finding, the study is to find out what effect federal government capital expenditure has on economic growth over the period under review.

1.3 The Research Questions

Following the problem discussed above, we consider the following research questions relevant for the study.

How Federal Government Capital Expenditure on Administration have an effect on Economic growth in Nigeria?
How Federal Government Capital Expenditure on Economic service have an effect on Economic growth in Nigeria? iii. How Federal Government Capital Expenditure on Social Community service have an effect on Economic growth in Nigeria?

iv. How Federal Government Capital Expenditure on Transfers have an effect on Economic growth in Nigeria?

1.4 Objectives of the Study

The general objective of this study is to determine the effect of Federal

Government capital expenditure on the Economic growth in Nigeria.

The specific objectives are to:

i. Determine the effect of Federal Government Capital Expenditure in

Administration on the Economic growth in Nigeria. ii. Determine the effect of Federal Government Capital Expenditure in

Economic service on the Economic growth in Nigeria.

Determine the effect of Federal Government Capital Expenditure in

Social Community service on the Economic growth in Nigeria.

Determine the effect of Federal Government Capital Expenditure in

Transfers on the Economic growth in Nigeria.

1.5 Statement of Hypotheses

The hypotheses formulated from the research questions in order to adequately evaluate the effect of capital expenditure on the economic growth in Nigeria are stated in the null hypotheses as follows;

Ho₁: Federal Government Capital Expenditure on Administration (CEAD) has no effect on the Gross Domestic Product (GDP) of Nigeria.

Ho₂: Federal Government Capital Expenditure on Economic service (CEES) has no effect on the Gross Domestic Product (GDP) of Nigeria.

Ho₃: Federal Government Capital Expenditure on Social Community (CESC) has no effect on the Gross Domestic Product (GDP) of Nigeria.

Ho₄: Federal Government Capital Expenditure on Transfers (CETR) has no effect on the Gross Domestic Product (GDP) of Nigeria.

1.6 Scope of the Study

This study principally examines the effect of federal government capital expenditure component on the economic growth in Nigeria. It covers data under capital expenditure components which are administration, economic service, social community service and transfer while the Gross Domestic Product (GDP) under the economic growth of Nigeria. It covers a period of thirty years (1985-2014). These indicators are identified as capital expenditure undertaken by the Federal Government.

1.7 Significance of the study

The flurry of discussions generated by the effect of capital expenditure on Nigerian economic growth has continued to soar high. Such capital expenditure effect on economic growth remains a highly contentious debate. In fact, scholars have continued to claim varying implications for different economies, all depending on the analytical tool in use as well as region and mode of capital expenditure classification. All these, have yielded no concrete result for any country specific policy formulation. On this strength therefore, this study on Nigeria was useful in a number of ways to policy makers. One, for the first time, the study was able to identify the variables that constitute federal capital expenditure and their effect on Nigerian economic growth. Given the fact that no two countries are structurally the same, any foray into specific country problem, will no doubt be far more informative to all and policy makers in particular than cross-section studies. Secondly, the study presents a sound premise for policy making. This is particularly so because, the findings no doubt, arise from sound empirical evidence from Nigerian experience.

The study equally stands to provoke more interest in the areas of capital expenditure and economic growth. Thus, researchers and other knowledgeseekers are here presented fertile ground for broadening their knowledge. It is expected that this study consolidated existing literature on the issues surrounding the relationship between capital expenditure and Nigerian economic growth.

1.8 Limitations of the Study

Experience has shown that studies of this nature pose some teething problems. These range from data sourcing problems, time to adequate funding.

Inadequate information: The difficulty with gathering the necessary data for the study is better appreciated than imagined. As such, many visits to the internet and other places of interest like the Central Bank of Nigeria (CBN), National Bureau for Statistics (NBS), as well as the numerous discussions demands on the part of any researcher.
Finance: Inadequate financing of the numerous efforts in data generation, especially during internet sourcing of materials is a major source of concern. However, the researcher uses the best that is

available.

1.9 Definition of Terms

Public expenditure (PE): Public expenditure is the spending of public income by government to provide social, political and economic infrastructures that will grow and provide higher standard of living for its citizens.

Recurrent expenditure (RE): Recurrent expenditure is the outlays that are necessary to maintain existing levels of government services.

Capital expenditure (CE): Capital expenditure is the expenditure created to accommodate resources meant for the accusation of capital assets and facilities of long term nature.

Economic growth: This is the percentage rate of increase in gross domestic product. It captures the change in value of goods and services produce in a given economy for a specific period of time. It will be calculated as a percentage rate of change of the GDP

Capital Expenditure on Administration: it is the total outlays budgeted annually for fixed assets and other major expenditure in the administration of the economy channeled on General Administration, Defence, Internal security and National Assembly.

Capital Expenditure on Economic Service: it is capital expenditure that deals with procurement or purchases of fixed assets and other infrastructures in the Agricultural sector, Construction sector, Transportation and Communication sector. Capital expenditure through this service is channeled to other economic services.

Capital Expenditure on Social Community Service: it is the total capital expenditure estimated on Education sector, Health sector and other social community service. It is used in the purchase of infrastructural equipments into these sectors for their services.

Capital Expenditure on Transfers: it is the federal government capital expenditure on managing debts services. The capital expenditure is distributed to public debt servicing, pension and gratuities, contingencies or subventions.

1.10 Organization of the Study

This study is organized into five chapters. In chapter one, the study looked at the background of the study, statement of the problem, research questions, objective of the study. It also contain, research hypothesis, scope of the study, significance of the study, limitation of the study, and definition of terms and summary. Chapter two of this study contains literature Review, the Theoretical, Empirical Review, and a summary of the literature. In chapter three it follows introduction, research design, method of data collection, and the methodology employed to study the model of the effect of government expenditure on gross domestic product (GDP) growth by estimating a GDP function to show the impact of various public expenditure of the economic to GDP growth in percentage. In chapter four it dwell on data presentation and statistical analysis of data and discussion of result thereof, while chapter five summarize and conclude the study and proffers recommendation respectively.

1.11 Summary

This chapter presents an overview into the understanding of this research study. It is organize into the following major headings, background of the study, statement of the problem, objective of the study. It also contains research question, research hypothesis, scope of the study, significance of the study, limitation of the study, and definition of terms

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