Effect of Government Recurrent Expenditure in Economic Services Sector and Economic Growth in Nigeria (1981-2022)

Effect of Government Recurrent Expenditure in Economic Services Sector and Economic Growth in Nigeria (1981-2022)

Chapter One

OBJECTIVES OF THE STUDY

Government spending is an essential venture for financial development at the removal of strategy producers in an agricultural nation like Nigeria. Current conditions oblige the appropriate allotment and productive usage of government use as the prize is more prominent moreover, the punishment for awful arrangement in this regard is more noteworthy than any time in recent memory in the domain of globalisation. More or less, government consumption could antagonistically influence financial development, if its distribution and use are not appropriately tended to.

This study aims to establish the relationship between the following variables or components of aggregate production function and economic growth in Nigeria empirically using Barros model.

The impact of government consumption expenditure on economic growth in Nigeria
The impact of government investment expenditure in Nigeria
The influence of government investment expenditure on human capital development on economic growth in Nigeria.
The impact of capital stock on economic growth in Nigeria
The impact of the labor force on economic growth in Nigeria
The impact of private investment on economic growth in Nigeria

CHAPTER TWO

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

INTRODUCTION

Financial development speaks to the extension of a nation’s likely public yield or possible genuine GNP; the extension of monetary ability to deliver (Ukwu, 2004). Without certain sorts of monetary development, non-industrial nations can’t remove themselves from the mess of early stage destitution. In this manner, these nations ordinarily seek after monetary strategy to accomplish quickened financial development. The term financial arrangement alludes to the utilization of monetary instruments, (for example, tax assessment and spending) to impact the working of the financial framework to help monetary government assistance (Tanzi, 2014). The fundamental goal of financial arrangement in less created nations should at that point, be advancing long haul development of the economy. This is on the grounds that zeroing in on the adjustment of the economy in less created nations would mean the propagation of the fixed states of immature harmony and would be very incongruent with the necessities of financial dynamism. Among the financial instruments, the focal point of this work is on government spending. Government spending, if suitably oversaw and used, has a huge positive effect on financial development, especially in the non- industrial nations, where there exist poor or small infrastructural offices and where the private area isn’t sufficiently grown to assume the normal job in the economy. Due to this perception, exact examinations on the effect of government spending on financial development have vital significance in defining judicious strategy measures. Inspecting pertinent hypothetical writing can help in building a system for experimental investigation. The following is an audit of hypotheses of monetary development starting from early development speculations.

CONCEPTUAL ISSUES/REVIEWS

Factors Determining Economic Growth

Beginning with early improvement theories, Mercantilists emphasized abundance harmony of trade while the industrialist focused on on duty assortment and state rule to stimulate monetary turn of events. Later before the completion of the eighteenth century, physiocrats focused on cultivating as the wellspring of monetary improvement of the state and the plenitude of occupants since they trust it can make investible abundance (Lambadrive, 2009).

The conventional models of Smith (2007) and Malthus (2007), portray monetary advancement to the extent of fixed land and creating people. Without mechanical change, growing people finally incapacitates the store of free land. The resulting extension in people’s thickness triggers a hypothesis of unavoidable misfortunes: fixity of land shields yield from growing proportionately to augment in labor. With less and less land to work, each new expert adds less and less extra things; the decline in labor’s irrelevant thing infers an abatement in the truly acquired veritable compensation. Malthusian concordance comes when the pay has tumbled to an asset level, under which the reserve of work won’t make itself. The customary models didn’t consider reality that creative progression can keep monetary advancement progressing in current countries by reliably moving the productivity twist of work forward (Samuelson and Nordhaus, 2009). The impact of advances in development is to move the creation believability twist, raising yield per unit of data mix (Ukwu, 2004). The affirmation of the wonder made us notice the piece of capital – which puts device, equipment and advancement to work in money related turn of events. A couple of monetary specialists have focused on this and made Models of Capital storing up to explain financial turn of events. Capital assortment depends upon the speed of hypothesis; itself depends upon the cost of capital and the typical speed of benefit for capital. Exactly when hypothesis occurs, the economy expands use today with the objective that it can deliver more usage tomorrow (Ukwu, 2004).

Created by Keynes and his perspective – is immovably associated with this perspective (Keynes, 2009). The Keynesian examination prompts the end that all out interest of the chiefs’ courses of action can and should be used to improve monetary execution. For Keynesians, demand is a basic for improvement. Harrod-Domar improvement model is the observable model in the Keynesian framework which gives some comprehension into the dynamic of advancement. Harrod (2008) singles out the possibility of multiplier to develop a “dynamic theory of advancement” considering the association between use, hypothesis and yield. An equivalent technique was obtained by Domar (2007) making the Harrod-Domar model one of the central theories of improvement in Economics thought.

As shown by the model, to choose a balanced advancement rate (g) in the economy, the agreement among market revenue for a nation’s yield should be kept up. On stock side, saving is a segment of the level of GDP(Y), state

S = sY. 2.1

The degree of capital (K) is expected to deliver a yield. (Y) is given by the condition

I = vY; 2.2

Where: v is called capital-yield proportion; I is Investment speaking to a significant segment of the economy just as the expansion in capital stock , in the event that I is more prominent than devaluation.

(In this way ∆K = V∆Y = I). 2.3

Thusly, the balance pace of development (g) is given by

g = ∆Y/Y = s/v. 2.4

CHAPTER THREE

METHODOLOGY

RESEARCH DESIGN

The investigation utilises time-arrangement information from 1981 to 2022. The information are acquired from factual notice of the Central Bank of Nigeria (CBN, 2011); since the investigation includes time arrangement examination, the examination utilised time-arrangement strategies for unit root test, co- coordination and mistake revision techniques. Fundamentally, the investigation is an experimental examination intended to show how government uses, which are ordered into government utilisation use, government speculation consumption and government venture use on human resources, influences monetary development just as how related factors like capital stock, workforce and private venture impact financial development in Nigeria during the period under survey. The examination configuration is that of relapse investigation, which surveys the impact of the regressors on the regressants.

SOURCES OF DATA

The wellsprings of information to be utilised in this investigation are the Central Bank of Nigeria (CBN) Statistical notice and United Nations Conference on Trade and Development (UNCTAD) information base. Capital stock, government utilisation consumption, government speculation use, government venture on human resources advancement and private speculation figures are removed from CBN Statistical Bulletin (2022). The figures for the workforce are obtained from UNCTAD measurable information base (2011).

METHOD OF DATA COLLECTION

The model to be utilized in this investigation follows Mankiw, Romer and Weil (1992), Osabuohien (2007) and Ulasa (2012), in light of Cobb-Douglas creation work (see Dowling, 2001) which made the monetary development model endogenous. The model can be appeared as:

K is capital; L is work input; while Y is yield and portions of yield for capital and work, separately. An is the file of creation proficiency factor.

This examination has drawn knowledge from Kwekaand Morrissy (1999), Katema (2006),Loto (2011) and Samimi and Habibian (2011) in determining the verifiable model as expressed in this investigation. The investigation utilizes the ostensible GDP (NGDP=Y), an intermediary for yield created in Nigeria, government utilization consumption (GCE=X1), government speculation (GI =X2), government interest in human resources (GIHC = X3), capital stock (KAP = X4), workforce (LAB = X5), and private venture (PI = X6) as regressants. Subsequently condition 3.1 can be assessed in an express structure as follows:

CHAPTER FOUR

Presentation of Results and Analysis

The results of the data analysed using E –view 9 is presented in three segments: unit root test, cointegration test and vector error correction (VEC) model.

CHAPTER FIVE

Summary of Findings, Conclusion and Recommendations

Discussion of Results

Looking at the objectives of these studies as presented in chapter one, these findings can be discussed along the following lines. The first objective of the study is to establish the impact of government consumption expenditure on economic growth in Nigeria. This study establishes that government consumption expenditure has a negative impact on economic growth. Theoretically, government consumption expenditure can be classified as unproductive expenditure (Barro, 1990). Based on the idea of unproductive and productive expenditures, government consumption expenditure is expected to exhibit negative or zero correlation with economic growth as it is unproductive (Barro, 1990, Ghali 1997). Our finding conforms with these theoretical postulations.

In terms of empirical findings in this area, this study tends to agree with Gammell and Kneller (2001), Albatel (2000), Osborn, Haque and Bose (2003), Maku (2009), Taiwo and Aboyemi (2011), and Ghali (1997) who found no relationship between government consumption expenditure and economic growth.

It is in perfect agreement with the findings of Nurudeen and Usman (2022) Landau (1986), Kweka and Morrisy (1999) and Samimi and Habibian (2011), who established that government consumption expenditure has the tendency to reduce the rate of economic growth.

The finding of this study, however, contradicts Oluwatobi and Ogunrinola (2011), Olapade and Olupade (2011), Dandan (2011) and Loizides and Vamvoukas (2001), who demonstrate that government consumption expenditure stimulates economic growth. The finding of our study that government consumption expenditure reduces the level of economic growth is not unreasonable, based on the fact that the resources used by the government in financing consumption expenditure could be obtained through taxation or borrowing. Theoretically, high taxes discourage hard work; savings and investment, and discourage productive behavior. Getting devours capital that in any case will be accessible for private venture and this may prompt higher financing cost (Mitchell, 2005). Subsequently, it isn’t astonishing that utilization use negatively affects monetary development, since it redirects assets from beneficial exercises to ineffective exercises.

The second unbiased of this examination expresses that administration speculation uses don’t significantly affect financial development. From our relapse examination, government speculation advances monetary development in Nigeria. Hypothetically, it is contended that administration speculation use encourages monetary development in the arrangement of overhead capital and infrastructural offices (Vedder and Gallaway, 1998).

Empirical studies of the relationship between government investment expenditure and economic growth are inconsistent. Gammell and Kneller (2001), Albatel (2000), Taiwo and Agbatogun (2011), Barro (1990), Arpaia and Turrini (2007), Dandan (2011) Alexiou (2009), Loizides and Vamvoukas (2011) and Loto (2011), establish that government investment expenditure promotes economic growth. However, studies like Usman, Mobolaji, Kilishi, Yaru and Yakubu (2011), Oluwatobi and Ogunrinola (2011), and Olapade and Olupade (2022), established that government capital expenditure reduces the rate of economic growth. Other studies like Maku (2009), Taiwo and Aboyemi (2011), Adesoye, Maku and Atanda (2022), and Ghali (1997), show that government capital expenditure has no relationship with economic growth. Our study agrees with the finding that government investment expenditure stimulates economic growth. This view appears to be plausible because capital expenditure falls under the category of productive government expenditure and under normal circumstances, given that government capital expenditure has not exceeded the threshold of optimal expenditure, it should stimulate economic growth.

The third objective of this study is to establish the relationship between government investment on human capital development and economic growth. From our analysis government investment on human capital development does not promote economic growth. This our finding is not in line with the theoretical postulation that government investment on human capital promotes economic growth because it impacts in workers greater physical and mental dexterity, better knowledge of job opportunities, greater willingness to take risk and ability to appreciate and adapt to new technology (Prest, 1985).

Our finding in this work agrees with the studies of Nurudeen and Usman (2022), Oluwatobi and Ogunrinola (2011), Osborn, Haque and Bose (2003), who establish that government investment on human capital has no impact on economic growth.

The empirical work of Albatel (2000), Kweka and Morrisy (1999), Saad and Kalakechi (2000) and Loto (2011) establish that government investment on human capital development stimulates economic growth. This finding is at variance with the one we establish in this work.

In our finding the relation between government expenditure on human capital and economic growth is negative in Nigeria during the period because government expenditure on human capital might not have been properly channeled and properly utilized and as such there is gap between the expected skilled manpower and available manpower. The fact that the majority of Nigerians cannot access quality health care and quality educational services, confirms this fact.

The fourth objective of the study states that the level of stock of capital influences economic growth significantly. The importance of capital stock is recognized by early economic models of economic growth; Harrod (1939), Doma (1946), which state that the level of output is directly related to the level of stock of capital; and Solow (1956) and Swan (1956), popularly known as the Solow-Swan model, state that output of the economy increases as a stock of inputs of capital and labour increase.

From an empirical perspective, evidence are not consistent. For example, Oluwatobi and Ogunrinola (2011), established that capital stock stimulates economic growth while Maku (2009) finds no significant relationship between the level of GDP and stock of capital.

Our study agrees with the finding of Maku (2009), that capital stock does not significantly stimulate economic growth in Nigeria. This is because; Nigeria is at a low level of development which needs a large stock of physical capital but there is a shortage of critical skilled manpower, and raw materials which are supposed to compliment physical capital. Shortages of both critical skilled labour and raw materials in Nigeria are likely the factors that explain under capacity utilization in Nigeria industrial sector and the non- significant contribution of capital stock in Nigeria economic growth.

The fifth objective is to establish the impact of the labour force on economic growth in Nigeria. Based on economic theory, the labour force is one of the factors of production. Therefore, labour forces enter the aggregate production function as a productive resource. The level of output according to Solow (1956) and Swan (1956), is directly proportional to the level of labour input and capital input.

From empirical findings of literature reviewed in this study, there is no consistent finding. Oluwatobi and Ogunrinola (2011), and Alexiou (2009), in their works establish that the labour force has no impact on economic growth. The finding of this research agrees with the above finding. In Nigeria, given the fact that the available labour force is not completely absorbed in the productive system, increases in the size of labour force is not expected to contribute economic growth.

The sixth objective of the study is to ascertain the impact of private investment on economic growth. Theoretically, private investment (local and foreign) provides inflows of foreign capital, funds and investment. It also provides the much needed technical manpower and technology which are lacking in the developing countries. It therefore fills in both capital and human resource gaps. Local firms also benefit through diffusion of technology. All these lead to economic development (Clunies-Ross, Forsyth and Huq, 2009).

From empirical findings, evidence available are conflicting on the impact of private investment on economic growth. Maku (2009), Adesoye, Maku and Atanda (2022), could not find any correlation between private investment and economic growth. Alexiou (2009), however, establishes that private investment stimulates economic growth significantly. The finding in this study is that private investment stimulates economic growth. This is reasonable because private investments augment resource gap in funds, skilled manpower and technology in the country.

Summary of Major Findings

The major findings of this work are as follows:-

Government consumption expenditure depresses economic growth in
Government investment expenditure promotes economic growth in
Government investment in human capital (education and health spending by the public sector) has no significant effect on economic
The stock of capital resources in Nigeria has no significant impact on economic
Statistically, the Labour force available in Nigeria does not contribute significantly to economic
Private investment in Nigeria contributes significantly to economic growth.

Conclusion

Based on the above findings, government consumption expenditure depresses economic growth in Nigeria. This finding is in line with Barro (1990) who hypothesizes that unproductive government spending is liable to depress economic growth. This means that the government has to reduce its recurrent expenditure in order to stimulate economic growth.

It is also established in this study that government capital expenditure stimulates economic growth in Nigeria. This finding is in line with the theoretical postulation that government productive expenditure (see Ram, 1986; Barro, 1990; Osborn, Haque and Bose, 2003) promotes economic growth. Thus, the current dismal performance of Nigeria’s economy may be attributed to the imbalance in the distribution of government expenditure in favour of consumption expenditure (current expenditure) rather than investment expenditure (capital expenditure).

This study establishes that government investment on human capital development has no significant impact on economic growth in Nigeria. Economic theory postulates that improvement in human capital development increases labour productivity through increases in skills and health of workers (Blanchard, 2022; Katema, 2006; and Kweka and Morrissey, 1999). In Nigeria the benefits of investment in human capital are not fully realized probably because the expenditure on human capital is not efficiently used for the development of human capital.

This study has established that labour force contribution is statistically insignificant to economic growth in Nigeria. This finding contradicts the neoclassical growth model, that, the growth rate of the economy is determined by the growth rate of the factors of production, including labour.

The finding of this study contradicts the theoretical postulation of the neoclassical economists but it is not unreasonable in the Nigerian case. This is because there is unemployment in the economy. As such an increase in the labour force is not expected to contribute to an increase in output. This explains the reason why the theory does not hold in Nigeria.

Private investment stimulates economic growth in this study. This is in line with the theoretical postulation that private investment augments investment funds and capital in a developing country, like Nigeria. It also provides the much needed technical manpower and technology which are crucial in the development processes (Barro and Silas-I-Martin, 2004). This means that an increase in private investment is needed in Nigeria to overcome the shortage of capital and to stimulate growth.

Recommendations

As pointed out earlier, the Nigeria economy is characterized by high levels of unemployment, persistent macroeconomic instability with the attendant result of growing poverty. Government expenditure as a fiscal policy instrument has not been very effective in resolving the macroeconomic challenges as pointed above. Based on these observations, the following recommendations are made:

Government spending should be judged based on social costs and benefits. In this case, careful evaluation of government expenditures between consumption and capital spending has to be A minimum level of consumption spending is needed to make capital expenditure effective. Funds allocation to consumption expenditure should not go beyond this minimum level. That is the level at which the social costs equal the social benefits.
Public investment should be made to complement private investment. It is argued that a direct contribution of public investment to economic growth is not as high as that of private investment. This is because in public investments, political forces dominate the process of decision-making and decisions on how money is spent is not usually based on increase in productivity but on political However, in private investments, economic forces of demand and supply guide the allocation of resources to where they are most productive. Swift punishment is meted on those who make bad decisions and rewards for those who make good decisions. It is generally argued that it is the effects of government investments on private sector productivity that make public investment worthwhile. Therefore, the role of government should be extended to ensure that the magnitude and quality of private investment are as high as possible in Nigeria.

To make government expenditure productive, qualified personnel should be attracted and motivated to join the public The present situation where the salaries of public civil servants are very low compared to their counterparts in the private sector cannot attract and sustain qualified and skilled personnel in the civil service. However, these qualified personnel are necessary and needed for efficient implementation of government programmes.
There is the need to achieve the National Economic Empowerment and Development Strategies (NEEDS) enshrined in the present programme of To achieve the NEEDS programme, Nigeria has to spend more on education, health and physical infrastructures. At the same time, there is the prospect that revenue is limited to pursue the NEEDS programmes. Hence, it is important that the government spends less on public supplies (consumption expenditure) and emphasizes more on capital investment that will stimulate private sector investment.

Area for Further Studies

As verified in the rundown, two of the factors utilized in the examination animate financial development and these are government speculation use and private venture. Just a single variable (government utilization use) pushes down financial development. While the leftover three factors (government in human resources, workforce and capital stock) applies unimportant effect on monetary development in Nigeria. Different analysts could examine these factors to discover more about their impact on financial development.

Another connected zone not shrouded in this work is the effect of government size (the size of government consumption) on financial development in Nigeria. It is contended hypothetically that there is a limit level of generally speaking government consumption that animates monetary development as high as could reasonably be expected. Underneath this edge the effect of government consumption on monetary development is lower or more, the effect is additionally lesser than the ideal. This sort of examination is additionally essential in Nigeria. This can assist us with knowing whether government size in Nigeria is beneath or above or simply the ideal level.

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