Impact of Government Expenditure on Economic Growth

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CHAPTER ONE

INTRODUCTION

I.0 INTRODUCTION

1.1 BACKGROUND TO STUDY
According to Wikipedia encyclopedia, Economic growth refers to the increase in the amount of goods produced by a country; this is a measure of the economic performance of the country while government expenditure is refered to as an outflow resources from government to other sectors of the economy, government expenditure (or government spending) includes all government consumption, investment but excludes transfer payments made by the state. Government expenditure is subdivided into recurrent and capital expenditures. Capital expenditure can be defined as payment for non-financial assets used in production for more than one year, e.g. expenses incurred on capital projects such as electricity generation, telecommunication, roads e.t.c. while recurrent expenditures are payments for non-repayable transactions within a year e.g. salaries, wages, interest on loans, maintenance e.t.c (CBN, 2003). There has been a recent revival of interest in growth theory which has also sparked interest among researchers in verifying and understanding the linkages between government spending and economic growth especially in developing countries like Nigeria. One of the major functions of government spending is to provide infrastructural facilities, so also does the maintenance of these facilities require a substantial amount of spending. Over the past decades, the public sector spending has been increasing in geometric term through government various activities and interactions with its Ministries, Departments and Agencies (MDA’s), (Niloy et al.2003). Some scholars argue that an increase in public expenditure either recurrent or capital expenditure, notably on social and economic infrastructure can be growth enhancing though the sources of financing such expenditures to provide essential infrastructural facilities including transport, electricity, potable water, sanitation, waste disposal, education and health can be growth retarding (for example, the negative effect associated with borrowing, taxation and excessive debt). For example, government expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power, etc, reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth. But if the source of financing such public expenditures is through borrowing it could lead to crowding out private investment which would in turn retard the growth process in the short run and diminish capital accumulation in the Long run (Diamond, 1989) The effect of government spending on economic growth still remains largely an unresolved issue theoretically as well as empirically. Although the theoretical positions on the subject are quite diverse, the conventional wisdom is that a large government spending is a source of economic instability or stagnation. Empirical research, however, does not conclusively support the conventional wisdom. A few studies report positive and significant relation between government spending and economic growth while several others find significantly negative or no relation between an increase in government spending and growth in real output.

1.2 Statement of problem
In the last decade, the Nigerian economy has metamorphosed from the level of million naira to billion naira and now arrived to trillion naira on the expenditure side of the budget. Therefore it will not be alarming if the economy is experiencing surplus or equilibrium on the records of balance of payment. Better still, if there are infrastructures to improve the quality of life, attract massive foreign direct investment or social amenities to raise the welfare and living standards of an average citizen of the economy but that has not been the case. It is the...
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