Inflation and Govt Expenditure
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Persistent public expenditure and inflation have become major concerns in both developed and developing countries. Extensive theoretical and empirical literatures have been developed to examine the relationship between Public expenditure and macroeconomic variables. The monetarists share the view that fiscal deficits are harmful to an economy. While some of the increases in the public expenditure have been associated with declining tax revenue resulting from the recession, others relate to the increase in debt service payments on public debt.
The relevance of public expenditure is often traced to the Keynesian inspired expenditure-led growth theory of the 1970s. Most countries of the world adopted this theory that government has to motivate the aggregate demand side of the economy in order to stimulate economic growth. However, its consequences on macroeconomic variables cannot be underestimated in most countries of the world, Nigeria inclusive (Olomola and Olagunju, 2004).
Over the years, there has been a persistent rise in private consumption expenditures and developments in the external sector have also impacted strongly on the size of public expenditure. Government’s narrow revenue base, vis-a-vis its expenditure, is likely to have serious consequences for the government’s budget balance (Cebula, 2000).
Most analysts therefore argued that deficit reduction is crucial to the future growth of an economy, although, economists are divided over its impacts. It is expected that lower budget deficits will lower real interest rates, increase investment, and thereby increase productivity, growth and real income. A country experiences deficit in her budgetary system when its expenditure exceeds its revenue while budget deficit financing reflect the means of operating budget deficit of the country. However, the source of finance has varying impact of a growing public expenditure on inflation. The major
INTRODUCTION
1.1 Background of the Study
Persistent public expenditure and inflation have become major concerns in both developed and developing countries. Extensive theoretical and empirical literatures have been developed to examine the relationship between Public expenditure and macroeconomic variables. The monetarists share the view that fiscal deficits are harmful to an economy. While some of the increases in the public expenditure have been associated with declining tax revenue resulting from the recession, others relate to the increase in debt service payments on public debt.
The relevance of public expenditure is often traced to the Keynesian inspired expenditure-led growth theory of the 1970s. Most countries of the world adopted this theory that government has to motivate the aggregate demand side of the economy in order to stimulate economic growth. However, its consequences on macroeconomic variables cannot be underestimated in most countries of the world, Nigeria inclusive (Olomola and Olagunju, 2004).
Over the years, there has been a persistent rise in private consumption expenditures and developments in the external sector have also impacted strongly on the size of public expenditure. Government’s narrow revenue base, vis-a-vis its expenditure, is likely to have serious consequences for the government’s budget balance (Cebula, 2000).
Most analysts therefore argued that deficit reduction is crucial to the future growth of an economy, although, economists are divided over its impacts. It is expected that lower budget deficits will lower real interest rates, increase investment, and thereby increase productivity, growth and real income. A country experiences deficit in her budgetary system when its expenditure exceeds its revenue while budget deficit financing reflect the means of operating budget deficit of the country. However, the source of finance has varying impact of a growing public expenditure on inflation. The major