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 general view that increased public expenditure will in addition to addressing the nation’s foremost needs, stimulate the economy thereby generating a large number of socially useful jobs and business opportunities and consequently fostering sustainable economic growth and development. All these are not there, yet we always have a very high estimated expenditure. This indicates that something is definitely wrong either with the way government implements the budget or with the ways and manners it has always been computed. 1.3 Research Questions

Hence, in order to justify reasons for so much expansionary effects on the way and manner public expenditure either capital or recurrent expenditure have been geometrically been increasing over the years so as to finance the infrastructural facilities with a view to raise the welfare of average citizen of the economy and improve the living standard by increasing national output, this study aims to provide solutions to the following questions: 1. Is there any causal relationship between government expenditure either capital or recurrent expenditure and economic growth in Nigeria? 2. What impact does public spending on Infrastructural facilities have on economic growth in Nigeria? 3. Is it true that has the nation is expanding its public expenditure on provision of infrastructural facilities, the economy has been growth-enhancing?

1.4 THE RESEARCH OBJECTIVES
The importance of the role of government expenditure on essential infrastructural facilities to achieving sustainable economic growth has been stressed earlier in the introduction to this work. Therefore efforts aimed at improving and maintaining the state of infrastructural facilities in Nigeria would be worthwhile. The main objective of this research is to evaluate the impact of government spending either capital or recurrent expenditure on economic growth. The research specifically intends to find answers to the research objectives raised which includes the following; 1. Examine if government spending on either capital or recurrent have any significant impact on economic growth in Nigeria. 2. Examine whether increase in government spending causes growth or growth causes government spending to increase. 3. Examine the state of infrastructural facilities in Nigeria.

1.5 SIGNIFICANCE OF THE RESEARCH
The study at its completion would be relevant in the following ways; First, it shall provide a basic understanding of the causal relationship between government spending and growth in Nigeria. Secondly, the outcome of the study will aid government in channeling its limited financial resources towards sectors in the economy that are growth enhancing.

1.6 RESEARCH HYPOTHESES
H0: Government spending (capital and recurrent expenditure) does not have any significant impact on Gross domestic product H1: Government spending (capital and recurrent) has significant impact on Gross domestic product 1.7 SCOPE AND LIMITATION OF THE STUDY

The study shall cover a period of 21 years, from 1990-2010. Total capital and recurrent expenditures would be used as proxy variables to measure the impact of government expenditure while Gross Domestic Product (GDP) will be used as the proxy variable to measure economic growth. 1.8 DEFINITION OF TERMS

Government expenditure: Government Expenditure refers to the expenses incurred by the State for the maintenance of the economy as a whole. Economic growth is defined as a sustained increase in a country’s real GNP and per capita real GNP.

1.9 REFERENCES
• CBN (2003), Highway Maintenance in Nigeria: Lessons from other countries. (Research Department Occasional Paper No. 27) • Diamond, J. (1989).Government Expenditure and growth. Finance and Development 27(3): December. • Niloy, B., Emranul. M.H and Denise. R.O (2003): Public Expenditure and Economic Growth: A Disaggregat...

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