Impact of government expenditure on economic

Economists have been well aware of the effects in promoting economic growth. Anyway, the general view is that government expenditure notably on social and economic infrastructure can be growth enhancing although the financing of such expenditure to provide essential infrastructural facilities including transport, electricity, telecommunication, water and sanitation, waste disposal, education and health can be growth retarding Olukayode, Nowadays, the relationship between government expenditure and economic growth has continues to generate sense or controversies among scholars in economic literature Inuwa, According to him, the nature of the impact of government expenditure on economic growth is in conclusion, and from the view point of the student researcher is still not incontrovertible.

Impact of government expenditure on economic

Keynes argues that the solution to economic depression is to induce the firms to invest through some combination of reduction in interest rates and government capital investment including infrastructure.

This claim that increasing government expenditure promotes economic growth is not supported by all scholars. A number of prominent authors especially of the neoclassical school argue that increased government expenditure may slow down the aggregate performance of the economy because in an attempt to finance raising expenditure, government may have to increase taxes and or borrowing.

The higher income tax may discourage or may be a disincentive to additional work which in turn may reduce income and aggregate demand. In the same manner, high corporate tax leads to increase in production costs and reduce profitability of firms and their capital to incur investment expenditure.

Sachs argues that among the developed countries, those with high rates of taxation and high social welfare spending perform better on most measures of economic performance compared with countries with low tax low rates of taxation and low social services spending.

Hayek however countered this argument saying that high levels of government spending in addition to harming, does not, through social welfare engendered fairness, economic equality and international competitiveness.

This argument is in line with Sudha who points out that countries with large public sectors have grown slowly. Thus, there is no general consensus among scholar on the impact of increasing government expenditure on economic growth.

The level of increase of government revenue from oil revenue and non-oil revenues including borrowing from internal and external sources has significantly affected the level of government expenditure in Nigeria over the years under review.

How Does Government Spending Affect The Economic Growth

The high levels of inflation and unemployment rates resulted in fiscal imbalance between and with negative consequences on balance of payment. The level of increase in external loans further accelerated the debt over-hand situation and other problems. The problems were so severe that restructuring of the economy was inevitable.

As a result, a comprehensive economic reform programme was introduced in The mismatch between the performance of the Nigerian economy and massive increase in government total expenditure over the years raises a critical question on its role in promoting economic growth and development.

Some authors contend that the link between public expenditure and economic growth is weak while others report varying degree of causality relationship in Nigeria Onokaya et al, The question which arises therefore is what is the relative contribution of capital expenditure and recurrent expenditure on economic growth in Nigeria?

Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks to criminality, protect life and property and the nation from external aggression, defense, roads, education, health, power and communication to mention but a few.

Some scholars argue that increase in government expenditure on socio-economic and physical structures encourages economic growth.

Impact of government expenditure on economic

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. Supporting this view, scholars such as KeynesRamBarroSachsRanjah and SharmaCooray conclude that expansion of government expenditure contributes positively to economic growth.

The higher income tax may discourage or be a disincentive to individual working for long hours or searching for additional work which in turn may reduce income and aggregate demand. In the same way, higher corporate tax profit tax tends to increase production costs and reduces the profitability of firms and their capacity to incur investment expenditure.

Moreover, if government increases borrowing especially from the banks in order to finance its expenditure, it will compete crowds-out away the private sector, thus reducing private investment.

It was further argued that in a bid to score cheap popularity and ensure that they continue to remain in power, politicians and government officials sometimes increase expenditure and investment in unproductive projects or in goods that the private sector can produce more efficiently.

Thus, government activity sometimes produces misallocation of resources and impedes the growth of national output. In fact, the studies by LaudauHayekHenreksonMitchell and Sudha suggested that large government expenditure has negative impact on economic growth. In Nigeria, the government expenditure has continued to rise due to receipts from oil revenue Petroleum profit tax and royalties and non oil revenue company income tax, custom and excise duties, value added tax [VAT] and others CBN Statistical Bulletin, And increased demand for public utilities goods like roads, communication, power, education and health.

Besides there is increasing need to provide both internal and external security for the people and the nation. Available statistics show that total government expenditure capital and recurrent and its components have continued to rise in the last few decades under review.

In the same manner, the composition of government recurrent expenditure shows that expenditure on general administration, defense, National Assembly, internal security, agriculture, construction, transportation and communication, education and health increased during the period under review.

Unfortunately, rising government expenditure has not translated to meaningful growth and development, as Nigeria ranks among the poorest countries of the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than Although the Nigerian economy is projected to be growing, poverty is likely to get worse as the gap between the rich and the poor continues to widen.

Couple with this, is dilapidated infrastructure especially roads and power supply that has led to the collapse of many industries, including high level of unemployment.

Moreover, macroeconomic indicators like balance of payments, imports obligations, inflation rates, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of decades under review.Abu and Abdullah () investigates the relationship between government expenditure and economic growth in Nigeria from the period ranging from to They used disaggregated analysis in an attempt to unravel the impact of government expenditure on economic growth.

IMPACT OF GOVERNMENT EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA CHAPTER ONE, Largest Undergraduate Projects Repository, Research Works and Materials. Download Undergraduate Projects Topics and Materials Accounting, Economics, Education. Impact of government spending on the economy.

There is a high possibility that the rise in taxes will negate the impact of rising government spending which would leave Aggregate Demand (AD) unchanged. However, it is possible that increased spending and . Government Spending. Economic theory does not automatically generate strong conclusions about the impact of government outlays on economic performance.

Research has shown that as the economy develops, the expenditure of government tends to increase with increase in economic activities. Growth may vary from one country to another.

Impact of government expenditure on economic

There are three major contributory factors towards the growth in government expenditure. 1. the impacts of public spending on economic growth, although there have been significant advances in quantifying linkages between expenditure components, on the one hand, and economic growth on the other (see Musaba et al.

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