THE IMPACT OF GOVERNMENT EXPENDITURE ON INFLATION IN NIGERIA

THE IMPACT OF GOVERNMENT EXPENDITURE ON INFLATION IN NIGERIA

ABSTRACT

This study looked at the effect of government spending on inflation in Nigeria. This study relied on secondary data obtained from the Nigerian Central Bank’s Statistical Bulletin (2017). The information was gathered over a thirty-two-year period (i.e. 1981-2017).

The study establishes the order of integration of individual time series using the unit root test and also subjects all variables to a stationary test; however, haven test the stationarity for each time series, test for co-integration between the variables, which reveals that none of the variables co-integrated, and then an error correction mechanism or model (ECM) was run on the model.

The Error Correction Mechanism results show that government spending has no statistical relationship with inflation.

Despite the fact that the coefficient of government recurrent expenditure was related to inflation. After accounting for the degree of freedom, government spending and the exchange rate explained 9.65% of the total variation in inflation.

The study concluded that government spending can cause inflation by influencing the money supply. According to the study, much of government spending should be directed toward productive ventures such as directly productive activities (DPAs) and Social Overhead Capital (SOCs); the money supply should be strictly controlled; and Create effective fiscal and monetary policy by combining them. Control the economy’s inflationary pressures. Maintain a good strategic balance between capital and recurrent expenditure to keep the economy from becoming too dependent on consumption.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Government Expenditure is the amount of money spent by a government to fund all of its operations in order to provide public goods. According to Oyinlola (2010), the size of government spending and its impact on economic growth have emerged as major fiscal management issues confronting transition economies. According to Singh and Sahini (2014), a large and expanding government is not conducive to improved economic performance. Public spending in Nigeria, like in any other country, has been increasing for decades.

According to Akpan (2015), the observed increase in public spending appears to apply to most countries regardless of economic development level. Increases in government finances have resulted in a number of theoretical implications over the years.

as well as empirical investigations into the causes of such increases. Researchers have questioned whether increases in the size of the federal budget are typically initiated by changes in expenditure followed by adjustments in revenues, or by the reverse sequence or both Baghestani & Mcnown, (2004), Akpan (2015).

Growing government spending is counterproductive to a government’s economic interests because various methods of government financing, such as taxes, borrowing, and printing money, have negative consequences. Government spending, regardless of how it is funded, is frequently economically destructive. Kneller (2009). (2009).

Governments require funds to carry out their functions in society. A government requires funds to provide all public goods, which are primarily obtained through taxes, grants, and loans. Tanzi, (2004). (2004). In

Nigerian governments rely more on oil revenues and taxes to fund their operations, and they frequently borrow and receive grants to cover budget deficits.

Inflation, on the other hand, determines the return on investment that a government will receive from its expenditures. One of any country’s most important macroeconomic goals is to maintain high economic growth while keeping inflation low. Liu, (2008). (2008). When inflation interferes with the economy’s efficiency, it imposes negative externalities. It may also reduce a country’s international competitiveness by making exports more expensive than imports, thereby affecting the balance of payments. Koiman, (2007). (2007). Individually, inflation and government spending have an impact on economic growth.

Government spending has a significant impact on the formation of physical and human capital. over time. The government serves two purposes: protection and the provision of certain goods. Fasta, Hagen, Hughes, Siebert, and Strauch (2010), as well as Abdullah (2010) (2003). The protection function includes the establishment of the rule of law and the enforcement of property rights, which help to reduce the risk of criminality and external aggression. Health, education, power, agriculture, and transportation are examples of public goods. Many political philosophers, including Hobbes and Locke, considered the hypothetical disadvantages of life without government (2006). The problem of the ideal size of government is not one of economic theory. However, economic theory instructs us to examine cost and benefit in order to determine whether resources are allocated in a way that promotes or inhibits economic growth. The fundamental economic policy  A good society prioritizes public spending in line with future economic growth and well-being. Spending on health and education, for example, increases labor productivity and boosts national output growth. Similarly, spending on infrastructure such as roads, communication, and power reduces production costs while increasing private sector investment and firm profitability, thereby promoting economic growth. Scholars such as Abdullah (2010) concluded that an economy’s inflation rate is determined by the expansion of government spending. In Nigeria, for example, the public sector includes federal, state, and local government enterprises. Some government financial operations continue to operate entirely outside of the budget and are supported by extrabudgetary accounts. As a result, the effects of spending on economic growth may be significant.

A comprehensive measure of public productivity. Governments, on the other hand, have always been very careful in planning their expenditures through government budgets and national income.

Government, in its various economic activities and policy formulations, whether short or long-term, frequently encounters problems that must be resolved. Without resolving these issues, the government may be unable to formulate and implement policies capable of putting the economy on a path of sustainable economic growth and development. Knowledge of the effects of government spending on economic growth and its application in the solution of some problems encountered by different policymakers in their short-term or long-term economic activities in order to arrive at a specific and active policy solution.

This study will attempt to address the issue of policy.

In light of this, the current study will set out to discover the relationship between government spending and inflation in Nigeria between the years 1981 and 2017.

1.2       Significance of the Study

The significance of a study on government spending and its impact on inflation in Nigeria cannot be overstated. Inflation has become a colossal challenge for developing countries such as Nigeria. It is like a blight afflicting Nigeria’s economy, resulting in a reduction in people’s purchasing power, as well as a reduction in investment and savings, thereby aggregating poverty levels in Nigeria, affecting mostly the middle and low income groups, particularly salary earners.

Again, the conduct of this research is critical because it will guide the following stakeholders in making decisions that will mitigate the harsh effects of inflation on government expenditure.

The study will also demonstrate how the government can plan and allocate state funds effectively during inflation. Not a

There has been a lot of research on the analysis of government expenditure and its impact on inflation in Nigeria, so I am confident that the research will add significantly to previous knowledge on the subject.

The contents of the research work would also bridge the information gap created by insufficient statistics relating to government expenditure and its effect on the rate of inflation in Nigeria. Furthermore, the research work’s findings and recommendations will suggest ways to address the challenges faced by Nigerians as a result of inflation.

1.3       Statement of the Problem

Price stability, or having relatively low rates of inflation that facilitates employment and output expansion, is one of the key macroeconomic goals that all economies strive for. Nigeria’s price instability persists, owing to its double-digit inflation rate. Excessive government spending, according to the Keynesians school of thought, is one of the primary causes of high rates of inflation in developing economies. Excessive government spending increases aggregate demand relative to supply, causing prices to rise. Furthermore, Nigerian governments at all levels frequently incur expenditure on unproductive and growth-enhancing projects, putting the economy under inflationary pressure. The inability of the government to incur expenditure prudently has contributed to Nigeria’s high rate of inflation. Fiscal irresponsibility has hampered the economy of Nigeria benefits from low inflation, which promotes economic growth. Thus, in order to keep inflation to a bare minimum, the way government funds are spent must be carefully scrutinized.

1.4       Objectives of the Study

The study’s main goal will be to investigate the impact of government spending on inflation in Nigeria. The study’s specific goals are as follows:

To assess the impact of government capital spending on Nigerian inflation.
To assess the impact of government recurrent expenditure on Nigerian inflation.

1.5       Research Questions

Throughout the investigation, efforts will be made to provide answers to the following questions:

To what extent does government capital spending influence Nigerian inflation?
What is the magnitude of government recurrent expenditure’s impact on inflation in Nigeria?

1.6       Research Hypotheses

In order to reach valid conclusions about the subject matter, the following research questions are proposed in accordance with the study’s objectives.

H01: Government capital expenditure has no significant impact on Nigerian economic growth.

H02: Government capital expenditure has no significant impact on Nigerian economic growth.

1.7       Scope of the Study

The investigation lasted 37 years, from 1981 to 2017. This time period was chosen for the study because it encompasses various economic and political regimes in Nigeria. In terms of economics, the period covered the pre-SAP, SAP, and post-SAP periods. In addition, for the political epoch, the period included both military and civilian administrations. The variables used in the study, however, are limited to government capital expenditure, government recurrent expenditure, inflation rate, and exchange rate (control variables). As a result, the variables of the study are delineated to time-series data.

1.8       Justification of the Study

Most developing economies, including Nigeria, are plagued by economic insecurity, as evidenced by high inflation rates. According to data from the Central Bank of Nigeria, inflation (consumer prices) was 18.87% in 2001, 17.86% in 2005, 13.72% in 2010, 15.70% in 2016, and 15.98% in 2017. In Nigeria, contrary to monetarist belief, inflation is caused not only by excessive growth in the money supply, but also by government expenditure, the majority of which is incurred unwisely. The majority of previous studies focused on the monetary causes of inflation in Nigeria, while adequate attention was not paid to the fiscal impact of inflation in Nigeria. The fact remains that if government spending is not directed toward productive purposes, and development-inducing projects, aggregate supply will continue to fall short of aggregate demand, putting downward pressure on the country’s goods and services prices. In recent years, there has been a scarcity of empirical evidence on the effect of government spending on inflation in Nigeria. In economic literature, the Keynesian position on inflation has not been thoroughly researched. It is necessary to determine whether the Keynesian approach to inflation is applicable to Nigeria. To the best of the researcher’s knowledge, no studies on the subject have been conducted in recent years (2015, 2016 and 2017). The study will thus contribute to the literature by assessing the extent to which government expenditure affects inflation in Nigeria between 1981 and 2017, with a focus on the last three years. The time frame of the study has not been researched.