The Impact Of Inflation On Government Spending In Nigeria Economy

The Impact Of Inflation On Government Spending In Nigeria Economy

Chapter One

Background To The Study

Affectation is an ineluctable property of any frugality in the world. It influences every country, negatively as well as appreciatively, whether it’s developed or developing country as well. Anyanwu( 2011) stated that affectation is an important factor leading to social and profitable insecurity and complaint. It’s one of the most largely observed and tested profitable variables both theoretically and empirically. Its causes, impacts on other profitable variables, and cost to the overall frugality are well known andunderstood.Nigeria, being a developing country, couldn’t overcome the continuously time to time climbing up affectation, and also its causes and consequences.

After remaining fairly low for quite a long time, the affectation rate in Nigeria started to accelerate in late 2003. The part of plutocrat force appears significant in impacting food price affectation in Nigeria( Anyanwu, 2011). which disturbed family budget as well as consumer’s purchasing power. People plodded in order to maintain their living standard but it drooped down gradationally. numerous authors have written on the impacts of affectation and cost of living on the Nigerian frugality, but the authors have different views, nonetheless, one common thing is that all the authors agree that affectation and cost of living have colorful impacts on the frugality ofNigeria.The problem created by the rising prices of goods and services leading to higer cost of living has come too delicate for the government to break. During inflationary period, fixed quantities of plutocrat buy lower volume of goods and services. The real value of plutocrat is drastically reducedi.e the purchasing power of consumers are reduced.

Government spending also appertained to as government expenditure relationship between affectation has continued series of debate among scholars. Keynes( 1936) argues that the result to profitable depression is to induce the enterprises to invest through some combination of reduction in interest rates and government capital investment includinginfrastructure.This claim that adding government expenditure promotes profitable development isn’t supported by all scholars. A number of prominent authors especially of the neoclassical academy argue that increased government expenditure may decelerate down the aggregate performance of the frugality because in an attempt to finance raising expenditure, government may have to increase levies and or borrowing. The advanced income duty may discourage or may be a counterincentive to fresh work which in turn may reduce income and aggregate demand. In the same manner, high commercial duty leads to increase in product costs and reduce profitability of enterprises and their capital to dodge investment expenditure. On the other hand, increased government borrowing( from the banks) needed to finance its expenditure may contend and crowds- out private sector and this reduce private investment in the frugality. Sachs( 2006) argues that among the developed countries, those with high rates of taxation and high social weal spending perform better on utmost measures of profitable performance compared with countries with low duty low rates of taxation and low social services spending.

According to the profit rallying Allocation and financial Commission – RMFC( 2011) the civil government of Nigeria spends52.2 of total government earnings. The remaining earnings are participated among the Federating States and Original Government Areas( LGAs) on the base of detailed sharing formula.

Statement Of The Problem

As far as Nigeria enterprises regarding inflationary goods it has been endured worst consequences reflected by poverty, food heads, price hike etc. Mahmood, Hafeez and Rasheed( 2009) concluded that affectation causes poverty. Day to day increase in prices of goods especially ofnon-food particulars like oil painting and gas catch plutocrat from savings of consumers and query of prices, both food andnon-food particulars, induce enthusiasm among people toward earn further and further thus, people prefer to work over recreation undervaluing their Health.

Muoghalu,et.al.( 2010) set up that the affectation brings negative impact while exports and investment brings positive impact on Nigeria frugality and suggested that we should encourage a larger scale of import creation conditioning to enhance the profitable growth. It’ll produce multitudinous job openings which increase the per- capita earnings and standard of living.

The relationship between government expenditure and profitable development has continued to induce series of debate among scholars. Government performs two functions – protection( and security) and provision of certain public goods( Nurudeen and Usman, 2008). Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize pitfalls to crime, cover life and property and the nation from external aggression, defense, roads, education, health, power and communication to mention but a many.

still, some scholars didn’t support the claim that adding government expenditure promotes profitable development, rather they assert that high government expenditure may decelerate down overall total performance of the frugality in that in the shot to finance rising expenditure, government may have to increase levies and/ or borrowing. The advanced income duty may discourage or be a counterincentive to individual working for long hours or searching for fresh work which in turn may reduce income and aggregate demand. In the same way, advanced commercial duty( profit duty) tends to increase product costs and reduces the profitability of enterprises and their capacity to dodge investment expenditure. also, if government increases borrowing( especially from the banks) in order to finance its expenditure, it’ll contend( crowds- out) down the private sector, therefore reducing private investment. It was further argued that in a shot to score cheap fashionability and insure that they continue to remain in power; politicians and government officers occasionally increase expenditure and investment in unproductive systems or in goods that the private sector can produce further efficiently. therefore, government exertion occasionally produces misallocation of coffers and impedes the development of public affair.

In Nigeria, the government expenditure has continued to rise due to bills from oil painting profit( Petroleum profit duty and royalties) andnon-oil profit( company income duty, custom and excise duties, value added duty( Handbasket) and others)( CBN Statistical Bulletin, 2012). And increased demand for public( serviceability) goods like roads, communication, power, education and health. either there’s adding need to give both internal and external security for the people and the nation.

Available statistics show that total government expenditure( capital and intermittent) and its factors have continued to rise in the last many decades under review. For case, government intermittent expenditure increased from ₦716.1 million in 1970 to ₦ 4,805.2 million in 1980 and ₦ million in 2010( see excursus 1). In the same manner, the composition of government intermittent expenditure shows that expenditure on general administration, defense, National Assembly, internal security, husbandry, construction, transportation and communication, education and health increased during the period under review. also, government capital expenditure rose from ₦187.8 million in 1970 to ₦ 883,874.75 million in 2010( see excursus 1). likewise, the colorful factors of capital expenditure( that is profitable services, social service, defense, husbandry, transport and communication, education and health) also show a rising trend between 1970 – 2012.

Unfortunately, rising government expenditure has not restated to meaningful development and development, as Nigeria ranks among the poorest countries of the world. In addition, numerous Nigerians have continued to wallow in menial poverty, while further than60.9 of over 163 million population poor. The Business Day review of Tuesday 14 February, 2012 reported that the chance of Nigerians living in menial poverty – those who can go only the bare rudiments of food, sanctum and apparel – rose to60.9 in 2010 as compared to54.7 in 2004. Although the Nigerian frugality 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 structure( especially roads and power force) that has led to the collapse of numerous diligence, including high position of severance. also, macroeconomic pointers suchlike balance of payments, significances scores, affectation rates, exchange rate, and public savings reveal that Nigeria has not fared well in the last couple of decades under review.

Objects Of The Study

The main ideal of this study is to empirically examine the impact of affectation on government expenditure in Nigeria. The specific objects of the study are as follows

To examine the effect of affectation on government expenditure in Nigeria.

To estimate factorsthatpromote affectation in Nigeria.

To recommend to financial authorities and the government on how affectation could affect standard of living and how it can be reduced to an respectable position.

Exploration Question

The exploration questions, which would guide this study, are as follows

Is there any significant relationship between affectation and government expenditure in Nigeria?

Has affectation had negative effect on government expenditure over time?

What are the factors that hamper applicable financial and financial policy?