BACKGROUND TO THE STUDY
Economic growth refers to increase in a country’s Gross Domestic Product, although this differs depending on how national product has been measured. Economic growth must be sustained for a developing economy to break the circle of poverty. Countries usually pursue fiscal policy to achieve accelerated economic growth. Tanzi (1994) observes that fiscal policy applies to the use of fiscal instruments (taxation and spending) to influence the working of the economic system in order to maximize economic welfare with the overriding objective of promoting long-term growth of the economy Perhaps, the aspect of public finance that has received much attention in the literature, debate and empirical analysis is the economic effects of public expenditures. Many support a large public expenditure on the ground that it puts money into circulation, increased investment and employment and reduces tax averseness.
However, public expenditure has some obvious economic consequences. For instance, when the state enters the market for factor inputs or labour, it stimulates unhealthy competition with the private sector firms for these same materials or labour services. As such, the government becomes the largest purchaser of goods and services because of its widespread activities, as hitherto evidenced in Nigeria.
To this extent, Suleiman (2009) observes that the size of Government and its impact on economic growth has emerged as a major fiscal management issue facing economies in transition. He notes that previous research focused predominantly on size of Government in industrialized countries, but given the openness of most Developing Countries (DCs), trade dependency, the vulnerability to external shocks, and volatility of finances, the role and size of Government become germane to adjustment and stabilization programmes. Mitchell (2005) has argued that a large and growing government is not conducive to better economic performance. For decades, public expenditures have been expanding in Nigeria, as in any other country of the world. Akpan (2005) opines that the observed growth in public spending appears to apply to most countries regardless of their level of economic development. This necessitates the need to determine whether the behaviour of Nigerian public expenditure and the economy can be hinged on the Wagner’s (1883) Law of Ever-increasing State Activity, or the Keynesian (1936) theory and Friedman (1978) or Peacock and Wiseman’s (1979) hypotheses.
Over the years, increases in the finances of the Federal Government have led to a number of theoretical and empirical investigations of the sources of such increases. Researchers have particularly questioned whether increases in the size of the federal budget tend to be initiated by changes in expenditures followed by revenue adjustments or by the reverse sequence, or both (Baghestani and McNown, 1994; Akpan, 2005). Friedman (1978), for example, argues that governments adjust expenditures to the level of revenues, so that control of taxation is essential to limit growth in government. Alternatively, the spend-and-tax model posits that revenues will be adjusted to finance any politically chosen level of expenditures. A third perspective, reflecting the institutional separation of allocation and taxation functions of the federal government, hypothesizes the independent determination of revenues and expenditures.
However, Suleiman (2009) observes that the fiscal volatility of the post-1979 period indicates a continued absence of coordination between expenditure and revenue decisions. He also opines that examining the empirical relationship between government revenues and expenditures is a crucial step in understanding the future path of the budget deficit.
Some scholars have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs. High levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand. Thus, government expenditure, even of a recurrent nature, can contribute positively to economic growth. On the other hand, endogenous growth models such as Barro (1990), predict that only those productive government expenditures will positively affect the long run growth rate.
Despite the rise in government expenditure in Nigeria over these years, there are still public outcries over decaying infrastructural facilities. Also, merely few empirical studies have taken holistic examination of the effect of government expenditure on economic growth regardless of its importance for policy decisions. More so, for Nigeria to be ready in its quest to become one of the largest economies in the world by the year 2020, determining the effect of public expenditure on economic growth is a strategy to fast-track growth in the nation’s economy.