CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Over the years, government expenditure also known as government spending has been identified as a major tool in improving the standard of living of citizens in a country. Various spending on recurrent and capital projects such as such as building of schools, provision of good and affordable health care, payment of salaries/casual wages, provision of good roads, electricity and clean water are determinants of standard of living (Morris, 1987). Increased spending on these infrastructures has the tendency of improving standard of living in a nation. For instance, policy interventions to reduce mortality may require increasedpublic spending or, similarly, it may be necessary to spend more on educationalprograms that aim to increase primary completion rates. However, what mattersis not only how much was spent but also how effectively this money was spent,there are a handful of countries that suggest an inconsistent relationship betweenchanges in public spending and outcomes. For example, Thailand has increasedpublic spending on primary schooling more than Peru did, yet primary schoolcompletion fell in Thailand and increased in Peru. Likewise, an analysis ofMalaysia over the late l980s found little association between public spendingon doctors and infant mortality, and the increased construction ofpublic schools in Indonesia that occurred in the 1970s did not have a significantpositive impact on school enrollments. The cross-country association betweenpublic spending and outcomes, after controlling for national income, is found tobe statistically and substantively weak. The message is not that public fundingcannot be successful; rather, it is commitment and appropriate policies, backed byeffective public spending that can achieve these goals.
Public expenditure is not always effective in providing quality services and reaching the intended beneficiaries, who are often the poor, and this partly explains why spending has a weak relationship with outcomes. Another reason for such a weak relationship is the interaction between the private and public sectors
Increasing public provision may simply crowd out, in part or in whole, equally effective services offered by non-government providers. Unless resources supporting services that work for poor people, the public resources spent on these services willnot get the optimal outcome. If more public money is spent on services and more of that money is spent on services utilized by the poor, the spending pattern willdetermine the efficacy of spending. For instance, wages and salaries of teacheron average account for 75% of recurrent public expenditure on education. There is no doubt that teachers’ play a critical role in the schooling process and given;them adequate incentives is important; however, spending on other vital input(such as textbooks) is also important. Too much spending on one input will have a negative impact on the quality of learning. To address this, governments must tackle not only the technical or managerial questions of how much to spend on one input relative to another, but also the institutional and political contexts that generate these decisions ( Son, 2009).
1.2 STATEMENT OF THE PROBLEM
Most poor Nigerians do not get their fair share of government spending an publicservices such as in health and education. Benefit incidence analysis on public expenditureprovides a clearer picture of who benefits from government spending. Evidencelargely suggests that the poorest fifth of the population receives less than a fifth of education and health expenditures, while the richest fifth gets more: 46% ofeducation spending, and the poorest receive only11% (Filmer 2003), Similarly, in other developing countries such as India the richest Eight receives three times thecurative health care subsidy of the poorest Eight. One reason for this imbalance isthat spending is biased toward services mainly utilized by richer people; anotherreason is that while channeling public spending toward services utilized by thepoor helps, such services may not be reaching the targeted beneficiaries.
1.3 RESEARCH QUESTIONS
The research questions formulated to guide the study are:
1.4 RESEARCH OBJECTIVES
The main aim of the study is to examine the impact of government expenditure on standard of living. Specific objectives of the study are:
Hi: There is a significant relationship between government expenditure and standard of living.
Hi: Increase in Government expenditure has a significant impact on standard of living in Nigeria.
Hi: Government expenditure on education and health care has a significant impact on standard of living in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study investigates the impact of government expenditure on standard of living in Nigeria. Many people have carried out studies on government expenditure and how it affects the economy of Nigeria, but the researcher is trying to add a new dimension to it by breaking down the variables into a specific economic indicator-standard of living.
The study will highlight the various impacts government expenditure has on standard of living and general welfare of the people of Nigeria. Various government agencies directly responsible for planning and budgeting in the country will find the study useful for monetary control purposes in the economy.
The study will also be useful to student researchers who may want to conduct research studies on government expenditures and how standard of living in Nigeria can be affected. Since enough research has not been conducted on this area, the researcher deems it fit to go into this area and recommend various policies that might be helpful.
1.7 SCOPE OF THE STUDY
This project covers the impact of government expenditure on standard of living in the Nigeria economy for a period of thirty (30) years. A general overview of government expenditures in capital and current projects is the foundation upon which the project is developed. Various economic indicators such as GDP, standard of living, inflation and government expenditure from 1982 to 2012 will be covered in the study.
1.8 LIMITATION OF THE STUDY
Time was a major constraint for the study. Combining academic work and research was not easy for the researcher; hence sourcing for data to conduct the research was a bit difficult.
1.9 DEFINITION OF TERMS
Capital expenditure: Refers to spending on fixed assets such as roads, schools, hospitals, building, plant and machinery etc, the benefits of which are durable and lasting for several years.
Capital stock: Means the total value of the fiscal capital of an economy; including inventories as well as equipments.
Capital: Human made resources (machinery and equipment) used to produce goods and services.
Classical economics: The macroeconomic generalizations accepted by most economists before the 1930s which led to the conclusion that a capitalistic economy would employ its resources fully.
Current expenditure: Refers to spending on wages and salaries, supplies and services, rent, pension, interest payment, social security payment. These are broadly considered as consumable items, the benefits of which are consumed within each financial year.
Dependent variable: A variable in which changes as a con sequence of a change in some other (independent) variables.
Direct relationship: The relationship between variables which change in the same direction.
Economic growth: Increase in real output or in real output per capita.
Economic growth: Means increase in an economic variable, normally persisting over successive periods. The variable concerned may be real or nominal GDP.
Economic model: A simplified picture of reality representing an economic situation.
Economic policy: Course of action intended to correct or avoid a problem.
Economic resources: Land, labour, capital and entrepreneur which are used in the production of goods and services.
Expanding economy: An economy in which the net domestic investment is greater than zero.
Fiscal policy: The use of taxation and government spending to influence the economy.
Government expenditure: Refers to the expenses that government incurs for its maintenance, for the society and the economy as a whole.
Government expenditure: Spending by government at any level. It consists of spending on real goods, and services purchased from outside suppliers; spending on employment in state services such as administration, defense and education; spending on transfer payment to pensioners; spending on community services; spending on economic services.
Gross Domestic Product (GDP): Refers to the money value of goods and services produced in an economy during a period of time irrespective of the people.
Growth model: It is a simplified system used to stimulate some aspects of the real economy.
Growth rate: The proportional or percentage rate of increase of any economic variable over a unit period, normally a year.
Independent variable: The variable causing a change in another variable.
Industrially Advanced Countries (IACs): Countries such as the US, Canada, Germany, Japan and Nations of Western Europe which have developed market economies based on large stocks of technologically advanced capital goods and skilled labour force.
International Monetary Fund (IMF): The international association of nations which was formed after the World War II to make loans of foreign monies to nations with temporary payment deficits and to administer adjustable pegs.
Investment: Spending for capital goods and addition to inventories.
Keynesian economics: The macroeconomic generalization which lead to the conclusion that a capitalistic economy does not always employ resources fully.
Labour productivity: Total output divided by the quantity of labour employed to produce the output.
Market failure: Refers to a label for the view that the market does not provide panacea for all economic problems.
Market forces: The forces of supply and demand, which determine equilibrium quantity and price in market.
Monetarism: An alternative to Keynesianism; the macroeconomic view that the main cause of changes in aggregate output and the price level fluctuations is the money supply.
Neo-classical economics: The theory that, although unanticipated price level changes may create macroeconomic instability in the short-run, the economy is stable at the full employment level of domestic output in the long-run because of price and wages flexibility.
Nominal GDP: Means GDP at current basic prices less indirect taxes net of subsidies.
Poverty: Inability to afford an adequate standard of consumption.
Price level: The weighted average of prices paid for the final goods and services produced in an economy.
Rate of interest: Prices paid for the use of money of for the use of capital.
Transfer expenditures: refer to expenditures on pension, subsidies, debt interest, disaster relief packages, etc. transfers are seen as redistribution of resources between individuals in the society, with the resources flowing through public sector as intermediary.
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