Relationship between government expenditure and investment

relationship between government expenditure and investment

Aggregate Expenditure: Investment as a Function of National Income. Just as a consumption function shows the relationship between real GDP (or national. period after characterised by government deficit expenditure. investigate the relationship between public expenditure and private. Government spending or expenditure includes all government consumption, investment, and For the term used in relation to the British monarchy, see Privy Purse. For the academic journal formerly called Public Money, see Public Money .

However, we are careful not to jump to the conclusion that the preponderance of recurrent expenditure over capital expenditure has -adversely affected the nation's economy. This is purely on the desired results in the economy to force an increasing intervention on the part of the state. This did not lead to a rapid growth in the public sector and public sector expenditure but, also fed various analytical hypotheses concerning public expenditure [ 10 ].

A question therefore, poses itself: Researching further, it is a common belief that the government plays a significant role in the development of a country and the public sector expenditure is an important instrument for the government to control the economy.

Also, economists have noted its effects in promoting economic growth. Meanwhile, the general view is that public sector expenditure either recurrent or capital expenditure notably on social and economic infrastructure can be growth enhancing. Jhingan stated that public sector expenditure, by increasing social welfarehelps in reducing inequalities of income and wealth and as well can be used to create trade as well as to correct externalities and regional disparities if employed judiciously, thereby fastening economic growth.

From this point that Omoke conclusively put that an increase in government expenditure will yield a positive increase in the growth of the economy by increasing the national income especially, when it is injected in development programs. For example, government expenditure on social and community services such as health and education are capable of raising the productivity of labour and increase the growth of national output. Also, an increase in infrastructural equipment and rise in salaries will motivate the lecturers and teachers to dedicate more time in equipping the students with more skills and knowledge.

Similarly, Abu and Abdullah observed that the public sector expenditure on infrastructure such as roads, communication, power etc. In Nigeria today, the public sector is predominant. The reason appears to lie in what the government perceived as its social responsibility or share of commitment in the growth and development process.

Government spending - Wikipedia

Its largeness has been stimulated by the urge to adopt shock adjustment to economic growth for quicker realization of national aspiration. This has led to the overwhelming consistent increase in the public sector expenditure in Nigeria [ 11 ]. Specifically, the public sector expenditure in Nigeria has continued to raise for over three decades, due to the increased demand for public utilities goods like roads, communication, power, education and health [ 12 ].

However, it has been argued by scholars if the rising state of public sector expenditure in Nigeria has gainfully contributed to economic growth in Nigeria.

Okoro pointed that increase in per capita which are a symbol of economic growth that leads to development and reduction in poverty. Moreover, macroeconomic indicators like balance of payments, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last three decades.

Government spending

Furthermore, public sector has incurred expenses in areas such as physical infrastructure, health, education, economic services, defence and general administration. Economic theory predicts that increases in productive public spending in areas like physical infrastructure, health and education leads to increases in economic growth of a country. Some governments have tried to promote public spending due to an understanding that large public sector expenditure is a source of economic growth and development, especially, in a country where public sector is predominant like Nigeria.

Therefore, understanding the relationship between public expenditure and economic growth could have a significant impact on the formulation and implementation of major macroeconomic policies. It could also guide the formulation of major economic policies required urgent funding and attention.

Controlling for the influence of non-oil revenue, this study seeks to uncover the long run and short run relationship between public sector and economic growth in Nigeria using Johansen cointegration approach. By examining the effect of public expenditure on economic growth, this study contributes to a number of studies that have explored public sector contribution on economic growth [ 14 ].

The remainder of this study is structured as follows: Section 2 details the literature. Section 3 contains details of the data and methodology employed the study. Section 4 contains the presentation of results. Section 5 offers an analysis of the results presented in the previous section and Section 6 concludes this paper.

Literature Review Theoretical review In the past, economic literature has amongst other things, concerned itself with the research and study of the relationships between public sector and economic growth. The major consensus is public sector expenditure impacts positively on economic growth.

Notable theories are Keynes [ 15 ], Wagner [ 16 ], Peacock and Wiseman [ 17 ]. Keynes, in his hypothesis draws a link between public expenditure and economic growth and concludes that causality runs from public expenditure to income, implying that public sector expenditure is an exogenous factor and a public instrument for increasing national income. Furthermore, holds that increase in government expenditure leads to higher economic growth.

Wagner, Peacock and Wiseman and many other economists have formulated different theories on public expenditure and economic growth. Wagner positioned public sector expenditure as a behavioural variable that positively dictates if an economy is growing.

However, the neo classical growth model developed by Solow [ 18 ] opined that the fiscal policy does not have any effect on the growth of national output. Another study by Solow [ 19 ] further argued that invention through fiscal policy helps to improve failure that might arise from the inefficiencies of the market.

Similarly, Dar and Amir [ 20 ] summarized that in the endogenous growth models, fiscal policy is very crucial in predicting future economic growth.

relationship between government expenditure and investment

Nevertheless, Barro [ 21 ], Barro and Sali-i-Martins [ 22 ] and Roux [ 23 ] all noted that the expansion of government expenditure contributes positively to economic growth.

However, Chude and Chude expressed that some researchers and policy makers do not support the claim that increasing government expenditure promotes economic growth.

relationship between government expenditure and investment

Instead, they assert that higher public expenditure may slow down overall performance of the economy. Glomm and Rarikumma [ 24 ] articulated that higher income tax discourages individuals from working for long hours or even searching for job.

This in turn reduces income and aggregate demand.

relationship between government expenditure and investment

In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms. Putting public expenditure into perspective, Pearce [ 25 ] noted that Public expenditure is associated with the public sector. The study emphasized that the phrase "public sector" could be referred to as that part of the economy, which is publicly owned as opposed to privately owned. It thus includes all government departments and agencies and all public corporations such as electricity boards, water boards etc.

Here, the public sector is thus defined in terms of ownership. It should not be defined as the sector only, which produces only public goods although, typically, public goods are provided via the public sector.

Afolabi [ 26 ] viewed the public sector the same as government sector consisting mainly of the government and government owned enterprises whether local, state or federal. In his view, Afolabi stated that the public sector is an economic agent acting on behalf of everybody generally with all its economic resources commonly owned and all its activities presumably carried out on behalf of, and for the benefit of everybody.

Meanwhile, the public sector is that portion of the society controlled by national or federal, state and local governments. The public sector encompasses defence, homeland security, public protection, firefighting, urban planning, taxation and various social programs.

Nweke [ 27 ] pointed that Public ownership in key sectors of the economy were viewed as a more effective way to achieve economic growth and development since it was believed that the private sector in developing countries lacked the means financial and entrepreneurial skill to undertake the task of development.

Anyanwu highlighted that public expenditure is usually categorized into recurrent and capital expenditure. In his view, Anyanwu noted that these are further broken down into their various compositions. For example; recurrent water supply etc. Empirical literature Recent evidence documents that, the size, structure and growth of public sector expenditure have increased tremendously and become increasingly complex.

Researchers have attempted to examine the impact of public expenditure on economic growth in different countries and periods. The results show, among others, that growth of government spending has significant negative impact on economic growth Foster and Skinner evaluated the relationship between government expenditure and economic growth for a sample of wealthy countries for periods, using various econometric approaches. They found a positive relationship between public sector expenditure and economic growth Devarajan et al.

The study covered 43 countries for periods of to The study shows that recurrent expenditure has positive impact on growth, while capital expenditure exerts negative impact on growth.

Difference Between Capital Expenditure and Revenue Expenditure - Vishal Thakkar

Expansionary fiscal policy can be used by governments to stimulate the economy during a recession. For example, an increase in government spending directly increases demand for goods and services, which can help increase output and employment. On the other hand, contractionary fiscal policy can be used by governments to cool down the economy during an economic boom. A decrease in government spending can help keep inflation in check.

Automatic stabilization is when existing policies automatically change government spending or taxes in response to economic changes, without the additional passage of laws.

The Contribution of Government Expenditure on Economic Growth of Nigeria Disaggregated Approach

Discretionary stabilization is when a government takes actions to change government spending or taxes in direct response to changes in the economy. For instance, a government may decide to increase government spending as a result of a recession.

According to Keynesian economicsincreased government spending raises aggregate demand and increases consumptionwhich leads to increased production and faster recovery from recessions.

Classical economistson the other hand, believe that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive. The downward sloping demand curve D1 represents demand for private capital by firms and investorsand the upward sloping supply curve S1 represents savings by private individuals.

The initial equilibrium in this market is represented by point A, where the equilibrium quantity of capital is K1 and the equilibrium interest rate is R1. If the government increases deficit spendingit will borrow money from the private capital market and reduce the supply of savings to S2.