Effect of public Expenditure and National Income Accounting on Macroeconomic Performance in Nigeria, 1980-2007.
ABSTRACT
This study analyzed the effect of public expenditure and national income accounting on macroeconomic performance in Nigeria for the period, 1980 – 2007. The study empirically verified the effect of public expenditure on growth of the economy.
The study also examined the challenges of improving fiscal discipline, bringing resource allocation in line with development priorities and creating an enabling environment for public financial managers and protecting due process.
Secondary data were the main source of data used for analysis. The hypotheses formulated were tested using simple and multiple regression techniques. Models were applied for predicting the impact of public expenditure on GDP, industrial capacity utilization, gross fixed capital formation and inflation.
Reasonable measures of economic development (national income) and state activity (public expenditure) can through the employment of econometric estimation, isolate the effects of a few variables on public spending.
There are in general six different formulations of Wagner’s hypothesis which have been employed to test the law on increasing state activities.
This study has modified these models and developed new models called “Expanding Activity” models which can be used for the prediction of the impact of categories of public expenditure on gross domestic product (GDP).
They also predict an increasing relative share for the public sector in the total economy as per capita income grows. The findings showed that both recurrent and capital expenditure have significant positive impact on gross domestic product (size of the economy).
This means that decreasing or cutting capital expenditure will create negative impact on the growth of the economy. The findings also proved that huge recurrent expenditures do suppress the impact of capital expenditure on the economy.
Empirically, the findings have also shown that there is strong positive relationship between recurrent and capital expenditure and gross fixed capital formation in Nigeria.
Similarly, findings showed that both public capital and recurrent expenditure have negative impact on inflation rate in Nigeria, which confirms inflation to be determined largely by both internal and external factors.
Thus, openness of the economy is highly correlated with inflation. This means that there are so many other exogenous variables that impact positively on inflation rate in Nigeria.
GDP per capita as aggregate of national income accounting and also an indicator of economic well-being provided good results on the nation’s economic health as shown by the impact of exchange rate, employment rate, and industrial capacity utilization and inflation rate.
The researcher discovered that there are factors hindering the effectiveness of public expenditure as a fiscal policy tool, which include high level of leakages in public funds, fiscal indiscipline, corruption, weak governance in public expenditure and poor budget implementation.
It is recommended that Government needs to take urgent steps in full implementation of various reforms in public expenditure management, which include Medium-term Expenditure Frameworks, Fiscal Responsibility Act and Public Procurement Act.
The accounting system in government should also reflect changing patterns in public expenditure management.
TABLE OF CONTENTS
TITLE PAGE i
APPROVAL PAGE ii
CERTIFICATION iii
DEDICATION iv
ACKNOWLEDGEMENTS v
ABSTRACT viii
LIST OF TABLES ix
CHAPTER ONE: INTRODUCTION 1
1.1 BACKGROUND OF THE STUDY 1
1.2 STATEMENT OF RESEARCH PROBLEM 6
1.3 OBJECTIVES OF THE STUDY 8
1.4 RESEARCH QUESTIONS 9
1.5 RESEARCH HYPOTHESES 10
1.6 SIGNIFICANCE OF THE STUDY 11
1.7 SCOPE AND LIMITATIONS OF THE STUDY 12
REFERENCES 14
CHAPTER TWO: REVIEW OF RELATED LITERATURE 16
2.1 INTRODUCTION 16
2.2 MACROECONOMIC POLICY 26
2.3 THEORIES OF PUBLIC EXPENDITURE 32
2.3.1 WAGNER’S LAW OF EXPANDING STATE ACTIVITY. 32
2.3.2 PEACOCK AND WISEMAN HYPOTHESIS (OR DISPLACEMENT) 35
2.3.3 THE CRITICAL –LIMIT HYPOTHESIS 36
2.3.4 MUSGRAVE THEORY OF PUBLIC EXPENDITURE GROWTH 36
2.3.5 THE LEVIATHAN HYPOTHESIS 37
2.4 OTHER THEORIES 38
2.5 REMARKS ON THE REVIEWED THEORIES 39
2.6 PUBLIC EXPENDITURE AND GROWTH 45
2.7 STUDIES BASED ON FOREIGN EVIDENCE 55
2.8 PURSUING ECONOMIC GROWTH IN NIGERIA 58
2.9 NATIONAL INCOME ACCOUNTING 65
2.10 DECADES OF NIGERIAN NATIONAL INCOME ACCOUNTING 68
2.11 REFORMING THE BUDGETING PROCESS IN NIGERIA 72
2.12 THE ROLE OF ACCOUNTING IN PUBLIC EXPENDITURE MANAGEMENT 78
REFERENCES 84
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN 89
3.2 NATURE AND SOURCES OF DATA 90
3.3 POPULATION AND SAMPLE SIZE 90
3.4 DESCRIPTION OF RESEARCH VARIABLES 91
3.4.1 DEPENDENT VARIABLES 91
3.4.2 INDEPENDENT VARIABLES 91
3.5 REGRESSION MODELS 92
3.6 MODEL SPECIFICATION 94
3.7 TECHNIQUES FOR ANALYSIS AND FURTHER PARAMETAL TEST 97
3.7.1 THE COEFFICIENT OF DETERMINATION (R2) 99
3.7.2 THE CORRELATION COEFFICIENT(R) 100
3.7.3 THE SIGNIFICANT TEST 101
3.7.4 THE F-RATIO TEST 101
3.7.5 THE STUDENT T-TEST 102
3.7.6 AUTOCORRELATION TEST USING DURBIN –WATSON 103
REFERENCES 105
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 INTRODUCTION 107
4.2 DATA PRESENTATION 107
4.2.1 GROSS DOMESTIC PRODUCT (GDP) 107
4.3 ANALYSIS OF RECURRENT AND CAPITAL EXPENDITURE 112
4.4 FUNCTIONAL ANALYSIS OF TOTAL PUBLIC EXPENDITURE 118
4.5 ANALYSIS OF THE FISCAL OPERATIONS OF FEDERAL GOVERNMENT OF NIGERIA 121
4.6 FINANCING FISCAL DEFICITS IN NIGERIA 127
4.8 TEST OF HYPOTHESES 132
4.8.1 HYPOTHESIS ONE 132
4.8.2 HYPOTHESIS TWO 134
4.8.3 HYPOTHESIS THREE 135
4.8.4 HYPOTHESIS FOUR 137
4.8.5 HYPOTHESIS FIVE 138
4.8.6 HYPOTHESIS SIX 139
4.8.7 HYPOTHESIS SEVEN 140
4.8.8 HYPOTHESIS EIGHT 142
REFERENCES 144
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1. SUMMARY OF FINDINGS. 145
5.2 DISCUSSION OF FINDINGS 148
5.3 CONCLUSION 151
5.4 RECOMMENDATIONS 152
5.5 CONTRIBUTION TO KNOWLEDGE 153
APPENDIX I – VII1: REGRESSION RESULTS 156
APPENDIX IX: FISCAL RESPONSIBILITY ACT, 2007 172
APPENDIX X: PUBLIC PROCUREMENT ACT, 2007 199
BIBLIOGRAPHY 251
INTRODUCTION
1.1 Background of the Study
Public expenditure happens to be the most visible and quantifiable measure of government activity. This appears to be the case with many countries, especially the developing ones.
Nigeria has been adopting public expenditure as a practical instrument of government policy towards achieving some macroeconomic objectives.
According to Adubi, et.al. (1999:184), public expenditure could simply be seen as expenses which the public sector incurs for its maintenance, for the benefit of the economy, external bodies and for other countries.
Klein (1976:4) states the view that public expenditure can comprehensively and conventionally be defined to include all spending by central and local government, as well as capital investments by public corporations.
Adubi, et.al.(1999:184) also express the view that public sector can be broadly defined as that portion of national economy in which economic and non-economic activities are under the control and general direction of government.
The public sector in Nigeria consists of the Federal Government, State Government, Local governments and government enterprises.
BIBLIOGRAPHY
Adeyemo, O.A. (1989), Oyo State Senior Policy Seminar on Budgeting, Ibadan: NCEMA National Seminar Report.
Adubi, A.A. and Obioma, E.C. (1999), “Public Expenditure Management in Nigeria”, edited by Komolafe, O.S; Jalilian, H, and Hiley, M. in Fiscal Policy Planning and Management in Nigeria,Ibadan: NCEMA.
Addison, D. and Wodon, Q. (2007), “Macroeconomic Volatility, Private Investment, Growth, and Poverty in Nigeria”, Munich Personal RePEc Archive: Online at http://mpra.ub.uni-muenchen.de/11113/
Ajayi, S.I. (2002), “The 2002 Federal Government Budget, Some Remarks”. The CBN Bullion,Vol.26.No.2. April/June.
Akinkugbe, A. (2004), “Budget Implementation and National Development: The Way Forward”, The Nigerian Accountant, ICAN Journal, Vol.37, No.2, April/June.
Akpan, H.E and Ndebbio, J.E. (1996), “Fiscal Operations in a DepressedEconomy: Nigeria: 1960-90”, African Economic Research Consortium.