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Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 52

Responsiveness of Selected Macroeconomic

Variables to Government Spending In Nigeria

Economy. (1981-2016)

Sani Abubakar

Department Of Business Administration School Of Management Sciences

Federal Polytechnic, Ekowe Bayelsa State.

saniab2020@yahoo.com

Odubo Angonimi

Department Of Marketing School Of Management Sciences Federal Polytechnic,

Ekowe Bayelsa State.

nimibiri@yahoo.com

Dr. Ebere Ume Kalu

University Of Nigeria Nsukka

ebere.kalu@unn.edu.ng

Abstract

This study is an empirical investigations on the responsiveness of selected macroeconomic

variables to government expenditure in Nigeria. This paper used the Autoregressive Distributed

Lag Model form of regression and found that Inflation, Exchange Rate and Economic Growth

respond to recurrent expenditure and aggregate government spending while no relationship of

significant nature exists with capital expenditure. Obviously, it is expected by way of deliberate

policy that government should pattern expenditure to produce more capital goods that would

trigger growth at different levels and sectors of the economy.

Keywords: Government Expenditure, Recurrent Spending, Economic Growth, ARDL and Nigeria

Introduction

In the past fifty years, one of the most

important issues for policy makers has

remained the effects of government spending

on macroeconomic performance of a country.

It is not difficult to understand the reasons

behind rapid rise in government spending in

comparison to GDP all over the world.

History, prior to last three decades, witnesses

rapid increase in the government spending only

during the depression periods or the war.

However, the policy makers, more or less,

remains silent to devise policies to overcome

this rising trend. This episode raises a very

relevant question, that is, what are the

repercussions of government spending.

Mudassar Rashid, Muhammad Abeer Farooq,

Shahzada and Naeem Nawaz, 2017).

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Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 53

In view of this Hertog (2010) identified some

sectors of the economy where government

spending can lead to smooth functioning of the

economy. The argument is that services

provided by the sectors are very critical to

economic growth and development. They

include electricity and gas, water, transport,

postal services and communication system. As

sectors that provide services critical to

economic development, if they are left to the

private sector alone to provide, the motive to

make profit may lead to their under production

or scarcity. To see that an economy is not

found in that situation, government investment

in those sectors is necessary. Many other

scholars support the argument that government

investment in critical sectors of an economy is

needed to make the economy work well.

Dabla-Norris and Matovu (2002) and Miron

(2010) accept that expenditure on

infrastructure can lead to good economic

performance. Miron (2010) believes that

government expenditure is a source of

economic stability as well as instability

depending on its outcome and can lead to

standard nature of macroeconomic activities.

Miron did not agree with Keynes that no

matter the manner government expenditure is

made, the spending will be good for the

economy.

Most of Nigeria’s public sector expanded with

the rise in international price of oil in early

1970s.The increase in oil revenue raised the

revenue profile of the government and

consequently spending pattern, the public

sector saw itself in sudden affluence. As a

country coming out of civil war, the oil

windfall was an opportunity for the

government to pursue her reconciliation,

reconstruction and rehabilitation programs.

There and then, public sector activities

expanded and government went beyond the

provision of public goods and social

infrastructure to direct investment in industrial

production of goods and services. Many

elephant projects like Ajaokuta steel complex

were embarked upon but remained unfinished

till now. Public expenditure in Nigeria rose

from N903.9 million in 1970 to N5, 942.6

million in 1975. By 1980, it has risen to N14,

968.5 million, showing that within a space of

10 years, government expenditure increased by

more than 1500%. On expenditure

composition, economic services and general

administration were the priority of the

government between 1970 and 2010.

Government channeled 20.32% of her

resources annually to capital expenditure on

economic services, while 19.72% was spent

annually on recurrent general administration

between 1970 and 2010 (Central Bank of

Nigeria, 2010). On macroeconomic constancy,

inflation rose from 13.8% in 1970 to 33.9% in

1975. It however fell to 9.9% in 1980 (Central

Bank of Nigeria, 2007). unluckily, between

1970 and 2010, domestic inflation was on

double digit (Central Bank of Nigeria, 2010),

Mudassar Rashid, Muhammad Abeer Farooq,

Shahzada and Naeem Nawaz, 2017).

For the few years past in the economic history

of Nigeria, the pace of economic growth

appear to be epileptic but government

expenditure as a proportion of gross domestic

product has kept a rising profile and the trend

of inflation rate appears to be on the path of

Page 3 of 16

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 54

increase. Central Bank of Nigeria’s Statistical

Bulletin 2012 as published in 2013, shows

percentage innovations in aggregate

government size as 9.52, -9.66, 20.59, 6.90 and

-7.38 for 1981, 1991, 2001, 2010 and 2012

respectively with inflation rates responding as

follows: 7.7 for 1981, 5.72 for 1991, 18.87 for

2001, 13.72 and 12.22 for 2012. Like many

countries, industrialized and developing, one

of the most fundamental objectives of

macroeconomic policies in Nigeria is to sustain

high economic growth together with low

inflation. There is the need to highlight here

that Price stability does not portend static

general price level of goods and services, but

rather simply suggests that the rate of such

changes is such that it does not attract attention

of economic and policy agents. Steady increase

in the general price level of goods and services

over a long time frame provides evidence of

inflation spiral. It is of essence to appreciate

that volatility in the general price level erodes

the power of money to function as a store of

value. To this extent, this will stunt savings,

discourages investment, growth, and creates

uncertainty and distortions in the economy, to

beget unreliable economic planning. (BigBen

Chukwuma Ogbonna, 2014).

In order to remedy the undesirable economic

syndrome, government has introduced a lot of

policy measures intended at controlling

inflation which has plagued Nigeria since the

inception of the present guided deregulation.

Of essence among the policy options is the

fiscal policy which involves the use of

government expenditure and taxation for the

control of inflation. Meanwhile, government

expenditure is the most frequently used

instrument to pursue the stabilization goal of

fiscal policy. This may be attributed to the

would-be adverse effect (which may be

counterproductive) of increase in tax for an

economy where over 83% of its citizens are

living below the poverty line of $2.00 a day

(WDI, 2012). Notwithstanding the intensity

and frequency of the use of this choice policy

option, the rate of inflation still remains

relatively very high in Nigeria, meaning that

inflation rate appears not to be substantially

responsive to adjustments in the levels of

public expenditure. It is on the strength of this

suspicion that we consider it plausible to

investigate the extent to which causal

relationship exists between innovations in

government size and developments in inflation

rate in Nigeria. (BigBen Chukwuma Ogbonna,

2014).

The effects of government spending on the real

exchange rate and consumption are

significantly different between advanced and

developing countries. The real exchange rate

depreciates significantly by 3 percent in

advanced countries but it appreciates by over 4

percent in developing countries. Consumption

increases with government spending in

developing countries, but the effect of

government spending on consumption is

negative and statistically insignificant in

developed countries. The current account

deteriorates in both groups. Our identification

of government spending shocks comes from

the assumption that military spending is

exogenous to the state of the economy. We

implement this identification strategy using the

local projections method, as in Jorda (2005).

This methodology has been widely used in the