CHAPTER ONE : INTRODUCTION
- BACKGROUND OF THE STUDY
Government Expenditure and Economic Growth have a strong relationship which has been argued about for a long time now. In 1936, Keynes argued that the solution to economic depression is achieved by persuading the firms to invest through reduction of interest rates and government capital investment which includes infrastructure.
Many scholars have the belief that an increase in government expenditure increases the growth of an economy, meanwhile other scholars believe otherwise. The neo classical school of thoughts argue that increasing government expenditure could decrease the aggregate production of an economy. Their argument is; in order for the government to increase their expenditure, they definitely need financial resources which are generated through increment of Tax or Borrowing from abroad. Increment of tax may lead to a decrease in income and aggregate demand because higher taxes discourage additional work. Furthermore, increasing Tax leads to increase in costs of production and decreases investment. If the government decides to increase their borrowing in order to increase their expenditure on the other hand, this reduces private investment due to competition and overcrowding. In 2006, a scholar named Sachs argued that countries with high tax rates and low social service spending are better off when it comes to economic performance when compared with countries with low tax rates and low social service spending (this only applies to developed countries).
In more detailed facts, the federal government of Nigeria (FGN) spends over 52% of its total government revenues and the remaining 48% are shared among federal states and local government areas (LGAs) according to the revenue mobilization allocation and fiscal commission (RMFC) IN 2011. The government revenue that is generated from oil revenue and non oil revenue, borrowing from internal and external sources increased significantly and this affected the level of government expenditure in Nigeria over the years. The central bank of Nigeria (CBN) referenced that the total expenditure increased from 716.1 million naira to 4.8 billion naira between 1970 – 1980. As of 2010 it increased up to 3.3 trillion naira. The government capital expenditure increased from 187.8 million naira to 10.2 billion naira between 1970 – 1980 and further to 1.8 trillion in 2010.