THE IMPACT OF GOVERNMENT EXPENDITURE ON NIGERIA’S ECONOMIC GROWTH BETWEEN THE PERIOD 1981-2013.

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CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The most critical function of government expenditure is to maintain reasonable degree of price level stability and an appropriate stable economic growth that will enhance the economy to achieve full development potential and stabilization (Musgrave, 1989). Economic stabilization is achieved when government spending, through its fiscal role succeeds in maintaining high employment, reasonable degree of price level stability and appropriate  rate of economic growth, with allowances for positive effects on trade, balance of payment, savings, investment and productivity (Noko, 2013). As long as the markets are imperfect, macroeconomic financial variables changes necessitate movement in government fiscal operations as well as fluctuation in price level and growth rate. It is the role of government expenditure (spending) to continue to restore this price stability and growth rate fluctuation through the budgetary mechanism. The economy will feel the effect of the government spending more positively when the economic growth rate is on the increase and the price level is relatively stable (Noko, 2013).

Thus, government spending is an aspect of public finance that deals with how government spends the money generated in meeting the needs of the public at large (Noko, 2013). Some scholars have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs. High levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand (Abdullahi, 2010).

For instance, Lipsey and Crystal (2007), advocate that government spending through its fiscal operations has important effects on the level of Gross Domestic Product in both the short run and long run. It has also been hypothesized that when government spends too much or very little money relative to the availability of goods and services in the economy, there would be corresponding pressures (increase or decrease) on prices, which may give rise to inflation, deflation or stagnation.
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THE IMPACT OF GOVERNMENT EXPENDITURE ON NIGERIA’S ECONOMIC GROWTH BETWEEN THE PERIOD 1981-2013.