ESTIMATION OF THE ECONOMIC GROWTH EFFECT OF GOVERNMENT RECURRENT EXPENDITURE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1. Background of the Study

The relationship between government expenditure and economic growth is a topic of ongoing debate among economists and policymakers. Government expenditure according to Aigheyisi (2013) refers to the expenses incurred by the government for the maintenance of itself and the provision of goods and services to foster economic growth and improve the welfare of people in the society while economic growth is the increase in the production of goods and services in an economy over a specific period, typically measured by the rise in real Gross Domestic Product (GDP).

Government recurrent expenditure worldwide encompasses the ongoing costs necessary for the daily operations of government services, such as salaries, utilities, and maintenance, which vary significantly across countries due to differing economic conditions and policy priorities. In Africa, recurrent expenditure varies widely among countries but often takes precedence in budget allocations due to inherited legacies of public sector reliance and the need to address pressing social needs, including health and education. This prioritization can hinder economic growth and infrastructure development, as many nations struggle to balance the immediate demands of recurrent spending with the necessary investment in capital projects for sustainable development (African Development Bank, 2019; United Nations Economic Commission for Africa, 2021). In Nigeria, recurrent expenditure has consistently accounted for a significant portion of the national budget, highlighting its critical role in sustaining economic and social stability (Stephen & Isaiah, 2011). This ongoing expenditure is essential for the provision of public goods and services, yet it often leads to debates on resource allocation, efficiency, and the balance between recurrent and capital expenditures, particularly in the context of Nigeria's economic challenges and developmental goals (Ogunleye, 2020).

In Nigeria, a significant portion of government expenditure is allocated to recurrent expenditure, which is often criticized for being wasteful and inefficient (Ahonkhai, 2017). Recurrent expenditure refers to the cost of maintaining and running existing government programs, services, and infrastructure (Ahonkhai, 2017). The debate centers on whether recurrent expenditure has a positive impact on economic growth, or if it merely diverts resources from other potentially more productive uses.

Therefore, Government recurrent expenditure refers to the ongoing expenses that a government incurs in the course of its regular operations (Melkers& Willoughby, 2006). This type of expenditure is essential for maintaining the day-to-day functions of government and public services. Unlike capital expenditure, which is used for long-term investments, recurrent expenditure is focused on short-term operational costs. Recurrent expenditure typically includes salaries and wages for government employees, maintenance costs for public infrastructure, and operational expenses for various government departments and agencies. This can also encompass spending on goods and services that are necessary for providing public services, such as healthcare, education, and security. For example, in the education sector, recurrent expenditure would cover teachers' salaries, school supplies, and facility maintenance. The significance of recurrent expenditure lies in its role in ensuring the smooth functioning of government services (Mose, 2014). It affects the quality and availability of essential services provided to citizens, such as healthcare and education. Moreover, recurrent expenditure is usually funded through government revenues, primarily from taxes. However, managing recurrent expenditure is crucial, as excessive spending can lead to budget deficits and strain government finances. Therefore, governments must carefully plan and monitor recurrent expenditure to ensure that it aligns with their fiscal policies and economic objectives. Ultimately, effective management of recurrent expenditure is vital for promoting economic stability and growth. Economic growth on the other hand, is the increase in the production of goods and services in an economy over time (Adofu et al., 2015). It is measured as the percentage change in the Gross Domestic Product (GDP) of a country over a specific period. Economic growth is extremely important because the bottom line for any economy is its ability to satisfy human wants (Van Den Berg as cited by Gadinabokao&Daw, 2013). Interestingly the behaviour of economic growth in Nigeria over the years has not shown the same upward trend as in the case of the government recurrent expenditure.

Historically, because of the global Great Depression, which caused severe economic depression throughout the world, the question of how government spending affects economic growth historically gained global attention in the 1930s especially the recurrent expenditure. Following the Great Depression, which caused unemployment in the US to rise by 25% and average over 17% for ten years (Cohn, 2007), Keynes (1936) questioned the laissez-faire system's policy recommendations, which the classical economists had backed to address the high unemployment rate at the time. Keynes saw that the classical economists were unable to explain the causes of the Great Depression. Keynes believed that the American economy at that time was capable of moving from the depression when expansionary government policies were put in place. Such policies according to Keynes could increase aggregate demand, re-employ people who would then re-spend their incomes and that will stimulate production to increase and so on – multiplier effect (Appiah, 2014).

Government recurrent expenditure in Nigeria has been a recurring issue in the country's budgetary process, with significant implications for the economy and the provision of public goods and services. The category of recurrent expenditure is the largest component of the federal budget, accounting for approximately 70-80% of the annual budget (Olomola et al., 2014). This dominance is attributed to the fact that recurrent expenditure includes essential expenses such as salaries and wages, pensions, and operational costs, which are necessary for maintaining public institutions and providing essential services to citizens.

The history of government recurrent expenditure in Nigeria dates back to the country's independence in 1960 (Hill, 2012). Prior to independence, the British colonial administration had established a system of government spending, which included both recurrent and capital expenditures. After independence, the Nigerian government continued to follow this model, with recurrent expenditure becoming the primary focus of government spending. The country's first post-independence budget, presented in 1962, allocated 70% of total expenditure to recurrent expenditure, with a significant portion going towards salaries and wages (Ogunyemi, 2022).

Over the years, the proportion of government recurrent expenditure in Nigeria has remained relatively high, with some periods experiencing even greater dominance. In the 1980s, during the military regime of General Muhammadu Buhari, recurrent expenditure rose to over 90% of the total budget, leading to widespread criticism and allegations of mismanagement (Chukwudinma, 2019). The trend has continued into the present day, with recurrent expenditure remaining the largest component of the federal budget. Despite its importance, government recurrent expenditure in Nigeria has been plagued by inefficiencies, corruption, and limited revenue and capacity. The high proportion of government recurrent expenditure has led to concerns about the sustainability of the system, as well as the potential for misallocation of resources. Corruption has also played a significant role in undermining the effectiveness of government recurrent expenditure, with allegations of embezzlement and misappropriation of funds being common (Obuah, 2010).

1. Statement of the Problems

Despite the significant allocation of government recurrent expenditure in Nigeria, there is an ongoing debate about its actual impact on economic growth. Many argue that recurrent spending, which primarily covers salaries, maintenance, and operational costs, may not directly contribute to long-term economic development (Blinder, 2011). Furthermore, there is concern that a large portion of recurrent expenditure may lead to inefficiencies and misallocation of resources, limiting its effectiveness in stimulating economic growth. Additionally, the challenge of managing recurrent expenditure amid rising fiscal deficits complicates the situation, as it may divert funds from capital investments that are crucial for sustainable economic development (ESCAP, 2017). Understanding the dynamics of this relationship is essential for policymakers to ensure that government spending effectively contributes to the country's economic growth and overall development.

Also, despite the significant proportion of government recurrent expenditure in Nigeria's budget, the country's economic growth has been sluggish and inconsistent over the years. The Nigerian government has been criticized for its inability to manage recurrent expenditure effectively, which has led to allegations of corruption and mismanagement (Imhonopi&Ugochukwu, 2013). This has resulted in a lack of trust in the government and its ability to manage public resources effectively, ultimately affecting economic growth and development in Nigeria.

1. Research Questions

Below are the questions that this research intends to answer as regards the estimation of economic growth effect of government recurrent expenditure in Nigeria:

What is the economic growth effect of government expenditure on administration?
What is the economic growth effect of government expenditure on economic social services?
What is the economic growth effect of government expenditure on community services?
1. Objectives of the study

The general objective of the study is to estimate the economic growth effect of government recurrent expenditure in Nigeria. Below are the specific objectives of the study;

To examine how government expenditure on administration influences economic growth rate in Nigeria
To also examine the economic growth effect of government expenditure on economic services
To determine the economic growth effect of government expenditure on social community service.
1. Research Hypothesis

Below are the research hypothesis of this research:

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