GOVERNMENT EXPENDITURE AND INFLATION RATE IN NIGERIA (1989-2009)
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GOVERNMENT EXPENDITURE AND INFLATION RATE IN NIGERIA (1989-2009)
The objective of government expenditure involves allocative, distributive, regulatory and stabilization functions. It is also the visible express of activities to actualize government decision on what goods and services to provide in the quantity and quality that is needed. However, in as much cannot be importance of its tool of intrasectoral allocative cannot be under-estimated, cautions measures must be taken to ensure that its execution should not trigger off a situation where too much money is pursing fever goods, thus resulting, hence general loss of purchasing power of the currency, hence inflation. Consequently, this dreaded and unlikable economic situation prompted this study “government expenditure and inflation rate in Nigeria economy (1989-2009). It aims at establishing the relationship between expenditure and the rate of inflation as well as examines the extent to which government expenditure influence the rate of inflation. The study is set against the background of the Nigerian economy which has been characterized by unstable price level as its most profound problem, if not in recent time. The secondary data used in the empirical analysis of evidence came from journals published by the central bank of Nigeria. The data was analyzed using statistical package for science and social science. The statistical tool includes correlation, regression and the t-test statistics. In order to carry out this research a number of questions were raised through which the hypothesis were formulated and tested using the simple regression model. The result from this test shows a negative relationship between inflation and government expenditure for the period under review, which is not line with our expectations. Based on this finding from the test, it reveals that the fiscal policy measures adopted by the CBN did not directly or positively impacted on the rate of inflation in Nigeria economy within the period under review.
TABLE OF CONTENTS
Title Page i
Table of Contents v
CHAPTER ONE: INTRODUCTION
1.1 Overview 1
1.2 Statement of the problem 2
1.3 Objective of the study 3
1.4 Hypothesis formulation 5
1.5 Significance of the study 6
1.6 Limitation of the study 6
1.7 Organization of the study 7
1.8 Definition of concept 9
CHAPTER TWO: LITERATURE REVIEW
2.1 Backgrounds 12
2.2 Government expenditure 13
2.3 Type of government expenditure 18
2.4 Sources of government expenditure 19
2.5 Importance of government expenditure 21
2.6 Inherent constraints to government expenditure 22
2.7 Problems of government expenditure 24
2.8 Government expenditure allocation given the period of coverage in question 29
2.9 Inflation 32
2.10 Types of inflation 34
2.11 General causes of inflation 34
2.12 Causes of inflation in Nigeria 36
2.13 Effects of inflation 39
2.14 Measurement of inflation 41
2.15 Position effects of inflation 45
2.17 Government and the economic issues on government of Nigeria and economy 46
2.18 Issues on Nigerian government expenditure and inflation 50
CHAPTER THREE: METHODOLOGY
3.1 Introduction 61
3.2 Research design 61
3.3 Sampling procedure 62
3.4 Data collection method 63
3.5 Data analysis technique 64
3.6 Model specification 65
3.7 Dependent variable 65
3.8 Independent variables 65
3.9 Model 67
3.10 The theoretical relationship between inflation and government expenditure 68
CHAPTER FOUR: PRESENTATION OF DATA ANALYSIS
4.0 Empirical investigation 70
4.1 Introduction 70
4.2 Data presentation and analysis 70
4.3 Analyses of result 72
4.4 Empirical result from simple regression 72
4.5 Hypothesis Test 74
CHAPTER FIVE: DISCUSSION, CONCLUSION AND RECOMMENDATION
5.1 Introduction 76
5.2 Discussion 76
5.3 Recommendations 77
5.4 Conclusion 79
In modern economies, the traditional role of government expenditure is to shape the course and determine the state of economic development.
Specifically, government expenditure is primary tool of intersectional resource allocation with its attendant involvement of public expenditure could be perceived to be in connected with the activities of the public sector of the economy. Thus, the general notion of government expenditure on productivity is predicated on the interpretation of how public sectors employs human and other resource and accumulated capital stock to produce public goods, such as judicial services, national defence, protection of the poor, economic stabilization and private goods.
Furthermore, government expenditure plays an important role in the functioning of the economy at all level of development, (Ekpo, 1994).
It is also the visible expression of activities to actualize government decision on what goods and services to produce in the quantity and quality that is needed. Government expenditure can also be seen as the measure through which allocative efficiency can be attained, it comes in the commanding height of the economy and takes all major decision for all allocation of scarce economic resources efficiently and effectively.
However, inflation is generally referred to as a situation of rapid, persistent and unacceptably high rise in the general purchasing power of the currency, Asioju (1991). Generally, the importance of this research is to analyzed the influence or impact of government expenditure on the rate of inflation, at presently, we are assessing the rate of inflation depending on government expenditure basically consist of two component, current expenditure which defines expenditure incurred by the government for the production of goods and services in a country within a fiscal year, then, recurrent expenditure, we mean all running cost of the government for the maintenance of existing or new institutions and services and capital expenditure, involve the cost of bring into existence new institutions, service and projects.
Noting that for the purpose of this work, we are aggregating all.
Analytically, the level of expenditure made by the government determines the level of money supplied in an economy. In turn, the money supplied in an economy determines the level of purchasing power in the society.
However, in a society if the purchasing power of the people increase more than the available goods and services, then we experience a situation where too much money will be chasing too fewer goods and services, hence inflation. This implies that, government expenditure is responsible for the rate of inflation in an economy if all things being equal. This occurs when the government increases her expenditure (expansionary measure), thereby increase the quantity of money in circulation. On the contrary when there is a contractionary measure in place, it resulted to a decrease in government expenditure thereby reducing the spending power of the people, hence deflation. Thus, from the fore going, the study is meant to ascertain how and to what extent does the government expenditure affect or influence the rate of inflation in an economic like Nigeria.
1.2 STATEMENT OF THE PROBLEM
In the post-independence and 1960’s witnessed relatively low government expenditure compared to what it was in the 1970’s to the present period. During the period, the inflationary trend was very minimal, CBN (2000).
Eventually, the 1970’s witnessed the emergency of the oil sector, thus, resulting to increase in government revenue. Therefore, it is expected that government revenue should equal government expenditure (balanced budget) given the above effect was increase in government expenditure unfortunately, this ugly trend led to a situation where disposable income of individuals in the country exploded, giving rise to a situation whereby too much money is pursuing too fewer goods, thus, inflation. But, several efforts have been made to ensure that this problem is addressed, or at least, to reduce it to a single digit, have received slow response. As will be noted by the combined efforts of formal minister of finance (Hon) Mrs. Okonjo Iwelaa and the immediate past central bank of Nigeria Governor, Prof. Charles Chukwuma Soludo, the emphasis of their combined polices to reduce the rate of inflation in Nigeria to a single digit, given the increase in revenue to the government through oil sales.
Thus, owing to this situation, it becomes imperative that a study of this kind be carried out so as to actually ascertain the cause of this relationship between rate of inflation and government expenditure. Hence, the study, the influence or impact of government expenditure on the rate of inflation in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The board objective of this study is to examine the impact or influence or government expenditure on the rate of influence in Nigeria.
However, the following specific objective shall guide the study;
1. To ascertain whether government expenditure has any impact on the rate of inflation in the Nigeria economy.
2. To examine if there is a relationship between government expenditure and the rate of inflation in the Nigeria economy.
3. To ascertain the nature of relationship and the rate of inflation in the Nigeria economy.
1.4 HYPOTHESIS FORMULATION
The following hypothesis will be formulated based on the above.
H01: There is no significant relationship between government expenditure and the rate of inflation in the Nigeria economy.
H02: There is a significant relationship between government expenditure and the rate of inflation in the Nigeria economy.
1.5 SIGNIFICANT OF THE STUDY
This study is relevant in the following ways;
1. It will widen the scope of the scholars towards a better understanding of the nature of relationship that exist between government expenditure and inflation rate in the Nigeria economy.
2. It will aid policy makers towards the formulation of policies that will be useful for the running of the economy and taking control of inflation in particular.
3. Lastly, it will help to build data for intending researchers on a similar topic.
1.6 LIMITATION OF THE STUDY
There are certain limitations which fall short of idea, which the research has established or organized, Baridan (1990). Insufficient information on sensitive economic and development issues. The availability of time was a constraint to conduct an intensive research. Specifically, it is believed that these limitations are not to serve in nature as to completely make avoid the conclusion of the research.
1.7 ORGANIZATION OF THE STUDY
The organization of the study will be structured in the following; chapter one will provide an overview of the context in which the study is conducted, it is made up of the following; a background to the study, hypothesis, formulation, significance of the study, limitation of the study, the organization of the study and definition of concepts.
Chapter two contained with the literature review of the opinions of scholars as it relates to the theme of the study. Chapter three will address the issue of method of study, sampling procedure, data collection method, data analysis technique model specification and the theoretical relationship between inflation and government expenditure.
Chapter four contained with the presentation of data analysis and its interpretation.
Lastly, chapter five, bring the report of this study to a conclusion with a discussion, recommendations and conclusion.
1.8 DEFINITION OF CONCEPTS
The following terms concerning this study will be defined for better understanding of the study.
Represent the cost of carrying out its various activities or it refers to the value of goods and services provided through the public sector.
Is concerned with action of the government to spend money, or to collect money in taxes, with the purpose of influence the condition of the national economy, (Tom-Ekine, 2009).
Means a general increase in the price of goods and services in all sectors of an economy.
This defines expenditure incurred by the government for the production of goods and services in a country within a year.
By recurrent expenditure we mean all day-to-day running cost of the government. They involve all expenditure by the government. They involved all expenditure.
By capital expenditure we mean costs of bringing into existence new institutions, services and projects.
This type of inflation is characterized with an exceptionally high rate but for a relatively short period. It is generally characterized by accelerating rates of inflation so that the rate of changes is significant within a period as short as one month, (Anyawn, 1993).
This type of inflation proceeds for a longtime at a moderate and fairly steady pace.
We mean extreme type of inflation characterized by an extremely fast rate of price increase. Under this situation, money almost totally loss its value.