Introduction
1.1 Background of the Study
Government Expenditure is the amount of resources spent by a particular government to finance all its operations so as to provide public goods. Oyinlola (2010) observed that the size of government expenditure and its impact on economic growth have emerged as a major fiscal management issue facing economies in transition. Singh and Sahini (2014) has urged that a large and growing government is not conducive to better economic performance. For decades public expenditures have been expanding in Nigeria, as in any other country of the world.
Akpan (2015) opines that the observed growth in public spending appears to apply to most countries regardless of their level of economic development. Over the years, increases in the finances of government have led to a number of theoretical and empirical investigations of the sources of such increases. Researchers have particularly questioned whether increases in the size of federal budget tend to be initiated by changes in expenditure followed by revenues adjustments or by the reverse sequence or both Baghestani & Mcnown, (2004), Akpan, (2015).
A growing government expenditure is contrary to a government’s economic interest because the various methods of financing government such as taxes, borrowing and printing money have harmful effects. Government spending by its very nature is often economically destructive regardless of how it is financed Kneller (2009).
Governments need finances because of their roles in the society. For a government to provide all the public goods, it requires finances which are obtained mainly through taxes, grants and loans Tanzi, (2004). In Nigeria, governments depend more on oil revenues and taxes to finance their operations and often borrow and get grants to finance their budget deficits.
Inflation on the other hand determines the value for money that a government will achieve out of its expenditures. One of the most macroeconomic objectives of any country is to sustain high economic growth with low inflation Liu, (2008). Inflation imposes negative externalities on the economy when it interferes with the economies efficiency. It may also reduce a country’s international competitiveness, by making its exports relatively more expensive than its imports thus impacting on the balance of payments Koiman, (2007). Individually, inflation and government expenditure do affect economic growth.
Government expenditure plays an important role in physical and human capital formation over time. Government performs two functions namely: protection and provision of certain goods Abdullah, (2010) and Fasta, Hagen, Hughes, Siebert and Strauch (2003). Protection function consists of the creation of the rule of law and enforcement of property rights which help minimize risk of criminality and external aggression. Under the provision of public goods are health, education, power, agriculture, transportation etc. Many political philosophers like Hobbes and Locke considered the hypothetical disadvantages of life without government Devarjan, Swaroop and Zou (2006). The ideal size of government is not the problem of the economic theory. But, economic theory tells us to examine cost and benefit in order to determine whether resources are allocated in a manner that increase or decrease economic growth.
The basic economic policy of the good society is public expenditure in line with future economic growth and wellbeing. For example, expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, Communication, power reduces productions cost and increases private sector investment and profitability of firms thus fostering economic growth. Supporting this view, Scholars such as Abdullah, (2010) concluded that expansion of government expenditure determine the inflation rate of an economy.
In the Nigerian context for instance, the public sector consists of the Federal, state and local government enterprises. Some government financial operations remain entirely outside the budget and are funded by extra budgetary accounts. Therefore, the effects of expenditure on economic growth may be a comprehensive indicator of public productivity. However, governments have always been very careful in planning her expenditures by means of government budgets and National income.
Government in their different economic activities and policy formulations whether short term or long term usually encounters some problems which needs to be solved. Without solving these problems, government might not be able to formulate and implement of policies which is capable to put the economy along the path of sustainable economic growth and development. Knowledge of the effects of public expenditure on economic growth and the application of this knowledge in the solutions of some problems encountered by different policy makers in their short term or long term economic activities with a view of arriving at a specific and active policy is a problem which this study will attempt to address.
In light of this, this present study will embarked on finding the relationship between the government expenditure and inflation in Nigeria using the economic period of 1981 and 2017 to determine this.
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