1.1 Introduction
Inflation is generally understood as a persistent rise in the general price level of goods and services over a period of time, leading to a decline in the purchasing power of money (Lipsey & Chrystal, 2015). Inflation has remained one of the most challenging macroeconomic problems, often driven by both demand-pull and cost-push factors. Among these, government expenditure is particularly significant, as expansionary fiscal policies and deficit financing tend to create excess liquidity in the economy, fueling inflationary pressures (Okoro, 2021).
In Nigeria, the size, structure, and composition of government expenditure have generated intense debate among scholars and policymakers because of their implications for inflation, growth, and welfare. The way in which public resources are allocated and managed is not only a matter of budgetary concern but also a critical determinant of price stability in the economy (Aigheyisi, 2019).
This chapter will address the background information that motivated this study, the challenges that prompted it, its aim, and its objectives as a preface to subsequent sections of the study. Additional factors include the study's significance, scope, limitations, research questions, and the definition of technical terms.
1.2 Background of Study
Government expenditure has long been recognized as a critical instrument of fiscal policy used to influence economic activities and achieve developmental objectives. According to Musgrave and Musgrave (1989), public spending is classified into recurrent and capital expenditure, with the former covering salaries, wages, and overhead costs, while the latter targets infrastructure and long-term investment. The balance between these categories is fundamental in determining the broader macroeconomic impact, especially on inflation. In many developing economies like Nigeria, the disproportionate emphasis on recurrent expenditure has been associated with inflationary outcomes, as resources are diverted away from productive ventures.
Aigheyisi (2019) reported that the composition of government expenditure in Nigeria has historically been skewed toward consumption-driven activities, which increase aggregate demand without a corresponding rise in output. This imbalance creates demand-pull inflation, where excess money chases limited goods and services. Similarly, Okoro (2021) asserted that Nigeria’s heavy dependence on oil revenues to finance its budget amplifies this problem, as oil price fluctuations influence government spending patterns and, consequently, inflation trends.
Adejumo and Oladipo (2020) stated that the structure of Nigeria’s fiscal operations shows persistent deficit financing, where the government borrows heavily to meet expenditure demands. Such practices inject excess liquidity into the economy, thereby fueling inflationary pressures. Ogunmuyiwa and Ekone (2022) affirmed that while borrowing is sometimes necessary, continuous reliance on it without productive investments leads to inflation, higher debt servicing, and crowding out of private sector growth (Ogunmuyiwa and Ekone, 2022).
The theoretical framework for this problem is also grounded in Keynesian economics, which contends that increased government expenditure stimulates aggregate demand and employment. However, when such spending exceeds the productive capacity of the economy, inflationary pressures emerge. Empirical evidence on Nigeria has consistently revealed this dilemma, where expansionary fiscal policies intended to stimulate growth are instead generating persistent inflationary outcomes.
The consequences of inflation triggered by government spending extend beyond macroeconomic indicators to affect the daily lives of Nigerians. Inflation erodes purchasing power, reduces real wages, and increases the cost of living, thereby exacerbating poverty and inequality. On the other hand, well-planned government expenditure directed toward productive sectors such as agriculture, industry, and infrastructure has the potential to stabilize prices and promote sustainable economic growth. The dual nature of government expenditure inflationary if mismanaged, stabilizing if disciplined captures the essence of Nigeria’s fiscal and economic challenges. This study is set against the backdrop of examining how government expenditure in Nigeria influences inflationary trends, considering both its stabilizing and destabilizing potentials.
1.3 Statement of Problems
The issue of inflation in Nigeria is one of the most pressing macroeconomic problems facing the country, and it is deeply connected to the pattern and structure of government expenditure. Government spending is intended to stimulate economic growth, provide infrastructure, improve welfare, and promote stability. However, in the Nigerian context, excessive and poorly managed expenditure is often linked with persistent inflationary trends. Rising public sector expenditure on recurrent costs, subsidies, and overheads, without a commensurate increase in productivity, is exerting pressure on prices and eroding the purchasing power of citizens (Aigheyisi, 2019).
Another major problem is that a significant portion of government spending in Nigeria is not directed toward productive investment but rather consumed by recurrent expenditure. Public resources are frequently misallocated due to corruption, inefficiency, and weak fiscal discipline. The result is a situation where government expenditure is expanding without corresponding improvements in infrastructure, industrial growth, or employment creation. Such misalignments between spending patterns and developmental needs is fueling structural inflation, further worsening the economic condition of households (Adejumo & Oladipo, 2020).
Additionally, Inflation in Nigeria is compounded by deficit financing. Government reliance on borrowing from both domestic and external sources to fund excessive expenditure is creating additional inflationary pressure through increased debt servicing obligations and higher interest rates (Ogunmuyiwa & Ekone, 2022).
Furthermore, the impact of government expenditure on inflation is therefore not only an academic concern but a practical challenge affecting the quality of life of ordinary Nigerians. High inflation reduces the real value of wages, increases poverty, and widens inequality. On the other hand, well-targeted and disciplined government spending has the potential to stimulate production, stabilize prices, and promote sustainable development. The contradiction between these outcomes is at the heart of Nigeria’s economic dilemma. It is against this backdrop that this study seeks to examine the impact of government expenditure on inflation in Nigeria.
1.4 Aim and Objectives of Study
The aim of the study is to assess the impact of government expenditure on inflation in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:
- To examine the trend of government expenditure in Nigeria over the years.
- To determine the effect of recurrent and capital expenditure on inflation in Nigeria.
- To investigate the role of deficit financing in influencing inflationary pressures.
- To evaluate the relationship between oil revenue-driven expenditure and inflation.
- To suggest policy recommendations for effective fiscal management to reduce inflation.
1.5 Research Questions
Based on the stated objectives, the study will provide answers to the following research questions:
- What is the trend of government expenditure in Nigeria over the years?
- How does recurrent and capital expenditure affect inflation in Nigeria?
- What role does deficit financing play in influencing inflationary pressures?
- How does oil revenue-driven government expenditure affect inflation in Nigeria?
- What policy recommendations are necessary for effective fiscal management to reduce inflation?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Government expenditure has no significant impact on inflation in Nigeria.
- H1: Government expenditure has a significant impact on inflation in Nigeria.
Hypothesis Two
- H0: Recurrent and capital expenditure have no significant effect on inflation in Nigeria.
- H1: Recurrent and capital expenditure have significant effects on inflation in Nigeria.
Hypothesis Three
- H0: Deficit financing has no significant role in influencing inflationary pressures in Nigeria.
- H1: Deficit financing has a significant role in influencing inflationary pressures in Nigeria.
Hypothesis Four
- H0: Oil revenue-driven government expenditure does not significantly influence inflation in Nigeria.
- H1: Oil revenue-driven government expenditure significantly influences inflation in Nigeria.
1.7 Significance of Study
It is believed that at the completion of the study, this research will contribute to existing knowledge on the expenditure-inflation nexus in Nigeria. The study will also serve as a guide to adopting fiscal policies that will control inflation, improve productivity, and enhance the welfare of citizens.
Furthermore, the findings will also help in designing fiscal policies that will balance government spending and inflation control. The research will provide useful insights into how inflationary trends linked to government spending will affect investment decisions.
Lastly, the research study will serve as a useful guide for policymakers in formulating and implementing fiscal policies that balance the need for public spending with the goal of controlling inflation.
1.8 Scope of Study
This study focuses on the impact of government expenditure on inflation in Nigeria, with specific attention to Lagos State as a case study.
1.9 Limitations of the Study
A study of this nature is bound to experience certain problems as such the constraints imposed on the research include:
- Time Constraints: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
- Financial Constraints: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
- Lack of Cooperation: Many of the respondents are usually aggressive on issue that border cooperation among the respondents border.
- Response Bias: The study will involve surveys and interviews with cooperative managers and members. Response bias may occur if respondents provide socially desirable answers or if there is reluctance to disclose negative financial information due to privacy concerns or fear of repercussions.
1.10 Definition of Terms
Government Expenditure: Government expenditure refers to the spending by the public sector on goods, services, and transfer payments aimed at promoting economic growth, development, and welfare (Musgrave & Musgrave, 1989).
Inflation: Inflation is a persistent increase in the general price level of goods and services in an economy over time, leading to a fall in the purchasing power of money (Lipsey & Chrystal, 2015).
Recurrent Expenditure: Recurrent expenditure refers to government spending on items that are consumed within a year, such as salaries, subsidies, pensions, and overhead costs, which do not create long-term assets (Aigheyisi, 2019).
Capital Expenditure: Capital expenditure is government spending on projects that create long-term assets such as infrastructure, schools, hospitals, and industries that promote productivity and growth (Okoro, 2021).
Deficit Financing: Deficit financing refers to the practice of funding government expenditure in excess of revenue by borrowing from domestic or external sources, which often has inflationary effects (Ogunmuyiwa & Ekone, 2022).
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