Impact_of_public_sector_Expenditure_on_t.docx - CHAPTER ONE...

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CHAPTER ONEINTRODUCTION1.1BACKGROUND OF THE STUDYThe market cannot work effectively alone, at minimum, anefficient market economy needs police to ensure physical security,an independent judiciary system to enforce contracts, regulatorymechanisms to prevent monopolistic abuses and lethal pollution,schools to educate the young, and a public health system to wardoff communicable diseases. This brings about the controversy ofwhere to draw the line between government and private activitiesthus making public expenditure a necessity (Samuelson, 2012).Public expenditure is an important instrument forgovernment to control the economy. It plays an important role inthe functioning of an economy whether developed orunderdeveloped. Public expenditure was born out of revenueallocation which refers to the redistribution of fiscal capacitybetween the various levels of government or the disposition ofresponsibilities between tiers of the government (Okoro, 2013).According to Keynesian view, government could reverseeconomic downturns by borrowing money from the private sectorand then returning the money to the private sector through1
various spending programs. High levels of governmentconsumption are likely to increase employment, profitability andinvestment via multiplier effects on aggregate demand. Thus,government expenditure, even of a recurrent nature, cancontribute positively to economic growth (Chude and Chude,2013).In the Nigerian economy public expenditure can broadly becategorized into capital and recurrent expenditure. The recurrentexpenditure are government expenses on administration such aswages, salaries, interest on loans, maintenance etc., whereasexpenses on capital projects like roads, airports, health,education, telecommunication, electricity generation etc., arereferred to as capital expenditure (Obinna, 2003). The size ofgovernment expenditures and its effect on economic growth, andvice versa, has been an issue of sustained interest for overdecades now. The relationship between government expenditureand economic growth has continued to generate series of debateamong scholars (Okoro, 2013).Prior to July 1986, Nigeria was operating more of a mixedeconomy in which government owned and ran most publicenterprise, as well as mining, iron and steel, etc. However, with2
the introduction of structure adjustment programme in July1986, the nation is more or less capitalistic with major publicenterprises either privatized or commercialized (Anyanwu, 1993).Previous literatures has shown that Government performstwo major functions- protection (and security) and provisions ofcertain public good (Al-Yousif, 2000). Scholars argue thatincrease in government expenditure on socio-economic andphysical infrastructures encourage economic growth. Forexample, government expenditure on health and education raisesthe productivity of labour and increase the growth of nationaloutput. Similarly, expenditure on infrastructure such as roads,communications, power, etc., reduces production costs, increasesprivate sector investment and profitability of firms, thus fosteringeconomic growth. As observed by Al-Yusuf and Couray (2009),Abdullah (2000), Ranjan, Sharma, (2008) and Cooray (2009) theexpansion of government expenditure contributes positively toeconomic growth. Their studies simply suggest that governmentexpenditure on health and education raises the productivity oflabour and increase the growth of national output. Similarly,

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