The Impact of Government Expenditure on Standard of Living in Nigeria

The Impact of Government Expenditure on Standard of Living of the People of Nigeria

The Nature and Constituents of Government Expenditure

Government expenditures refer to the expenses that government incurs for its own   maintenance, for the society and the economy as a whole (Weil, 2009). Government spending reflects the policy choices of government. Once government has decided upon the type and quantity of goods and services to provide, government spending represents the cost of carrying out these policies (Weil, 2009).

The rationale behind the need for expenditure is associated with the existence of externality or market failures, there is no reason to assume that additional public sector investments would be more productive than the private sector investments (Tanzi, 1997).

Government spending on public services has profound effect on the citizens’ standard of living and opportunities. Government spending on public services has the objectives of given the citizens chance to realize their fool potential (through education, training and work), building an inclusive and fair society and strengthening a competitive economy (Lin, 1994). Thus the objectives of public expenditure encompasses both equity and efficiency elements.

It is argued by some economists that efficiency improvement must be achieved at the expense of equity. However, inefficiency in the provision of public services has shown that opportunities for improved equity are lost because of wasteful use of resources (Bailey, 2002). This point is exacerbated to the point that both the provision and financing of public services crowds out the private sector and leads to reduced economic growth. Lower economic growth resultsto few resources being available for to pursue social programmes.

The provision and financing of public services is not simply concerned with the redistribution of income in favour of disadvantaged socio-economic groups in society. Social justice is not only concern with distributional issue, but with equality of opportunities, individual responsibility for self improvement and reward for merit and effort. In this scenario, improvements in efficiency and in equity are not mutually exclusive (Ketema 2006). According to Bhatia, (2008), what exactly constitute public spending is opened to question and the definition of public expenditure has changed on many occasions. Such changes are usually justified on technical grounds, and, generally, have attempted to separate that part of public expenditure over which central government has or no control from that part over which it does have (or could reasonably be expected to have) control, such changes may also be politically be expedient in allowing central government to claim success in controlling reducing expenditure.

Government expenditure can be represented by two broad categories of government activity: exhaustive expenditures and transfer expenditures. (Bhatia, 2008) Exhaustive public expenditures correspond to government purchases of current goods and services (labour, consumables etc), and capital goods and services (i.e. public sector investment on roads, electricity, schools, hospital etc). These expenditures involve purchases of inputs by public sector and are estimated by multiplying the volume of inputs by input prices.

Exhaustive government expenditures are viewed as claim on the resources of the economy. Use of these resources by the public sector precludes use by other sectors. The absorption of resources by the public sector means that the opportunity cost of these government expenditures is the forgone output of the other sectors. It is the opportunity cost argument of this kind that underlies the argument for those who frown upon larger size of public sector and that also form the basis of many techniques used to measure public sector efficiency. This arguments underpinned the crowding-out debate (Bhatia, 2008).

Thus, according to economists, an increase in government expenditures does not necessarily imply an increase in public output; neither does it always imply a reduction in efficiency, which makes efficiency calculation using national income data tricky (Brown and Jackson, 1996).

Transfer expenditures on the other hand (which includes expenditures on pension, subsidies, debt interest disaster relief packages, etc.) do not represent a claim on the society’s resources by the public sector as in the case of exhaustive public expenditures. Transfers are seen as a redistribution of resources between individuals in society, with the resources flowing through the public sector as intermediary (Bhatia, 2008).

The economic categories of exhaustive and transfer expenditures do not figure explicitly in public expenditure statistical series, since, they are used for analytical purposes, they have little value for accounting or planning purposes. The published public expenditure figures are the summation of many accounting components. This calls for and requires an understanding of accounting constituents of government spending for empirical analysis (Barley, 2002).Accounting components of government expenditure is made up of current and capital expenditures (Daravanjan et al 1996).

Current expenditure includes spending on wages and salaries, supplies and services, rent, pension, interest payments, social security payments, etc. These are broadly considered as consumable items, the benefits of which are consumed or exhausted within each financial year. Capital expenditures on the other hand, include spending on fixed assets such as road, schools, hospital, land, buildings, plants and machinery, etc. the benefits of which are durable and lasting several years. Both components entails exhaustive and transfer expenditures. For instance, social security payments are categorized as current expenditures as are the interest payments on debt, used to finance capital expenditures (Barley 2002, Davanjan et al, 1996, Akrani, 2011).

The distinction in government expenditures is considered useful by those who believe that a large share of capital or developmental expenditure in total public spending is a sign of an economic policy that contributes to growth. However, there is no standardized way of categorizing expenditure as current or capital because what may be classified as current item of expenditure in one country may be classified as capital (developmental) in another (Katema, 2006).

Government expenditures can also be seen from the perspectives of the tiers of government. Generally speaking, expenditures by the central government (Federal government in the case of Nigeria) include: expenditure on social security, defense, health, education, road, transport, trade and industry, agriculture, international relations, etc. On the other hand, major expenditures by states and local governments include expenditure on education, personal social services, local environmental health, feeder roads, leisure and recreation etc (Perkins, et al, (2001).

Government expenditure can be classified as functional (sectorial) categories of expenditure. Sectorial classification can further be decomposed into current and capital expenditures. On the other hand, functional or sectorial expenditure include general public service, defense, public order and safety, education, health, agriculture, manufacturing and construction, mining, and quarrying water supply, transport and communication electricity, environmental protection etc (Akrani, 2011; IMF, 2001; Heller and Diamond, 1990).

Barro, (1990), and Akrani, (2011) categorized government expenditure as productive and non-productive. Productive government expenditure includes resources devoted property rights reinforcement, as well as government spending activities that enter directly into the production function. On the other hand, those expenditures that could not enter into production function (such as government consumption services) are considered unproductive. Bleaney, et al, (2001) also classified general public expenditure, into: defense expenditure, educational expenditure, health expenditure, housing expenditure, and transport and communication expenditure as productive expenditure. Bleaney and his associates treated health and education spending as investments on human capital because of the additions to human capital they entailed. They classified social security and welfare expenditures, expenditure on recreation, and expenditure on economic services as unproductive expenditure.

  • Public Expenditure Growth

The classical economists believe in the doctrine ofnon state intervention in the economy and self-correcting mechanism of an economic system. Despite this believe, it is observed that public expenditures have risen tremendously in absolute terms over the years, indicating state expanding roles or activities in the economy. Even after making allowances for population and price increase, it is observed that public expenditures at all levels of government rose over a long period of time (Musgrave, 1889: Bailey 2002: Bhatia, 2008). This means that the classical belief in the doctrine of the state non- intervention and self-correcting mechanism of an economic system has not hold in practice, hence increase in government expenditures in all countries.

There are some macro models of public expenditure that help to explain how government expenditure has expanded over a long term period (Brown and Jackson, 1996). The first model can be described as the development models of public expenditure growth; the second model is based on Wagner’s law of expending state activities; and the third model is referred to as Peacock and Wiseman’s (1961) model of public expenditure growth.

Development models of public expenditure growth can be represented by the works of Musgrave, (1919) and Rostow, (1960). Their views are generalizations gleaned (gathered) from examination of a number of different cases (histories) of developed economies. In the early stages of economic growth and development, public sector investment as a proportion of the total investment of the economy is found to be high since public capital formation is of particular importance at this stage. The public sector is therefore, seen to provide social infrastructure overhead such as roads, transportation systems, sanitation systems, law and order, health and education and other investments. It is argued that this public sector is necessary to increase productivity and stimulate the economy for take-off into the middle stages of economic and social development. Up to the middle stage of growth, the government continues to supply investment goods but this time public investment is complementary to the growth in private investment. During all the stages of development, market failure exist which can frustrate the push towards maturity hence the need for increase in government involvement (spending) in order to deal with this market failure.

Musgrave argued that, over the development period, as total investment as a proportion of GNP increases the relative share of public investment falls. This is because as the economy develops, a larger flow of saving becomes available; the capital stock in the private industry and agriculture must be built up. The basic stock of social overhead capital, similar to public utilities becomes a declining share of net capital formation (Musgrave, 1959).

Rostow (1960) argued that once the economy reaches the maturity stages, the mix of public expenditures will shift from expenditures on infrastructure to increasing expenditure on education, health and welfare services. In the mass consumption stage, income maintenance programmes, and policies designed to redistribute welfare, will grow significantly relative to other items of public expenditure and also relative to GNP.

Wagner| (1890) postulated the law of rising public expenditure by analyzing trends in the growth of public expenditure and the size of public sector in many countries of the world. Wagner’s law of public expenditure postulates that: (i) the extension of the functions of the state leads to increase in public expenditure on administration and regulation of the economy; (ii) the development of modern industrial society would give rise to increasing political pressure for social progress and calls for increasing allowance for social consideration in the conduct of industry; and (iii) the rise in public expenditure will be more than proportional increase in the national income and will thus result in a relative expansion of the public sector.

This article was extracted from a Project Research Work Topic


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