1.1
INTRODUCTION
Bhatia (2009) defined public expenditure
as those expenses that government incurs to maintain itself, the society and
the economy and in helping other countries. In the words of Njoku (2009),
public expenditure refers to all expenditures, both recurrent and capital
expenditures which the government incurs in the course of performing its
functions. Public expenditure is structured into two major categories which
includes recurrent expenditure and capital expenditure. Recurrent expenditure
are expenditures that occur regularly throughout the year while capital
expenditure refers to all the expenditures on capital projects such as
buildings, construction of roads, bridges and all permanent structures and
assets. The effects
of public expenditure include making for economic stabilization, stimulation of
production in the economy, creation of human skills through education and
training development of basic infrastructures and stimulation of economic
growth (Chijioke, 2014).
1.2
Statement of problem:
The Nigeria’s public expenditure has been increasing
over time. Available data shows that total recurrent expenditure increased from
N38.24 million in 1991 to N579.3 million in 2001 while total capital
expenditure increased from N28.34 million in 1991 to N918.55 million in 2001.
The available data also showed that
total recurrent expenditure further increased from N47799.99 million in 2017 to
N8121.64 million in 2020 while total
capital expenditure also rose from N1242.30 million in 2017 to N1614.89 million
in 2020 (Central Bank of Nigeria statistical bulletin 2021). Given that one of the main objectives of increases in government
expenditure is to stimulate investment so as to reduce unemployment rate, these
increases in both recurrent and capital expenditure is expected to stimulate
investment thereby reducing unemployment rate in Nigeria. Unfortunately,
increases in government expenditure has not been to reduce unemployment rate in
Nigeria as available statistics shows that unemployment rate increased from 3.1
percent in 1991 to 13.1 percent in 2001. It also continued to increase from
18.8 percent in 2017 to 30.33 percent in 2020 (World Development Indicators).
The study therefore seeks to investigate the impact of government expenditure
on unemployment rate in Nigeria.
1.3 Objectives of the study:
The broad objective
of the study was to investigate the impact of government expenditure on
unemployment rate in Nigeria. The specific objectives of the study were:
(i). To examine the
impact of capital expenditure on unemployment rate in Nigeria.
(ii). To investigate
the impact of recurrent expenditure on unemployment rate in Nigeria.
(iii).To examine the
impact of credit to private sector on unemployment rate in Nigeria.
1.4 Hypothesis of the
study:
In order to guide the
study, the following null hypotheses were formulated:
HO1:
Capital expenditure does not have any impact on unemployment rate in Nigeria.
HO2:
Recurrent expenditure does not have any impact on unemployment rate in Nigeria.
HO3:
Credit to private sector lending does not have any impact on unemployment rate
in Nigeria.
2.0 LITERATURE REVIEW
2.1 Theoretical
literature
2.1.1 The Wagner’s
Law:
the theory states that as per
capita income of an economy grows, the relative size of government expenditure
grows along with it. As the economy grows, there will be an increase in the
number of urban centres with the associated social vices such as crime which
require the intervention of the government to reduce such activities to the
barest minimum. Large urban centres also require internal security to maintain
law and order. These interventions by the government have cost leading to
increase in public expenditure in the economy.
2.1.2 Rostow-Musgrave model: Rostow and Musgrave also
carried out a research on the growth of public expenditure and conclude that at
early stages of economic development, the rate of growth of public expenditure
will be very high because government provides the basic infrastructural
facilities (social overhead) and most of these projects are capital intensive,
therefore the spending of the government will increase steadily. The investment
in education , health, roads, electricity, water supply are necessities that
can launch the economy from the traditional stage to the take off stage of
economic development making government to spend an increasing amount with time
in order to develop an egalitarian society.
2.1.3 Peacock-Wiseman’s model: they looked at increasing
public expenditure on the socio-political perspective. Government expenditure
will increase as income increases but because the leaders want re-election into
political offices so more infrastructure must be provided in order to convince
the electorate that their interest is being catered for by the people they
voted into power. However, the citizens of the country are less willing to pay
tax. The resistance of individuals to pay tax must be taken care of by the
government in the form of increased spending to avoid social crisis in the
economy. The resistance to pay tax by the people will make the state to have
low revenue hence the cost of providing more facilities is borne by the
government making government expenditure
to rise rapidly (Likita, 1999).
2.1.2 Conceptual
literature: Public expenditure is the expenses or cost that
government usually incurs for maintenance of itself as an institution, the
economy and the society (Likita,
1999). Public expenditure, according to Chinwoke 2014, is the expenses of the
government for its own maintenance and on the society and the economy as a
whole. Bhatia (2009) sees public expenditure as the expenses which a
government incurs for its own maintenance the society and the economy and
helping other countries. Anyanwu (1997) opined that public expenditure involves
all the expenses which the public sector incurs for its maintenance, for the
benefit of the economy, external bodies and for other countries. In the words
of Likita (1999), public expenditure is made up of the capital and recurrent
expenditure. Capital expenditure include
all investment in infrastructural projects, physical assets that are for
long term purposes, mainly to improve the living conditions of the citizens and
this includes housing, road construction, agriculture and water resources,
these are generally productive investments. The recurrent expenditures are
generally spending on service to maintain the existing facilities in the
economy including wages and salaries, maintenances of social services and
security.
There are principles that also govern the public expenditure decision.
They include: (i) canon of sanction which advocates that public fund can only
be used by proper authorization and for the purpose for which it approved. In a
democratic set up, it is the legislature that sanctions the expenditure on
demand by the executive authorities. The rationale is that such a restriction
would avoid unscrupulous and unwanted expenditure and it will observe as a check
against misappropriation of public funds.
(ii) canon of economy which suggests that necessary care must be taken
to avoid wasteful usage of public funds. The process of public expenditure
should not involve the use of resources more than what are just necessary.
(iii) canon of benefit which suggests that expenditure is to incurred only if
it is beneficial to the society. Expenditure is therefore judged by the benefit
that will accrue from it. (iv) canon of
surplus which emphasizes on the fact
that government should avoid deficit budgeting at least for the greater
part of the time, that is, persistent one. Government should be prudent and try
to meet its current expenditure from current revenue. Government should not
spend beyond its available resources into a debt (Chinweoke, 2014).
The effect of public expenditure
include: (a) it makes for economic stabilization. The economy is prone
to fluctuations in income, employment and prices from time to time. During
periods of depression, there is the need for a continuous injection of
additional purchasing power in the market through stimulation of investment and
consumption activities and through direct public investment which a part of public expenditure. Such a
public expenditure is meant to directly add to the effective demand in the
market and generate a high value multiplier effect in the economy. Again during
a boom, the need to curb extra demand arises. This may be done through the
reduction in public expenditure while maintaining the same or slightly raising
the level of taxation. (b) public expenditure in an economy accelerates the
pace and development of economic activities in the economy thus leading to the
attainment of higher levels of production and growth. Public expenditure can
add to the effective demand directly and thus, generate conditions favourable
for the market forces to push up production. Public expenditure aids private
investments and production through measures which reduce the cost of production
or remove particular bottle–necks creation and maintenance of social over heads
lead to an all-round reduction in the cost of production and improvement in
efficiency. (c) public expenditure stimulates research and development in an
economy. New, effective and cheap method of production can be found whereby
local resources are used in production and thus imports are reduced while
foreign exchange is saved. New products can also be invented which will help
the economy various productive activities. (d) public expenditure can be used
to create human skills through education and training. The federal government
through the education tax fund has developed infrastructures such as classroom
blocks, laboratories, libraries, computer centers in many tertiary institutions
public expenditure aids the development of basic infrastructures. This is for
the development of selected economic activities, for example, roads,
electricity, housing, public health. With these infrastructures in place, key
and basic industries, power, irrigation, mines are developed. Through these,
the economy is provided a firm basis for growth. (Chinweoke. 2014).
2.3
Empirical literature
Saraireh
(2020) estimated the effect of government spending on unemployment in Jordan
for the period 1990 to 2019. By using the ARDL co-integration test the study
found a negative and statistically significant long-run relationship between
government spending and unemployment rate in Jordan. An increase in government
spending per a percent of the GDP is found to reduce unemployment by about 0.43
percentage points in the same year. The study also revealed that in the short
run, government spending has positive and significant impact on unemployment.
Ebi and Ibe (2019) empirically examined the causal relationship
between government expenditure and unemployment from 1981 to 2017. Data used
was secondary and obtained from Central Bank of Nigeria (CBN) Statistical Bulletin
of various years and other reports. Unemployment rate was the dependent
variable. Government expenditure was decomposed into recurrent and capital
expenditure (independent variables). Unit root test indicates the variables
were integrated in order (I). Co-integration test results indicate a long-run
equilibrium relationship between unemployment rate (UEMR), recurrent
expenditure (REXR) and capital expenditure (CEXR). The study revealed that was a
negative and significant relationship between unemployment rate (UEMR) and
recurrent expenditure (REXR). The negative relationship agrees with a priori
expectations. On the other hand, relationship between unemployment rate (UNER)
and capital expenditure (CEXR) is positive and significant. However, the positive
relationship was contrary to the a priori expectation. This means that a change
in government expenditure will impact unemployment rate. Increased government
capital expenditure results in increased unemployment rate instead of a
decrease. The study showed that there was no causal relationship amongst all
the variables of interest. The study among others recommended that there should
be re-allocation of capital expenditure so as to enhance employment
opportunities for unemployed people.
Nwaeze
(2019) empirically investigated the direction and degree of relationship
between government spending and reduction in unemployment Secondary data for the period 2005 to 2019 sourced from the CBN Statistical
bulletin were used to experiment on the disaggregated impact of government
expenditure on administration, economic services, social community services and
transfers have on the rate of unemployment in Nigeria. The Error Correction
econometric model (ECM), the Johansen co-integration and the Granger causality
tests were the central analytical tools used in the study. The stationary test
showed that the variables were non-stationary at levels but all were stationary
at first difference. In the short-run, a positive relationship was observed.
The short-run coefficient of economic service and unemployment was observed to
be negative and the direction of causality was from government expenditure on
economic services. Expenditure on social community service observed negative
and statistically and observed a weak causal influence on unemployment.
Government expenditure on Administration was found to be positive and
statistically significant and the direction of causality was from government
expenditure on administrative expenses. However, there was no causal
relationship between government expenditure on transfers and unemployment. The
study recommends the need for policy makers to keep an eye on the trend and
effects of changes in expenditure on administration and economic services,
Egbulonu and Amadi (2016) examined the relationship between fiscal
policy and unemployment rate in Nigeria for the period 1970 to 2013. Data for
the study were sourced from the National Bureau of Statistics (NBS) and the
Central Bank of Nigeria (CBN) Statistical Bulletin (various editions), and
consists of Government Expenditure, Government Debt Stock (as proxy for
Government borrowing), Government Tax Revenue and Unemployment rate. The data
were tested for Stationarity using Augumented Dickey-Fuller (ADF) Unit Root
test. The test revealed that all the variables used in the study are stationary
at their first difference. The data were also subjected to co-integration test
in order to know whether using the variables together in the model would
produce reliable results. The test revealed that a long run relationship
between unemployment rate and fiscal policy tools used in the study which
satisfy the condition for fitting a parsimonious Error Correction Model (ECM)
to the data. The study found a negative relationship between fiscal policy
tools (government expenditure and government debt stock) and unemployment rate
in Nigeria while government tax revenue exhibited a positive relationship with
unemployment rate. The results also reveal that, there exist a long-run
equilibrium relationship between unemployment and fiscal policy in Nigeria. The
study recommended among others that government should increase her capital
expenditure mostly on infrastructure as this will help improve national income
and create more employment in the economy.
Selase (2019) investigated the impact of disaggregated public
expenditure on unemployment rate in selected African countries with panel data
spanning from 2000 to 2017. The data were majorly sourced from the World Bank
Indicator. The study employed Generalized Method of Moments (GMM) techniques
for empirical analysis. The findings of two-step system GMM showed that
expenditure on infrastructure and education reduce unemployment rate, while
expenditure on defense and health increase unemployment rate in the region. The
short-run elasticity estimate showed that infrastructure and education
expenditures reduce unemployment rate by 9% and 1.83%. A unit rise in defense
and health expenditure increase unemployment rate by 5.2% and 84.5%. The
long-run elasticity of infrastructure and education expenditure reduce
unemployment rate by 3.8% and 7.89 %, while the long-run defense and health
expenditure elasticity’s increase unemployment rate by 22.22% and 364.58% in
the selected African countries.
Therefore, the study recommended among others a drastic measure to
further improve the education sector through adequate investment in education
that will help in skills, development and training.
Onuoha and Agbede
(2019) examined the impact of disaggregated public expenditure on unemployment
rate in Angola, Benin, Botswana, Cameroun, Central African Republic, Chad,
Egypt, Equatorial Guinea, Ethiopia, Ghana, Kenya, Mauritius, Morocco, Namibia,
Nigeria, South Africa, Sudan, Tanzania, Togo and Tunisia with panel data
spanning from 2000 to 2017. The data were majorly sourced from the World Bank
Indicator. The study employed Generalized Method of Moments (GMM) techniques
for empirical analysis. The findings of two step system GMM showed that
expenditure on infrastructure and education reduce unemployment rate, while
expenditure on defense and health increase unemployment rate in the region. The
short-run elasticity estimate showed that infrastructure and education
expenditures reduce unemployment rate by 9% and 1.83%. A unit rise in defense and
health expenditure increase unemployment rate by 5.2% and 84.5%. The long-run
elasticities of infrastructure and education expenditure reduce unemployment
rate by 3.8% and 7.89%, while the long-run defense and health expenditure
elasticities increase unemployment rate by 22.22% and 364.58% in Angola, Benin,
Botswana, Cameroun, Central African Republic, Chad, Egypt, Equatorial Guinea,
Ethiopia, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa,
Sudan, Tanzania, Togo and Tunisia. The study recommended among others a drastic
measure to further improve the education sector through adequate investment in
education that will help in skills, development and training.
Rahmat
and Saeidi (2017) investigated the effect of government development
expenditures on unemployment rate in the Provinces. The
study period was from 1998 to 2013. In this period all provinces of the country
with segregation in two provinces were divided into large and small provinces
that were considered as a research population and statistics and relevant
information were obtained from sources of information and the Statistical
Center of Iran. In order to analysis data and the estimation of econometrics
patterns, Excel and Eviews econometric softwares were used. The results revealed that Government
development expenditures have a significant negative effect on the unemployment
rate in the province. Also, all logarithmic models on large and small provinces
for the government development expenditures showed that on large provinces a
negative coefficient 0.049 was obtained which was significant at 5% probability
level and in small provinces negative coefficient of 0.07 was obtained which
was significant at 5% probability level. So, the results relate to all
algorithms models in large and small provinces showed that that the effect of
government development expenditure in small provinces is more than the large
provinces.
3.0 Methodology Multiple regression
analysis was used in the study. Time series data spanning from 1991 to 2020 was
sourced from the Central Bank of Nigeria statistical bulletin and World Bank
Development Indicators. The data was analysed using E-views 10
3.1 Model
specification: In
order to investigate the impact of government expenditure on unemployment rate
in Nigeria, the model for this study was specified thus;
UNEMP = f (CAP, REC,
CRP) …. (1)
Where: UNEMP =
Unemployment rate
CAP = Capital
expenditure
REC = Recurrent expenditure
CRP = Credit to private sector
The model in its
econometric linear form can be written as: UNEMP = b0 + b1CAP
+ b2REC + b3CRP + U …… (2)
U = stochastic or
random error term
bo = constant
intercept
b1 – b3
= coefficients of associated variables
The theoretical
expectations about the signs of the coefficients of the parameters are as
follows: b1<0, b2<0, b3<0,
The
Augmented-Dickey Fuller (ADF) unit root test was employed to ensure data
stationarity and avoid the problem of spurious regression since the data for
the analysis is time series. Bound
test was applied to determine the existence of long run equilibrium
relationship among the variables
The estimated long run coefficient result in table 4 showed
that capital expenditure (CAP) and recurrent expenditure (REC) has a negative
relationship with unemployment rate (UNEMP). The result also showed that CAP is
statistically significant while REC is not statistically significant. The
result also showed that credit to private sector (CRP) has a positive and
significant impact on unemployment rate (UNEMP). A unit increase in capital
expenditure will bring about 0.006172 units fall in unemployment rate while a
unit increase in recurrent expenditure will bring about 0.001214 units
reduction in unemployment rate. The result also showed that a unit increase in credit
to private sector (CRP) will lead to 0.0000653 units increase in unemployment
rate.
4.1 Summary:
The study examined the impact of government
expenditure on unemployment rate in
Nigeria for the period 1991–2020.The estimated short run coefficient result
revealed that CAP has a negative and significant impact on unemployment rate while REC, one
period lag of REC and CRP have a positive and significant impact on unemployment rate. The result also showed
that one period lag of CRP and three periods lag of CRP have a negative and
significant impact on unemployment rate while two periods lag of CRP has a
positive and significant impact on unemployment rate. The speed of adjustment
for correcting disequilibrium from the previous year to equilibrium in current
year is 37.23 percent as shown by the coefficient of ECM. The estimated long
run coefficient showed that capital expenditure (CAP) and recurrent expenditure
(REC) has a negative relationship with unemployment rate (UNEMP). The result
also showed that CAP is statistically significant while REC is not
statistically significant. The result also showed that credit to private sector
(CRP) has a positive and significant impact on unemployment rate (UNEMP).
4.2 Recommendations:
Both the short run and long run result of the study showed that there is a negative
and significant relationship between capital expenditure and unemployment rate
in Nigeria but a negative and insignificant relationship between recurrent
expenditure and unemployment rate though positive and significant relationship
between recurrent expenditure and unemployment rate in the short run. Based on
these findings, the study recommends proper management of government
expenditure by ensuring that capital expenditures are channeled towards productive
sectors and ensure that such
that there is transparency in the management of such fund.
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