EFFECT OF PUBLIC EXPENDITURE AND NATIONAL INCOME ACCOUNTING ON MACROECONOMIC PERFORMANCE IN NIGERIA, 1980-2007

ABSTRACT

This study analyzed the effect of public expenditure and national income accounting on macroeconomic performance in Nigeria for the period, 1980 – 2007. The study empirically verified the effect of public expenditure on growth of the economy. The study also examined the challenges of improving fiscal discipline, bringing resource allocation in line with development priorities and creating an enabling environment for public financial managers and protecting due process. Secondary data were the main source of data used for analysis. The hypotheses formulated were tested using simple and multiple regression techniques. Models were applied for predicting the impact of public expenditure on GDP, industrial capacity utilization, gross fixed capital formation and inflation. Reasonable measures of economic development (national income) and state activity (public expenditure) can through the employment of econometric estimation, isolate the effects of a few variables on public spending. There are in general six different formulations of Wagner’s hypothesis which have been employed to test the law on increasing state activities. This study has modified these models and developed new models called “Expanding Activity” models which can be used for the prediction of the impact of categories of public expenditure on gross domestic product (GDP). They also predict an increasing relative share for the public sector in the total economy as per capita income grows.  The findings showed that both recurrent and capital expenditure have significant positive impact on gross domestic product (size of the economy). This means that decreasing or cutting capital expenditure will create negative impact on the growth of the economy. The findings also proved that huge recurrent expenditures do suppress the impact of capital expenditure on the economy. Empirically, the findings have also shown that there is strong positive relationship between recurrent and capital expenditure and gross fixed capital formation in Nigeria. Similarly, findings showed that both public capital and recurrent expenditure have negative impact on inflation rate in Nigeria, which confirms inflation to be determined largely by both internal and external factors. Thus, openness of the economy is highly correlated with inflation. This means that there are so many other exogenous variables that impact positively on inflation rate in Nigeria. GDP per capita as aggregate of national income accounting and also an indicator of economic well-being provided good results on the nation’s economic health as shown by the impact of exchange rate, employment rate, and industrial capacity utilization and inflation rate. The researcher discovered that there are factors hindering the effectiveness of public expenditure as a fiscal policy tool, which include high level of leakages in public frunds, fiscal indiscipline, corruption, weak governance in public expenditure and poor budget implementation. It is recommended that Government needs to take urgent steps in full implementation of various reforms in public expenditure management, which include Medium-term Expenditure Frameworks, Fiscal Responsibility Act and Public Procurement Act. The accounting system in government should also reflect changing patterns in public expenditure management.