Impact of government expenditure on economic growth and development

Impact of government expenditure on economic growth and development

By: JB

Empirical evidence from other developing countries

In Nigeria, it was observed that capital expenditure, construction expenditure, and non-oil revenue have the potency of accentuating infrastructural development in the long-run but such is being hampered by external debt. The positive effect of recurrent expenditure on infrastructural development suggests that the bulk of the expenditure in Nigeria over the years is recurrent in nature. It can also be argued that a nation can also borrow for productive activities that would stimulate growth in the long-run, and the fact that external debt was found to have a damping effect on infrastructural development in Nigeria is a pointer that the country has been borrowing for non-productive and unviable ventures. These suggest the need to boost non-oil revenue, reduce recurrent, and channel external debt into productive infrastructural development.

In the case of Kenya, this country experienced rapid growth in government expenditure which caused concern among policymakers on the implication of such growth to the economy and the private sector in particular. Studies have noted that the allocation of financial resources through various policies is neither reflected in government priorities nor adequately promoted growth and development in the past. Over the three decades, government expenditure grew at a faster rate than GDP. On the basis of empirical results, some studies concluded that the composition of government expenditure matters for economic growth. In the long run, expenditure on economic affairs, defence, education, government investment, general administration and services and physical infrastructure have positive impacts on economic development.

The study found that the government should increase its investment in areas that are beneficial to the private sector and eschew from those that compete with or crowd it out. It should increase its expenditures on those items that enter private production functions as productive public inputs that enhance economic growth. Such productive government investment expenditure includes expenditure on buildings, plant, machinery and equipment all of which generate positive externalities that raise private investment and, thus, economic growth.

More resources should be allocated to areas of physical infrastructural development in order to stimulate economic growth as envisaged in the vision 2030. This is because additional expenditure on physical infrastructure in such areas as roads, railways, ports, communication, water and electricity contribute significantly to the economic growth by increasing the marginal productivity of inputs in the private and public sectors. Furthermore, high government expenditure on transportation and communication and energy create an enabling environment for business to thrive through reduced cost of production.

The government should increase its expenditure allocation to education and human capital development. This could be done through the provision of proper education facilities such as schools, colleges and universities, training and employing more teachers, ensuring access to education to all citizens, reduction of the cost burden to the parents/guardian and expanding education to the marginalised groups. This is because quality education creates positive externalities and increases the productive capacity that helps to raise the steady-state rate of economic growth.

The allocation of economic affairs should be increased by the government. This would be achieved by ensuring that the sectors that are productive in nature under this allocation are accorded the right attention while those that are non-productive in nature are rationalised. This is because economic affairs provide a direct provision of productive activities through its expenditure in areas of the form of infrastructure and education.

The government should reduce its size to an optimal one by adopting a policy on privatisation and expenditure downsizing and outsourcing to cut its expenditure and in turn ease public debt. This is because running a large public debt for a long period of time could have an adverse effect on economic growth since borrowing might crowd out private sector investment.

The private sector should partner with the government in the provision of certain services through Public-Private Partnership (PPP). This could be achieved through joint efforts in the provision of services such as infrastructure, energy, health and education.

Individuals, on the other hand, should be responsible citizens, hardworking and business-minded by engaging in entrepreneurial ventures. This should be done by people in all walks of life to ensure a cohesive and prosperous nation
The empirical findings presented for both countries are not much different for the case of Guyana. Particularly, the case of Nigeria where it was found that the need to boost non-oil revenue, reduce recurrent and channel external debt into productive infrastructural development. With the statistical data presented in previous weeks’ articles that show the growing deficits in the Consolidated Fund, the overdraft on government deposit accounts and together with the official stock of public debt combined replicates the framework of Nigeria. As such, policymakers in the next government ought to bring this under control and reduce those deficits and stock of public debt before it is spiralled into a debt crisis.


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