Page 1 of 16

Advances in Social Sciences Research Journal – Vol. 9, No. 12

Publication Date: December 25, 2022

DOI:10.14738/assrj.912.13674. Ojelabi, S. A., Bulama, M., & Aruwa, S. A. S. (2022). Public Expenditure and Revenue Causality Pattern in Nigeria. Advances in Social

Sciences Research Journal, 9(12). 398-413.

Services for Science and Education – United Kingdom

Public Expenditure and Revenue Causality Pattern in Nigeria

Ojelabi, Sunday Adeyemi

Anan University, Kwall Plateau State, Nigeria

Mohammed Bulama

Anan University, Kwall Plateau State, Nigeria

Aruwa Suleiman A. S.

Anan University, Kwall Plateau State, Nigeria

ABSTRACT

Government expenditure remains an important instrument utilised in the process

of development. It plays a pivotal role in the functioning of any economy at almost

all stages of growth and development. The expenses incurred will provide the

necessary infrastructures such as health care, educational and social security

services etc. Funds spent on the provision of infrastructures are basically sourced

from taxes, fines, royalties, borrowings and grants from the states, national and

international governments. This study is on Nigeria public expenditure and

revenue for the period of 2010-2020, data were collected for eleven years and were

analyzed using statistical package E-view 10. The study revealed that fiscal

synchronization and tax and spend have positive and significant effects on

government expenditure. While spend-revenue and spend and tax were found to be

negative and insignificant on government expenditure in Nigeria. Based on the

findings, the study concluded that federal government revenue, tax and spend and

fiscal synchronization among the independent variables were statistically

significant at 5% level of significance in the short run. In the long run, spend- revenue and spend and tax also turned out to be statistically significant. The study

recommended that spend and tax of the country should cautiously be under watch

to ensure that government should first make expenditure decision then adjust the

tax policy and revenue in a way that it can go with the expenditure of the country.

As for spend-revenue,government should always keep her expenditure under

control by making sure that her expenditure change does not have any significant

change on the revenue.

Key words: Nigeria, Public Expenditure, Revenue, Causality Pattern

INTRODUCTION

Government expenditure remains an important instrument utilised in the process of

development. It plays a pivotal role in the functioning of any economy at almost all stages of

growth and development. Most developing and developed countries today use public

expenditure to improve income distribution, direct the allocation of resources in desired areas,

and influence the composition of national income (Assi et al., 2019; Vtyurina, 2020; World Bank,

2008). In developing countries for instance, the variation in government spending pattern is

Page 2 of 16

399

Ojelabi, S. A., Bulama, M., & Aruwa, S. A. S. (2022). Public Expenditure and Revenue Causality Pattern in Nigeria. Advances in Social Sciences

Research Journal, 9(12). 398-413.

URL: http://dx.doi.org/10.14738/assrj.912.13674

not only projected to guarantee stabilization but also to spur economic growth and expand

employment opportunities (World Bank, 2015).

Empirical evidences on the effect of government expenditure on output growth especially for

developing economies like Nigeria, present two opposing views, some suggesting that

government expenditure has negative effect on output growth (Abu & Abdullahi, 2010;

Devarajan et al, 1996; Folster & Henrekson, 2001; ̈ Gukat & Ogboru, 2017; Nurudeen & Usman,

2010; Saidu & Ibrahim, 2019; Segun & Adelowokan, 2015). In contrast, other studies

established that government expenditure promotes output growth and development of a

country (Aigbeyisi, 2013; Akanbi, 2014; Ahuja & Pandit, 2020; Awode & Akpa, 2018; Nyarko- Asomani, et al., 2019; Bose, Haque & Osborn, 2007; Idris & Bakar, 2017; Ihugba & Njoku, 2017;

Jibir & Aluthge, 2019a; Jibir & Babayo, 2015; Srinivasan, 2013; Olayungbo & Olayemi, 2018).

Public expenditure describes spending made by government on common needs of a country in

terms of pension, provision of infrastructure and lots of other economic issues. Until the 19th

century, public expenditure according to Adam Smith in his 'Wealth of Nations' (1776) should

be restricted to defense against foreign assault, protection of home peace and order, public

development work. Further functions in addition to these were seen as beyond the ability of

the state and expenses on them were treated as unjust and wasteful. However, there had been

a startling growth in the activities of state and this resulted in incomparable boost in public

spending.

In the 20th century, John Maynard Keynes argued the role of public expenditure in determining

levels of income and distribution in the economy. Keynes opined that government should

borrow money to spend on public works; and deficit spending would create jobs and enhance

purchasing power in the economy as trying to balance the government's budget during a

depression would make things worse, not better. Keynes's supposition laid the basis for the

field of macroeconomics which treats the economy as a whole and focuses on government's use

of fiscal policy spending, deficits and tax in overall economic management, since then

government expenditures have shown a rising trend.

Valentino (2001) pointed out that public expenditure is the value of goods and services bought

by the State and its articulations. He maintained that public expenditure performs such

functions as contribution to current effective demand, coordinating inclination on the economy,

which can be used for stabilization of fluctuations in business cycle and growth purposes. Public

expenditure also increases public endowment of goods for everybody which gives rise to

positive externalities to specific sectors, geographical areas and the nation at large through its

capital component. He stressed that democratically, public expenditure is an expression of

people's will and how they are managed through political parties and institutions,

characterized by a high degree of apathy and law dependency, which tempers the will of current

majority. The conflicting results can be attributed to differences in methodological approach,

scope, or dataset. Irrespective of which of the arguments may be more convincing, what

remains obvious is that there is need for further studies to go beyond their specifications and

methodologies. Thus, the focus of this study is to empirically investigate the impact of

government expenditure on economic growth in Nigeria using latest data and ARDL model with

structural break.

Page 3 of 16

400

Advances in Social Sciences Research Journal (ASSRJ) Vol. 9, Issue 12, December-2022

Services for Science and Education – United Kingdom

It is the craving of each country to achieve rapid economic growth and development. Funds are

needed to this effect as development entails spending. The expenses incurred will provide the

necessary infrastructures such as health care, educational and social security services etc.

Funds spent on the provision of infrastructures are basically sourced from taxes, fines,

royalties, borrowings and grants from the states, national and international governments. This

goes to justify the assertion that valid and significant monetary development and advancement

can't be accomplished without fiscal management.

According to the Keynesian perspective, government's association in the undertakings of a state

can trigger off economic growth by encouraging deficit financing and expenditure in the face of

a decrease in government revenue and an increase in government expenditure as supported by

Wager’s hypothesis of increasing expenditure of the state. Due to the intrigues surrounding this

subject matter, different scholars have come up with 4 alternative hypotheses to explain this

phenomenon and to provide an explanation for fiscal management but they have only

succeeded in creating variations as a means to the end (Kanu, et al., 2014). First is the revenue- spend hypothesis of Friedman (1978) which assumes that changes in state revenue lead to

changes in government expenditure by almost the same proportion, but in the same direction.

Second is the spend-income speculation which expects that adjustments of expenditure can

prompt changes in pay as evolved by Peacock and Wiseman (1979). As per this speculation,

emergency in an economy could prompt a removal impact i.e., the current expansion in

government spending prompts an increment in income. This kind of causality associates

income with consumption Meltzer.

Richard (1981) described yet another causality relationship – the fiscal synchronization

hypothesis which posits that government determines its expenditures and revenues

simultaneously based on the cost benefit analysis of the planned government programs. The

last but not the least is the institutional separation hypothesis that is of an opposite view with

the fiscal synchronization hypothesis. It posits that government determines its expenditures

and revenues independently from the foregoing analyses, it is evident that empirical studies on

the relationship between government revenues and expenditures appears to be inconsistent

with one another. This goes to underscore the importance of the variables- revenues and

expenditures in determining the public expenditure path and nature of causality relationship

between them.

Hypothesis of the Study

H01: There is no significant relationship between government revenue and public

expenditure in Nigeria from the period 2010 to 2020.

LITERATURE REVIEW

Conceptual Review

Public expenditure can be characterized as the expenditure incurred by government like the

federal, state, and local governments to satisfy the aggregate needs of individuals. It is

fundamentally made by the government of a country on citizen’s needs and items such as

pension, provision of infrastructure etc. Bhatia (2008) defines public expenditure as the

expenses which a government incurs for (i) its own maintenance, (ii) the society and the

economy, and (iii) helping other countries. Public expenditure refers broadly to expenditure

made by local, state, and national government agencies as distinct from those of private