CHAPTER ONE
INTRODUCTION
1.1                        Background to the Study Government expenditure has served as a common means of using fiscal policy in many countries to achieve economic growth, expansion, development and transformation. Musgrave (1989) described public expenditure as a tool used to achieve three distinct objectives which include allocation, distributive and stabilization purpose. Hence the public expenditure is a comprehensive set of expenditure policy measures designed to achieve certain set up macro-economic goals including maintaining equilibrium between the aggregate demand and aggregate supply (IMF, 1993). There are many irregularities in the country leading to public outcry and there was increasing fraud in government activities resulting from an inappropriate public finance planning and implementation mostly in Nigeria. Banks and businesses were collapsing which lead to crises in the external and internal activity of the economy. Some of the causes this are corruption, indiscipline, lack of accountability which is the hallmark of the Nigerian society resulting to decrease in growth and development. The inter-relationship effect is low productivity, avoidable idle time leading to loss of trade with advanced countries that have better finished products. The consequential effect is deficit in balance of trade and payment. Some scholars have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs. High levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand. Thus, government expenditure, even of a recurrent nature, can contribute positively to economic growth. On the other hand, endogenous growth models such as Barro (1990), predict that only those productive government expenditures will positively affect the long run growth rate. In the neoclassical growth model of Solow (1956), productive government expenditure may affect the incentive to invest in human or physical capital, but in the long-run this affects only the equilibrium factor ratios, not the growth rate, although in general there will be transitional growth effects. Others have argued that increase in government expenditures may not have its intended salutary effect in developing countries, given their high and often unstable levels of public debt. The government consumption crowd-out private investments, dampens economic stimulus in short run and reduces capital accumulation in the long run. Vedder and Gallaway(1998) argued that as government expenditures grow incessantly, the law of diminishing returns begins operating and beyond some point further increase in government expenditures contributes to economic stagnation and decline. For decades public expenditure has been expanding in Nigeria as in other countries of the world. Akpan (2005) opines that the observed growth in public spending appears to apply to most countries regardless of their level of economic development. This necessitates the need to determine whether the behaviour of Nigeria public expenditure and the economy can be hinged on wagner’s (1883) law of ever-increasing state activity or the Keynesian (1936) theory and Friedman (1979) or peacock and Wiseman’s (1979) hypothesis. Consequently, this study dwells primarily on the expenditure side of public finance and seeks to examine the relationship between government expenditure and economic growth in Nigeria for the period 1985 to 2016 employing the econometric methodology after examining the fiscal factors in the link between public expenditure and economic growth.