EFFECT OF GOVERNMENT EXPENITURE ON ECONOMIC GROWTH
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The study is all about investigating the effects of public expenditure on economic growth. In chapter one, we will begin by describing and discussing our problem, drawing from a general perspective to an individual level. The foregoing will be considered in the background information. Next, we will define our problem, state our research questions as well as state the objectives of this study. Then depending on those objectives, we will state our hypothesis and give the significance of our study. To conclude the chapter, we will delimit our study area and organize our study. In chapter two, we will be concerned mainly with reviewing literature. In chapter three, we will denote the methods and procedures used in the data collection for these study. That would conclude our research proposal.
In chapter four and five, we will present the results of our data collection, as well as interpret them and explain their application visa vis our stated hypothesis. And then we will conclude by summarizing our work and recommending solutions to stated problems in chapter five.
1.1 Background Information.
Public expenditure influences economic growth if it affects capital formation or productivity growth. That impact may be direct or indirect. The direct one is structured by the effectiveness and efficiency with which spending is transformed into capital. The indirect impact of public expenditure on economic growth operates through people‘s productivity, consumption and labour supply reactions to changes in relative prices and income derived from public spending variations.
Right from the early books there has been a form of exchange of goods and services individually and among groups; birthright for food; gold and silver for economic goods in the Ancient Egypt civilization; treasures for Lebanon wood and so on were all recorded in the Bible as individual and public spending. Onuora (2014) describes public expenditure as government spending. This is not restricted to international trade, it includes such expenditure on the maintenance of the government itself and also for the society and the economy.
Public expenditure in Cameroon is usually divided into recurrent and capital expenditure. Suffice it to say that recurrent expenditure are payments for non-repayable transactions within one year while capital expenditure are payments for non-financial assets used in the production process for more than one year. Over the past decades, the public sector spending has been increasing in geometric terms through government various activities and interactions with its Ministries, Departments and Agencies. In july 2016, public spending stood at 464.10XAF Billionbut saw a drastic increase by july of 2019 to 521.7BXAF Billion (Trading Economies.com/Institut National de la Statistique). In the words of Taiwo and Abayomi (2011), the size and structure of public expenditure will determine the pattern and form of growth in output of the economy. In Cameroon, the recurrent expenditure of the government include expenses on administration, wages, salaries, interest on loan, maintenance etc, whereas expenses on capital project include roads, airports, education, telecommunication, electricity generation etc. Both capital and recurrent expenditure that constitute the public expenditure recorded a steady increase during the past decade and especially from the year of 2016 to date. The steady increase would be as a result of the political unrest that was witnessed within the aforementioned period.
The effect of government spending on economic growth is still an unresolved issue theoretically as well as empirically. Although the theoretical positions on the subject are quite diverse. Few empirical studies report positive and significant relation between government spending and economic growth while several others find significantly negative or no relation between an increase in government spending and growth in real output (Olapade&Olapade 2010).
1.2 Statement of the problem.
In the last decade, Cameroon’s economy has grown from million to billion FCFA and has increased on the table of trillions concerning her expenditure (Economie du Cameroon, 2016).
Despite the increase in the magnitude of expenditure over the years, the Cameroonian economy is still described as underdeveloped. This research is interested in investigating whether the rising public expenditure has a positive impact on growth of Cameroon’s economy. With the rising public expenditure, it will not be surprising if the economy experiences surplus or deficit balance of payment. Better still, if there were enough infrastructures to improve commerce within the system or social amenities to raise the welfare of average citizens of the economy, then the rising expenditure would be perceivable. All these are not there, if any, there are not efficient enough.And yet we always have a high estimated expenditure. It seems that rising government expenditure has not translated to meaningful growth and development of theCameroonian economy as Cameroon still ranks among the poorest in the world. In addition, many Cameroonians continue to wallow in abject poverty asabout a third of the population lives below the international poverty threshold of US$1.25 a day(Human Development Indices. UN. p. 35.)and coupled with this is collapse infrastructure (especially roads and power) that has resulted to economic hardship, low national productivity and decline economic capacity to sustain future growth. Therefore, as earlier mentioned, the aim of this study is to investigate Government Expenditure and its impact on the economic growth of Cameroon as well as suggest solutions in a subtler manner which will enable Cameroon achieve growth and subsequent emergence.
1.3 Research question.
This study constitutes two research questions which are: the main research question and the specific research question.
1.3.1) The main research question:
The main research question is:
To what extent does public spending influence economic growth?
1.3.2) The specific research questions:
The specific research questions are:
How does actual public debt servicing affect economic growth?
What is the effect of total public borrowing on economic growth?
To what extent does public spending in the form of inflation affect economic growth?
To what extent does public spending in the form of interest rate affect economic growth?
1.4 Objectives of the study.
This study constitutes two objectives which are: the main objective and the specific objective.
1.4.1) The main objective:
The core objective of this study is to determine the relationship between public expenditure and Economic growth.
1.4.2) The specific objectives:
The specific objectives are as follows:
To assess the level in which public expenditure on actual public debt services, affects economic growth.
To determine the extent to which public expenditure on total public borrowing, impacts on economic growth.
Evaluate the level in which public spending oninterest rate affects economic growth.
To determine the extent to which public spending on inflation rate affects economic growth.