IMPACT OF TAX ON GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA
This study examines the impact of tax on government expenditure and economy growth in Nigeria. In the light of the empirical review and other discussions, a number of questions arose as to whether there is significant relationship between total tax revenue and government investment expenditure, there is significant relationship between total tax revenue and government consumption expenditure as well as to determine if there is significant relationship between total tax revenue and government health expenditure. Using the Ordinary Least Square (OLS) regression technique with the aid of computer software, for a 1980 – 2010 time series data, the empirical findings revealed among other things, that there is a significant relationship between total tax revenue and government investment expenditure. The study recommends that the government should ensure that government should encourage the education and health sectors through increase funding, as well as ensuring that the resources are properly managed and used for the development of education and health services.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Research Problem
Objectives of the Study
Scope of the Study
Significance of the Study
Limitations of the Study
CHAPTER TWO: LITERATURE REVIEW
Tax Policy Reforms in Nigeria
Problems of Tax Administration in Nigeria
Impact of Tax Administration on Government Revenue in a Developing
Prior Empirical Review
Theories of Government Expenditure
Public Expenditure Policies in Nigeria
An Overview of Government Expenditure
Determinants of Government Expenditure
Effect of Economic Growth on Taxation Revenue
CHAPTER THREE: RESEARCH METHODOLOGY
The Research Design
Sources of Data Collection
The Population of the Study
Method of Data Analysis
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
Test of Hypotheses
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND TO THE STUDY
For development and growth of any society, the provision of basic infrastructure is quite necessary. This perhaps explains why the government shows great concern for a medium through which fund can be made available to achieve their set goals for the society (Fagbemi, Uadiale, and Noah, 2010). Government needs money (fund) to be able to execute its social obligations to the public. These social obligations include but are not limited to the provision of infrastructure and social services.
According to Murkur (2001), meeting the needs of the society call for huge funds which an individual or society could not contribute alone. It becomes the responsibility of government to source for the funds to enable her provide these basic amenities to the citizenry who are the beneficiaries. One of the medium through which fund is derived is through taxation. Therefore, the citizens are expected to discharge their civic responsibility by paying their taxes as these contribute to the development and administration of the society at large.
Taxation as defined by Ogundele (1999) is the process or machinery by which communities or groups of persons are made to contribute in some agreed quantum and method for the purpose of the administration and development of the society. It can be inferred that the payment of tax will in turn be beneficial to the entire citizenry. This view is also similar to the definition of Soyode and Kajola (2006) who defined tax as a compulsory exaction of money by a public authority for public purposes.
Nightingale (1997) described tax as a compulsory contribution imposed by the government. These various authors concluded that it is possible for tax payers not to receive anything identifiable for their contribution but that they have the benefit of living in a relatively educated, healthy and safe society.
However, the infrastructure which tax payers are supposed to enjoy is in a deplorable condition (Fafunwa, 2005), educational system in disarray (Obaji, 2005) and the health system is in a worrisome condition (Lambo, 2005). Hence, there has been a clamour by leaders that a huge some of the resources which they are to use find their way out of the economy through tax evasion.
Over the past decades, the public sector spending has been increasing in geometric term through government various activities and interactions with its Ministries, Departments and Agencies (MDA’s), (Niloy et al. 2003). Although, the general view is that public expenditure either recurrent or capital expenditure, notably on social and economic infrastructure can be growth-enhancing although the financing of such expenditure to provide essential infrastructural facilities-including transport, electricity, telecommunications, water and sanitation, waste disposal, education and health-can be growth-retarding (for example, the negative effect associated with taxation and excessive debt). The size and structure of public expenditure will determine the pattern and form of growth in output of the economy (Taiwo, and Abayomi, 2011).
The structure of Nigerian public expenditure can broadly be categorized into capital and recurrent expenditure. The recurrent expenditure are government expenses on administration such as wages, salaries, interest on loans, maintenance etc., whereas expenses on capital projects like roads, airports, education, telecommunication, electricity generation etc., are referred to as capital expenditure. One of the main purposes of government spending is to provide infrastructural facilities (Taiwo and Abayomi, 2011).
Nurudeen and Usman (2010), added that, in Nigeria, government expenditure has continued to rise due to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods like roads, communication, power, education and health. Besides, there is increasing need to provide both internal and external security for the people and the nation. Available statistics, according to Nurudeen and Usman (2010) show that total government expenditure (capital and recurrent) and its components have continued to rise in the last three decades. For instance, government total recurrent expenditure increased from N3, 819.20 million in 1977 to N4, 805.20 million in 1980 and further to N36, 219.60 million in 1990. Recurrent expenditure was N461, 600.00 million and N1, 589,270.00 million in 2000 and 2007, respectively. In the same manner, composition of government recurrent expenditure shows that expenditure on defense, internal security, education, health, agriculture, construction, and transport and communication increased during the period under review. Moreover, government capital expenditure rose from N5,004.60 million in 1977 to N10, 163.40 million in 1980 and further to N24,048.60 million in 1990. The value of capital expenditure stood at N239, 450.90 million and N759, 323.00 million in 2000 and 2007, respectively. Furthermore, the various components of capital expenditure (that is, defense, agriculture, transport and communication, education and health) also show a rising trend between 1977 and 2007.
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, the conventional wisdom is that a large government spending is a source of economic instability or stagnation. Empirical research, however, does not conclusively support the conventional wisdom. A few 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.
In the light of the above, this study intends to examine the impact of tax on government expenditure in Nigeria.
STATEMENT OF THE RESEARCH PROBLEM
In the last decade, Nigerian economy has metamorphosed from the level of million naira to billion naira and postulating to trillion naira on the expenditure side of the budget. This will not be surprising if the economy is experiencing surplus or equilibrium on the records of balance of payment. Better still, if there are infrastructures to improve commerce with the system or social amenities to raise the welfare of average citizen of the economy. All these are not there, yet we always have a very high estimated expenditure. This indicates that something is definitely wrong either with the way government expands budget or with the ways and manners it has always been computed.
Unfortunately, the rising government expenditure has not translated to meaningful growth and development, as Nigeria ranks among the poorest countries in the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than US$2 per day. Couple with this, is dilapidated infrastructure (especially roads and power supply) that has led to the collapse of many industries, including high level of unemployment (Nurudeen and Usman, 2010).
Moreover, macroeconomic indicators like balance of payments, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of years.
Against this backdrop, the following research questions are raised:
Is there significant relationship between total tax revenue and government investment expenditure?
Is there significant relationship between total tax revenue and government consumption expenditure?
Is there significant relationship between total tax revenue and government health expenditure?
OBJECTIVES OF THE STUDY
The broad objective of the study is to examine the impact of tax and government expenditure in Nigeria.
The specific objectives are:
To determine if there is significant relationship between total tax revenue and government investment expenditure.
To examine if there is significant relationship between total tax revenue and government consumption expenditure.
To verify if there is significant relationship between total tax revenue and government health expenditure.
The following hypotheses will be tested in the course of this study.
Ho: There is no significant relationship between total tax revenue and government investment expenditure.
H1: There is a significant relationship between total tax revenue and government investment expenditure.
Ho: There is no significant relationship between total tax revenue and government consumption expenditure.
H1: There is a significant relationship between total tax revenue and federal government consumption expenditure.
Ho: There is no significant relationship between total tax revenue and government health expenditure.
H1: There is a significant relationship between total tax revenue and government health expenditure.
SCOPE OF THE STUDY
This study is undertaken to examine the impact of tax on government expenditure.
In term of time series, a period of thirty years is used (i.e. 1980 to 2010) as means of assessing the impact of tax on government expenditure. It is hoped that this will help to achieve the stated objective of the study.
SIGNIFICANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the relationship between tax revenue and government expenditure. The study would also facilitate the examination of the effects of tax revenue and government expenditure and thus boosting the empirical evidence from Nigeria.
Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies and policy simulation with respect to the selected variables examined in the study.
The result of the study would be of benefits to education analysts, and institutions in examining the effectiveness of tax on government expenditure. It will also be useful in stimulating public discourse given the dearth of empirical researchers in this areas from emerging economies like Nigeria.
Finally, it would also add to the available literature on the areas of study while also providing a platform for other researchers who may want to further this study.
LIMITATIONS OF THE STUDY
The weakness of this study lies on the vastness of the topic and the amount of time required obtaining the relevant data and information necessary for the research coupled with the paucity of statistical data in Nigeria and where data are available, the disjointed nature of data. The researcher anticipates some challenges in gathering necessary statistical data spanning over thirty (30) years for the purpose of this research. Also there is the tendency of existence of serial correlation in the measurement of economic relationship due to the use of time series data.
Fagbemi, T.O., Uadiale, O.M. and Noah, A.O. (2010), The Ethics of Tax Evasion: Perceptual Evidence from Nigeria, European journal of social sciences, 17(3): 360-371.
Fafunwa, A.B., 2005. “Collapse in Educational System: Our Collective Failure”, The Guardian, October: 30
Lambo, E., 2005. “Minister decries State of Health System”. The Guardian, October:13
Soyode, L. and S.O. Kajola, 2006. “Taxation: Principles and Practice in Nigeria”: 1st Edition: Silicon, Ibadan
Ogundele, A.E., 1999. “Elements of Taxation”. 1st Edition: Libri Service, Lagos.
Nightingale, K., 1997. “Taxation: Theory and Practice”. Pitman. United Kingdom
Niloy, B., Emranul. M. H and Denise., R.O (2003): Public Expenditure and Economic Growth: A Disaggregated Analysis for Developing Countries, JEL, Publication.
Nurudeen, A. and Usman, A. (2010), Government Expenditure And Economic Growth In Nigeria, 1970-2008: A Disaggregated Analysis, Business and Economics Journal, 1(10):1-11
Taiwo, M. and Abayomi, T. (2011), Government Expenditure and Economic Development: Empirical Evidence from Nigeria, European Journal of Business and Management, 3(9): 18 – 28.
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