Capital Budget Implementation and Economic Growth: A VECM Approach

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Published on International Journal of Economics & Business
Publication Date: May 15, 2019

OGUNMAKIN, Adeduro Adesola & AFOLABI, Ademola Joshua
Department of Accounting, Ekiti State University
Ado-Ekiti, Nigeria

Journal Full Text PDF: Capital Budget Implementation and Nigerian Economic Growth: A VECM Approach.

The study examined the capital budget implementation and economic growth of Nigeria using vector error correction model approach. Specifically, the study analyzed the impact of administrative capital expenditure, economic services capital expenditure, social community services capital expenditure, transfer capital expenditure, on economic growth of Nigeria. Time series data were collected from the statistical bulletin of the Central Bank of Nigeria. Data collated were analyzed using vector error correction estimation, impulse response estimation, variance decomposition alongside post estimation test such as normality test, autocorrelation test and heteroscedasticity test. The study revealed that capital expenditure on administration has positive impact on gross domestic product as reflected by its one period lag estimate (β=1.842224, std err=9.06270). On the long run its impact on gross domestic product is negative and significant (β=-249.2560, std err=109.255)., with gross domestic product responding positively to its one standard deviation innovations only during the second and third period horizon after which the response remain negative. The impact of capital expenditure on economic service on gross domestic product is positive as reflected by its one period lag estimate (β=1.300115, std err=3.43153). The long run impact of capital expenditure on gross domestic product is negative and insignificant (β=-24.68280, std err=37.6859) with the response of gross domestic product to it one standard deviation innovation shock is negative for the first seven periods and though the percentage forecast error of gross domestic product explains increases over the time horizon. The study concluded that capital budget implementation in Nigeria has positive impact on economic growth; though over time such dynamic impact has not been significant. In the same vein capital budget implementation in the country has not significantly contributed to economic growth of the country especially when analyzed in the long run context. Observably the long run impact on capital expenditure had hither-to contributed relatively and significantly as compared to other subset of capital budget. It is therefore recommended that government should put in place effective budget implementation framework that can help foster rapid economic growth that can be sustained to attain the desired level of economic development in the country, it also recommended that government should allocate more percentage of its capital expenditure to transfer as this will have significant long run impact on the growth of the economy. Furthermore, it equally recommended that government should increase fraction of the total budget that goes to capital expenditure in the country to help maintain and sustain infrastructural development needed for improved productivity in the country.

Keywords: Capital Budget, Budget Implementation, Economic Growth, Capital Expenditure, VECM.

Capital budget is a fragment of the national budget, which shows the proportion of the national revenue allocated for the purpose of carrying out project with a useful life of more than a year. The crux of this study being ‘capital budget’ unlike the recurrent budget is initiated to provide funds to finance capital projects or assets. Ogujiuba and Ehigiamusoe (2014) stated that capital project includes the likes of construction of roads, bridges, hospitals, schools, prisons, public administrative buildings, highways, dams and irrigation systems; the purchase of machinery and equipment; and the supply of water, electricity, and transport, health and educational facilities. Either a recurrent or capital budget, a budget must fulfil the obligation for which it was initiated. Generally, for a budget (capital or recurrent) to perform its obligation effectively and efficiently, it must, however, possess adequate monitoring. For a public budget to effectively perform its obligations, it should be well designed, effectively and efficiently implemented, adequately monitored and ultimately, its performance should be evaluated. However, it must be stated herein that the beauty of a budget lies not in its formulation or initiation but in its implementation. The performance of a country’s budget heavily depends on whether it is effectively and efficiently implemented to meet the needs and aspirations of the people of the country (Faleti & Myrick 2012)
A well-implemented budget helps to translate government policies and programs into outcomes that have a direct, positive impact on people, such as the development of critical infrastructure (electricity, roads, water, hospitals, schools and so on), the provision of employment opportunities, the reduction of poverty and the supply of transport, health and educational facilities. Once the budget is approved, the Federal Ministry of Finance issues a warrant to the Accountant General of the Federation to release funds from the consolidated revenue in order to meet the budgeted services that are approved in the estimates. The warrant authorizes the MDAs to incur expenditures that are approved in the estimates (Akande, Falokun, Taiwo, Ogunwale & Adeoye, 2009). This is the stage where activities in the budget are executed and implemented. It is important to note that the implementation of the budget is the responsibility of the executive arm of the government. Economic growth is an essential ingredient for sustainable development. Economic growth brings about a better standard of living of the people and this most time is brought about by improvement in availability of infrastructures, access to food, health, housing, education. These sectors are very important in stimulating the economic activities as well as addressing the nation’s human development and thereby bringing about sustainable development (Boiyor & Willy, 2016). Tracing history would reveal that the implementation of the 2012 capital budget did not match expectations, as controversy concerning the implementation level of the 2012 Ap¬propriation Act continued between the executive and legislative arms of the government. While the execu¬tive claimed that 56% of the budget had been released and implemented by July 20, 2012, the National As¬sembly submitted that less than 30% of the budget was implemented by September 30, 2012.
The Central Bank of Nigeria (CBN) in their various bulletin issues has made it clear that administration, economic services, social community services and transfer are the major components of capital expenditure. The aforementioned will be used as proxy for capital expenditure in Nigeria. It becomes imperative to use this variables as it will serve as good indicators to reveal the actual component of capital expenditure that contribute negatively to economic growth or otherwise. Review of related empirical studies on this subject matter revealed that there are gaps that must be filled. Observably previous studies majorly analyzed the impact of aggregate capital budget expenditure on economic growth, thus restricting the possibility of tracking the influence of sectoral allocation of capital expenditure, which goes a long way in the determination of how capital budget implementation will engender economic growth in the country. In the same vein, previous researchers mostly focus on the static analysis of the connection between capital expenditure and economic growth without much attention given to the dynamic link between the two phenomena. Observably, previous studies only attest to short run and long run impact of capital expenditure on economic growth using static based techniques such as ordinary least regression analysis, co-integration analysis, error correction model analysis (ECM) without tracking the response of each of the variables to innovations shock on the other that is there is no focus on how economic growth respond in innovative shock in capital expenditure and vice versa. Given these gaps, this study set out to investigate the impact of capital budget implementation on economic growth using disaggregated capital expenditure to administration, economic services, social community services as well as transfer, using Vector Error Correction Model (VECM) dynamic estimation techniques.

2.1 Concept of Budget
Budget is the framework that provides the principle to arrive at the predetermined goal. The historical French word for budget is known as bougettee meaning, small bag: but it was first used in England to explain the white leather bag that held the seal of the medieval court of the exchequer. Therefore, the minister’s bag containing his proposals for financing government expenditure became his budget (Abuh & Aliyu, 2013). Budget is a plan that provides answers to three important questions in any society: first, what is the desired goal or goal to be achieved? Second, when is the goal to be achieved and thirdly, how is to be achieved? This is because any society without goal, any performance or production lacks directions, problems are unforeseen, and therefore result will be hard to interpret (Abuh & Aliyu, 2013). Planning involves objective and result oriented thinking well ahead, taken into consideration known and unknown variables factors. Budget is therefore a formal expression of an organizational plan. Shim (2005) sees budget as a formal expression of governmental plans, goals, and objectives which covers all aspects of the operations for a designated time period usually one year; it is a tool used in providing governmental target and directions. Walter (2009) considers budget as a financial statement, a monetary statement or quantitative course of action prepared and approved before a given period of time stating the policies to be pursed during the time and ways of achieving the target. Abdullahi (2011) describes budget in the following words: plan, forecast, standard, or even prediction depending on the nature of the society. Reviewing these various opinions, explanations and or descriptions, budget could therefore be summarized as aware and objective financial and related non-financial plans and guidelines of a society to achieve a specified level of activities in a specific period. On the government aspect, Abuh and Aliyu, (2013) sees budget as an aggregate policy instrument for organizing and articulating governmental goals and objectives often expressed in terms of programmes and projects usually accompanied by a financial plan and the instruments for not only attaining pre-determined goals but also for imposing checks and balances on the relationship between government and the governed. In line with this detailed explanation, Abdullahi (2007) describes government budget as a political and administrative instrument by which the executive and the legislative bodies endeavour to allocate scare resources among the various organs of government either at state or federal level. This descriptions rather than definitions of budgets are comprehensive enough to bring out exactly what government budget is all about.

2.2 Budget Implementation in Nigeria
It is indeed worrisome that practically every year, the im¬plementation of the capital budget in Nigeria has been the major source of friction between the Executive and the House of Representatives. In 2010 and 2011, the Executive was also accused of poorly implementing the capital budget. While further reflecting on the cause of the dispute, Onike (2013) opined that it is not sur¬prising that there was no serious contention regarding the recurrent budget, as the recurrent budget mainly involves the statutory budget allocation and general costs of administration/overhead. Critics, nonetheless, recognized that in the last 13 years or so, the federal budget has never been implemented satisfactorily. Fur¬thermore, a credible explanation for the disbursement of the billions of Naira that remained unspent at the end of each year has never been given. Boyo (2012) asserted that Nigerians may be mis¬guided, however, for expecting substantial improve¬ments in social welfare resulting for the appropriate and full disbursement of the capital budget. Indeed, the seemingly traditional pattern of less than 30% allocation for capital projects cannot truly support rapid infrastructural improvement for a country of over 160 million people. Furthermore, tangible prog¬ress is further precluded by the prevalent culture of impunity and corruption, which inevitably substan¬tially diminishes the already meager capital budget. Ayemokhia (2010) posited that Nigeria produces one of the best annual budgets in all of Sub-Saharan Africa because the nation is blessed with an intimidating ar¬ray of top-class financial experts in the Central Bank of Nigeria (CBN) and ministries in charge of Finance, Planning and Budget. However, these advantages have not helped drive Nigeria up the ladder of developing nations in the world

2.3 Economic Growth
Economic growth has long been considered an important goal of economic policy with a substantial body of research dedicated to explaining how this goal can be achieved. Economic growth has received much attention among scholars. According to Abata, Kehinde and Bolarinwa (2012), classical studies estimate that economic growth is largely linked to labor and capital as factors of production. The emergence of the endogenous growth theory has encouraged specialists to question the role of other factors in explaining the economic growth phenomenon (Bogdanov, 2010). Economic growth represents the expansion of a country’s potential GDP or output. For instance, if the social rate of return on investment exceeds the private return, then tax policies that encourage can raise the growth rate and levels of utility. Growth models that incorporate public services, the optimal tax policy lingers on the characteristic of services (Olopade & Olopade, 2010). Economic growth has provided insight into why state growth at different rates over time; and this influence government in her choice of tax rates and expenditure levels that will influence the growth rates Abata, et al (2012).

2.4 Empirical Review
Asghar, Hussain and Rehman (2012) examined the impact of govern¬ment spending on poverty reduction in various sectors of the economy in Pakistan. Time series annual data for the period from 1972 to 2008 were used to analyze the long-run impact of government spending on edu¬cation, health, and economic and community servic¬es. The results showed that government spending on education and law and order significantly contribute to poverty reduction, while government spending on budget deficit and economic and community services appeared to be responsible for increased poverty in Pakistan. The study recommended that the Govern¬ment of Pakistan allocate more resources to the edu¬cation and health sectors to foster the development of human capital.
Health and education are very important determi¬nants of poverty. Educated and healthy individuals may have more opportunities to obtain better employ¬ment, which increases their earnings and helps raise their standard of living. Education is considered to be the most important way to build human capital and eradicate poverty by enhancing productivity. Health is another major form of human capital. The results of various studies have shown that there is a positive rela¬tionship between government expenditures on health and poverty reduction, as spending on health increases individuals’ capabilities and thereby reduces poverty. Improvements in health lead to increased life expec¬tancy, which provides more opportunities for people to work and earn more income and eventually leads to poverty reduction. Government spending on both education and health are accordingly expected to have a negative impact on poverty (Asghar, et al 2012).
Humera (2015) study examine the impact of budget deficit on economic growth in Pakistan during the period from 1976-2007. Co integration technique, VAR Granger Causality test and vector error correction model is used. Economic growth was measured as growth in GDP. The technique of time series econometrics such as Granger Causality, Johansen co integration and error correction models has been used. Johansen co integration shows that all variables are co integrated and error correction term is also significant. However we have not found any significant impact of budget deficit on economic growth of Pakistan. The results showed that GDP cause investment and investment cause deficit. However budget deficit does not cause GDP growth. The results of this study also support Keynesian view about budget deficit. The findings also show that the budget deficit has a positive impact on the growth.