Background
There are three fundamental roles played by today’s government as part of their intervention. These three roles are; allocation, distribution and regulation, and stabilization. The major reason for government intervention is because there exist some problems of socially unacceptable outcomes and the market inefficiency. Without its intervention, there would be a lot of negative externalities as firms and other household would only be interested in maximizing their gains without considering the impact of the externality they cause when improving their gains. Beside these roles, governments also has an important goal of improving the economic performance of the country. This is part of the most important macroeconomic goal of the government. Economic growth and development determines the employment level in an economy, the price stability, and also the level of poverty. Ebiringa and Yadirichukwu (2012) noted that there are some policy formulation and implementation implications that have been presented by several empirical researches. Enhancement of an economy’s growth as stated by Polard, Piffault and Shackman (2012) is that it’s only possible for nations with implementations of economic reforms and with good institution.
This study will be of utmost importance to governments and policy makers as by identifying the existing relationship between expenditure by the government and economic growth, a reference for shaping the country’s future for the policy maker will be provided; this will be by ensuring minimal waste of resources. It will also provide a basis on which the policy maker may examine the existing policy; this is by weighing the extent of its influence towards the desired results (Dalamagas, 2000). Salih (2012) on his research greatly emphasized on understanding of the relationship existing between economic growth and macroeconomic variables as important. He noted that this will help on the implementation of policies that will help in stabilizing the economy especially to the policy makers.
This research will mostly be based on literature review where theoretical and empirical evidence will be obtained since a huge collection of data in required which is necessary to carry out the analysis. Some of the data may be difficult to obtain and time consuming. Given time constraint, empirical results will be of great importance in confirming the hypothesis under test. However, some secondary data will be collected in order to derive some important characteristics of this economy. Primary data won’t be collected as it may be time consuming and very expensive. Regardless of the tests made, if the empirical results from different researches tend to give some similar results, then we shall confirm our hypothesis to be true or false.
Objectives of Research and Hypothesis
The current economic growth rate for Singapore is too low; the economy is moving to a negative economic growth which would interpret to a recession. Most economists and policy makers are interested in promoting the economic growth since the economy may end up in a situation that may be difficult to handle. Nearly all economies in the world have experiences a recession from one period to another. During a recession, the economies productivity falls, unemployment rises, the demand for goods and services fall creating a disincentive for production by economies. Considering the impacts recession have on world economies, no economy in the world would wait for an economy to move to a recession so as to take the necessary action. The government is expected to take effective actions as soon as the economy is observed to be shifting to that direction. This paper shall analyze the various policies implemented by the government of Singapore but it will broadly rely on the use of government spending policies.
Historical facts holds that a government is necessary in order for a country to prosper economically and there is no single economy that has been able to gain such achievement without a government. Anarchy reins in the absence of a government leading to less accumulation of wealth from productive activities. Economic growth means an expansion in a country’s GDP or its outings. Growth itself means an improvement in economic activities. Fiscal policy is the budgetary policy of the government on influencing the economic growth through changes in taxation and spending (fiscal allowances). There are many other macroeconomic policies that can be contrasted with fiscal policy. Others include the monetary policy tools aimed at stabilizing the economy by influencing the supply of money in the economy and interest rates. Since we have noted that taxation and spending are the two fiscal policy instruments, it’s worth noting the variables they stimulate on the economy. One is the economy’s aggregate demand and economic activity, second is the pattern of allocating resources and lastly the distribution of income.
This paper’s main aim is to establish whether increased government spending improves the growth of an economy. At the end of this paper, there will be a notion of whether the government should lower or raise its spending; and this again will depend on the economic situation. This paper will help in answering the following questions.
- Does increasing government spending result in a positive impact on economic growth?
- When do government employ the policy of raising its expenditure?
- Does the relationship between government spending and economic growth exist on the short or the long run?
The hypothesis of this study is to whether there is a significant relationship between government expenditure and economic growth.
Methodology
H0: Government expenditure have no influence on economic growth.
H1: Government expenditure influences economic growth
The research used both descriptive and econometric analysis. Only secondary data is used in this study as primary data may be difficult and expensive to collect. The data collected is on GDP, GDP growth rate and Government expenditure. Time series data is collected for the period 1983 to 2018. The data is on annual basis which makes it 36 observations. By using the Central Limit Theorem (CLT), it was assumed that the data was normally distributed around the mean (population) since the observations were beyond 30 (Kouritzin and Heunis, 1992). The dependent variable was GDP whereas the independent variable was government expenditure. Graphical representations are plotted using the excel program. Due to the inability to get most data that would be used on carrying out regression analysis, the research greatly relied on empirical results to confirm our hypothesis.
Not everyone understands the meaning of economic growth especially those that have not done economics. Some people are not aware of whether the economy is growing or not. Those who are mostly aware of such an occurrence are mostly investors, economists and the policy makers. Basically, economic growth may be defined as a long term improvement of a country’s productive potential. It represents the changes in the value of goods and services produced in an economy. This description encompasses all aspects of an economy; from taxes, profits, wages, etc. On the other hand, GDP is a measure used on the evaluation of a country’s performance. The definition of GDP provide by Abbas et al. (2011) is that it reflects the market value of all finished goods and services that a country produce within its borders over a given time period. It’s the main indicator used in evaluation of an economy’s health status. Countries greatly spend on education, defense and other social services. Government expenditure can thus be defined as expenses that it incurs upon spending on maintenance and cost on society and the economy (Chinweoke, Ray and paschal, 2014). Total government expenditure on an economy’s GDP exhibits a positive relationship. In the short run, government expenditure have been noted to impact production positively (Alshahrani and Alsadiq, 2014). The justification of long run relationship between government spending and GDP was provided by Attari and Javed (2013).
In Malaysia, economic growth is not mainly determined by government expenditure (Kogid, Mulok, Beatrice and Mansur, 2010). However, Alshahrami and Alsadiq (2014) noted that it exerts a positive short-run effect on production. Current spending is the most important area in which this effect was derived from. Another study by Dalamagas (2000), there is a positive correlation between GDP and government spending. There is also a positive relationship between the total spending that the government directs towards social and economic growth. On the other hand, total government expenditure was found to have a significant impact on GDP when directed towards education (Chude and Chude, 2013). Attari and Javed (2013) also noted the existence of a long-term relationship between GDP and government expenditure in Pakistan. There also exist unidirectional causality between government spending and the economy’s GDP. Butkiewicz and Yanikkaya (2008) pointed out that in developed countries, the negative growth effect resulting from total government spending is small.
Literature Review
Menyah & Wolde-Rufael (2013) found that in Ethiopia there is a positive statistically significant relationship between Government expenditure and GDP both in the short and long term. In Nigeria, government expenditure was found by Moses (2013) to have a positive significant influence on its GDP. Government expenditure directed towards social and general development exhibited a negative impact to GDP. However, Pham (2009) noted that government expenditure on GDP showed that there is a positive significant impact on GDP. Both indirect and direct government spending were noted by Hidayat, Suman and Kaluge (2014) to indicate a positive significant impact toward GDP.
There are different results from different government spending. Government expenditure towards education has no significant relationship with economic growth. On the other hand, expenditure on social security has a positive significant relationship to GDP. Every country have different effects of its governmental spending on GDP owing to governmental structure and the priorities of policy makers (Conte and Darrat, 1988). In a nutshell, the use of past empirical researches heightens the expectation that this study will give positive results for the relationship between government expenditure and GDP. It’s expected that increasing government expenditure will lower unemployment rate as more jobs will be created, and there will be a gain on firms’ profits. This will translate to an improvement on an economy’s GDP.
Keynesian theory is dated many years ago and it argues for the intervention of the government in order for an economy to achieve growth and stability. Keynes argued that increasing government expenditure injects power into the economy thus accelerating its growth (Mitchell, 2005). Keynes considered government expenditure to be an exogenous factor capable for promoting a nation’s economic growth if utilized as a policy instrument. Chude and Chude (2013) supported Keynes argument that government expenditure has a positive influence to economic growth. Government expenditure as a fiscal policy instrument according to Srinivasan (2013) is powerful for stability achievement in the short run and increased long term growth as in the Keynesian theory. This theory plays a significant development process and thus widely used by governments as their intervention. Keynesian view was such that fiscal policies can improve economic growth and its causality runs to the growth of the economy. Menyah and Wolde-Rufael (2013) argued that if causality from government expenditure runs to economic growth, then the adoption of government expenditure as an effective policy would be a wise decision.
The graph is a representation of the Growth rate of Singapore from the year 1983 to 2018. The graph indicates that Singapore has managed to report a positive growth rate for most of the years. There are only several instances where negative growth rate were recorded. From the graph it can also be deducted that this economy has strong policies to promote its growth rate since it can be observed that the period following a negative growth rate report is a strong positive growth rate. Just like most world economies, Singapore was also on a recession during the Global Financial Crises (GFC) that originated from the U.S but was felt all over the world. The graphical observation also indicate that there was a recovery on the following years. However, since the recovery, the economic growth rate for Singapore has been too low
Singapore’s general government total expenditure from 1990 to 2018 is on a rising trend. Even though the data intended to be used for the analysis was for the period 1983 – 2018, the data available for this component from the IMF starts from 1990. The spending in the 90s was too low and it has nearly tripled as at 2018. The spending had fallen as the economy approached the GFC, but later it went up as a result to government intervention.
This study has mostly relied on empirical results and theoretical review. But since it has been noted that there exist different results for different government spending depending on government structure and priorities of policy makers, it’s therefore advisable for every government to carry out the analysis again incorporating all the variables specific to that country. However, irrespective of the analysis carried out, it’s mostly expected that the results will be positive. For an economy to effectively promote growth by using this fiscal policy of government expenditure, it should also find ways to implement the policy of increasing expenditure not only when the economy is unhealthy, but also when it’s performing well.
One of the reasons why governments are not successful in promoting economic growth is that there is no proper criteria for choosing the areas that have greater potential for promoting growth. Most of government’s spending is on areas that brings less value to an economy. If governments could invest more on research and development, there would be an increment in productivity and the economy would grow significantly. Furthermore, we are aware that governments invest heavily on defense and other critical activities, but there is no measure that provides the optimum level for which this investment should be made. Thus, there may be a big probability that some governments may be overinvesting some of its resources on critical activities beyond what is enough. The challenge is determining the optimum level. If such a level would be determined, the distribution of resources to the most appropriate areas would be enabled. There are more areas where government could direct its spending and improve its economic performance.
Conclusions
Our H1 is confirmed and thus government expenditure influences economic growth. Government expenditure have been globally been accepted as one of the most important tool of controlling an economy. The study has confirmed that there is actually a positive relationship between government spending and GDP. This has been confirmed to be true both in the short and long run. The Keynesian theory was confirmed to be broadly use by governments in implementing fiscal policies as it explains the running of causality from government expenditure to economic growth. Economies have been confirmed to employ this fiscal policy especially on a period when the economy’s health is poor in order to induce some stimulus. It has been noted that in the short run it’s capable of positively stimulating productivity. However, irrespective of whether the positive impacts are on the short or on the long term, it’s eventually reflected on GDP growth.
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