ABSTRACT

Economic growth refers to increase in a country’s potential GDP, although this differs depending on how national product has been measured. Economic growth must be sustained for a developing economy to break the circle of poverty. Countries usually pursue fiscal policy to achieve accelerated economic growth. Tanzi (1994) observes that fiscal policy applies to the use of fiscal instruments (taxation and spending) to influence the working of the economic system in order to maximize economic welfare with the overriding objective of promoting long-term growth of the economy. Perhaps, the aspect of public finance that has received much attention in the literature, debate and empirical analysis is the economic effects of public expenditures. Many support a large public expenditure on the ground that it puts money into circulation, increased investment and employment and reduces tax averseness. However, public expenditure has some obvious economic consequences. For instance, when the state enters the market for factor inputs or labour, it stimulates unhealthy competition with the private sector firms for these same materials or labour services. As such, the government becomes the largest purchaser of goods and services because of its widespread activities, as hitherto evidenced in Nigeria. To this extent, Suleiman (2009) observes that the size of Government and its impact on economic growth has emerged as a major fiscal management issue facing economies in transition. He notes that previous research focused predominantly on size of Government in industrialized countries, but given the openness of most Developing Countries (DCs), trade dependency, the vulnerability to external shocks, and volatility of finances, the role and size of Government become germane to adjustment and stabilization programmes. Mitchell (2005) has argued that a large and growing government is not conducive to better economic performance.