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THE CONCEPT OF CAPITAL EXPENDITURE NIGERIAN PERSPECTIVE

(A DRAWING OF LOCAL GOVERNMENT TREASURY FORM, SHOWING ESTIMATE OF CAPITAL EXPENDITURE)

PREPARED BY

KAYODE OLADIPUPO OLAYEMI


RESEACH ANALYST IBADAN, NIGERIA

FEBRUARY, 2012

INTRODUCTION
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Capital expenditure refers to the expenses, which the government incurs for its own maintenance as also for the society and the economy as a whole. Some government expenditures are in return for goods and services that account as part of current output. When the government buys the services of factors of production and uses them to produce goods and services in the capital sector of the economy, the factors are unavailable to produce private-sector output. capital expenditure can be ascribed to the With expanding State maintenance of the activities, it is becoming increasingly difficult to judge what portion of the government itself and what portion to the benefit of the society and the economy. THEORETICAL CONCEPT OF CAPITAL EXPENDITURE Though historically capital expenditure is found to be continuously increasing over time in almost every country, the area of capital expenditure remains relatively unexplored. As Lowell Harris says, the economists have generally concentrated their attention on the theory of taxation. The theory of capital expenditure has been more or less Of course, it may be confined to that of generalisations in terms of the effects of capital expenditure on employment and prices etc. the field of capital expenditure. Over one hundred years ago Adolph Wagner, a leading German economist of the day, formulated a law of expanding state expenditures which pointed to the growing importance of government activity and expenditure as an inevitable feature of a progressive State. According to Wagner, there are inherent tendencies for the activities of different layers of a government (such as central, State and local governments) to increase both intensively and extensively.
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pointed, that lately this deficiency is being removed by various studies in

There was a functional

relationship between the growth of an economy and the growth of the

government activities so that the governmental sector grows faster than that of the economy. In the original version, it is not clear whether (c) Wagner was referring to an increase in (a) absolute level of capital expenditure, (b) the ratio of government expenditure to GNP, proportion of capital sector to the total economy. Wagner offered three reasons why this development would come about with respect to the administrative and protective functions of the State. Wagner thought, because of the substitution of capital for private activity. In addition, new needs for capital regulative and protective activity would develop as a result of the increased complexity of legal relationships and communications that inevitably accompanied the greater division of labour with industrialization. In later writings, Wagner anticipated many subsequent authors by adding the increase in population density and urbanization (which he saw accompanying industrialization) as additional factors leading to increased capital expenditures on law and order and on economic regulation, in order to maintain the efficient performance of the economy in the face of the increased frictions of urban life. Secondly, Wagner also explicitly predicted a considerable relative expansion of cultural and welfare expenditures, especially with respect to execution and the redistribution of income. Though the reasons why he thought these activities would expand were left less than clear in his exposition, he appears to have assumed, in essence, that they constituted superior goods or luxuries. In other words, the income elasticity of demand for these capital services was greater than unity, so that more of them would be demanded as income rose. Finally, Wanger suggested that the inevitable changes in technology and the increasing scale of investment required in many activities would create an increasing number of large private monopolies whose effect would have to be offset, or the monopolies taken over, by the State in the interests of economic efficiency. Several comments must be made about this law and the reasoning underlying it. One important point is that these ideas were
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formulated in Germany in the later nineteenth century. Unsurprisingly, therefore the law and explicitly framed to refer only to states in which income was raising as a result of industrialization. The conditions under which one might expect the law to operate would therefore seem to be (1) rising per capita incomes (2) technological and institutional change of particular sort, and (3) at least implicitly democratization (in the senseof wider political participated) of the polity. A second point is that Wagner himself thought of the law as a proposition in the positive theory of capital expenditures which refers that body of economic and political analysis which attempts to understand and explain the observed pattern and level of government expenditures and the changes in those expenditures over time. In fact, however, his exposition of the law was inextricably entangled with his own normative assumptions as to the nature of the state and the state activity. Thus it should be surprising if the reasons Wagner offered in support of his general positive proposition do not stand up very well to critically analysis, for on the whole they were simply statements of what he thought ought to happen as the economy became industrialized. This criticism is especially relevant to his arguments on the increase in capital production and the rise in cultural and welfare expenditures. The latter in particular can only be understood it one realises that Wagner viewed the state as comprises of different units of government under Federal structures and each unit with its own tastes and preferences. Under a Federal system of administration, the capital sector role in economic management and development is the joint responsibilities of the various levels of government. A Federal structure ensures that capital goods and services which are consumed at the local levels are supplied by State and local authorities, while the central government concentrates on provision of services that are centrally consumed. Therefore in order to prevent conflicts and ensure efficient provision of services, the functional responsibilities and revenue sharing arrangements are always enshrined
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in a constitution protecting the inter-dependence and inter-governmental fiscal relationships of the tiers of government. The issue of efficiency is central to the impact and sustainability of inter-governmental fiscal relations. The ability of this relationship to stimulate growth and enhance the welfare of the population well depend on the efficiency of the fiscal system. At this point, it is more important to address the issue of relative efficiency among the various tiers of government rather than exploring the genesis of raising capital expenditures, as this would determine the ultimate impact of changing the allocational responsibilities of government. A change that results in moving responsibilities and expenditures powers from a relatively more efficient unit to a less efficient unit would certainly result in lowering of the impact of capital expenditure growth. Enough evidence abound to demonstrate the relative efficiency of the various tiers of government, in which the Wagners law tends to ignore. Despite the unpersuasive nature of some of his reasoning, as detailed nature of some vision of the rise in the state activity and the (assumed) accompanying rise in government expenditure as a proportion of national income has been apparently confirmed over the last century in every advanced country in the world. It is therefore important to look more closely at the relevant evidence level of this theory confirmation at the local government level.

TABLE 1.1 - LOCAL GOVERNMENT EXPENDITURES (=N= MILLION) 2003-2010 YEAR 2003 2004 RECURRENT EXPENDITURE 13,966.5 14,884.2 CAPITAL EXPENDITURE 5,508.8 4,082.9 TOTAL EXPENDITURE GDP AT CURRENT FACTOR COST (=N= 19475.3 18967.1 691606.8 911091.3

2005 2006 2007 2008 2009 2010

16,317.2 17,292.5 21,856.5 29,192.2 41,614.0 90,973.6

6,126.1 6,969.2 8,083.4 13,549.0 18,747.3 40241.4

22,443.3 24261.7 29939.9 42741.2 60361.3 131215.5

1960689.1 2,740458.5 2834998.7 2721510.7 3250670.0 3,614280.0

SOURCE:

C.B.N. ANNUAL REPORT AND STATISTICAL STATEMENT OF ACCOUNTS FOR THE YEAR ENDED 31ST DEC. 2010 AND STATISTICAL BULLETIN VOLUME 9, NO. 2 DEC. 2011.

ESTIMATE OF CAPITAL EXPENDITURE IN LOCAL GOVERNMENT TREASURE FORM


SECTO R HEAD NEW SUB HEAD SUB HEA D PROJE CT DESCR IPTION AND LOCAT ION Appr oved Esti mate 2009 Actual Expen. Reconcile d with Appropria tion Account From 1/1/20 09 to 30/06/ 2009 52 Comple ting of constru ction Furnishi ng of school of Engr and Engr. Technol ogy Comple ting of constru ction of Adm Buildin g Furnishi ng of library % of comp letio n Estima te 2010 Targ et Implemen tation schedule

SOCIA L SERVI CES

UNIVE RSITY OF TECHN OLOGY

00160 001

00160 001

(a) Constru ction of Schl. Of Engr. Tech. (b) Furnish ing of School Engr & Technol ogy c) Constru ction of Admin. Buildin g (d) Furnish ing of Admin buildin g

210.0 00

375.000

100, 000

167,500

18

00160 001

1005 00

15.983

20

00160 001

80,0 00

135,500

50

CONCLUSION
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Local governments are expected to perform a wide range of statutory functions, not just in the traditional areas of maintening law and order but also in the provision of social and the promotion and management of development. To do these effectively and efficiently, no doubt, requires huge amount of resources for which local governments have depended heavily on external sources. In order to raise funs sufficient to effectively address the myriad of development problems and challenges facing them, local governments have to demonstrate more imagination and exert greater efforts in generating a substantial portion of their revenue requirements through raising their investments in productive and viable economic activities. We therefore recommend the Federal Government should design appropriate legislation to make it mandatory on local governments to be able to finance a significance part of their recurrent expenditures, particularly on staff emoluments. This measure has an in-built capacity to make local governments bureaucracy not only efficient but also imaginative in their fiscal operations and spending habits.

REFERENCES

1. 2.

Adolph Wagner: Finanz wissens chaft 3rd edition, (1890) and also Grandlegung der politischen Oekonrmie 3rd edition, (1893). ABUCONS; Evaluation of Revenue and Responsibilities of the ThreeTiers of Government in Nigeria (1997), Final Report of Study Revenue Mobilization, Allocation and Fiscal Commission, Abuua. Borcherding, T.E. ed. (1977) Budget and Bureaucrats: The Sources of Government growth; Durham Duke University Press. Borcherding, T.E. ed. (1977a); One Hundred Years of Capital spending 1890-1970; in Borcherding ed. Chapter 2. Borcherding, T.E. ed. (1985); The Causes of Government expenditure Growth: A Survey of the US Experience; Journal of Capital Economics 28 (december). Borcherding, T.E. and Deacon R.T. (1972); The Demand for Services of Non-Federal Governments, American Economic Review 62 (December). Buchanan, J.M. (1949): The Pure Theory of Government Finance: A Suggested Approach. Journal of Political Economy, Vol. LVII (December). Buchanan, J.M. (1950) Federalism and Fiscal Equity; American Economic Review, Vol. XL (Sept.). Deacon R. (1978); A Demand Model for the Local Capital Sector; Review of Economics and Statistics 60 (May) Bhatia, H.L. (1976); Capital Finance; Vikas Publishing House PUT Ltd New Delhi 1987 edition.

3. 5. 6.

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