The Impact Of Fiscal Policy On The Nigeria Economy

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY. Fiscal Policy as a tool of macroeconomic management used by the government to control the economy via its revenue and expenditure portfolios is an important concept in economics. The revenue portfolio consists of components like tax revenue, trade surplus, and foreign aid, while the expenditure portfolio consists of recurrent and capital expenditure. In other words, fiscal policy is government’s deliberate actions towards spending money and for levying taxes aimed at influencing macro-economic variables so as to achieve desired macroeconomic objectives. The relationship between fiscal policy and economic growth has been discussed extensively in the literature using empirical analysis. According to Tanzi and Zee (1997) there are three cardinal indicators of fiscal policy—government expenditure, taxes, and deficits. There have been macroeconomic imbalances of varying degrees in Nigeria. Inappropriate public expenditure and revenue policies, large deficit in the public sector have been identified by experts as responsible for the macroeconomic disequilibrium (Ajisafe and Folorunso, 2002). Evidence reveals that there was a substantial increase in government spending, primary deficit, and debt in Nigeria between 1991 and 2005 (CBN Statistical Bulletin, 2012). This was as a result of the oil windfall between 1991 and 1992 which was followed by rapid growth in government spending with an average of about 21 percent of GDP during that period. However, as the oil market weakened in subsequent years, oil receipts were not adequate to meet increasing levels of demands and expenditures as being reinforced by political pressures. Although the democratically-elected
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government in 1999 adopted policies to restore fiscal discipline, but the rapid monetization of foreign exchange earnings between 2000 and 2004 and another era of oil windfall resulted in large increases in government spending. In 2005 alone, the government spending alone increased to 19 percent of GDP from 14 percent in 2000, extra-ordinary budgetary outlays not initially included in the budget increased (CBN Statistical Bulletin, 2012). The growth and development of the Nigerian economy has not been stable over the years. As a result, the country’s economy has witnessed so many shocks and disturbances both internally and externally over the decades. Internally, the unstable investment and consumption patterns as well as the improper implementation of public policies, changes in future expectations, and the accelerator are some of the factors responsible for it. Similarly, the external factors identified are wars, revolutions, population growth rates and migration, technological transfer and changes, as well as the openness of the country’s economy are some of the factors responsible. Fiscal policy is a major economic stabilization weapon that involves measures taken to regulate and control the volume, cost and availability, as well as direction of money in an economy to achieve some specified macroeconomic policy objective and to counteract undesirable trends in the Nigerian economy (Gbosi, 1998). Therefore, economic stabilization cannot be left to the market forces of demand and supply and as well, other instruments of stabilization such as monetary and exchange rate policies among others, are used to counteract the problems identified (Ndiyo and Udah, 2003). This may include either an increase or a decrease in taxes, government expenditures, as well as public debt which constitute the bedrock of fiscal policy but in reality, government policy requires a mixture of both fiscal and monetary policy instruments
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to stabilize an economy because none of these single instruments can cure all the problems in an economy (Ndiyo and Udah, 2003). In the light of these, this study will examine the impacts of fiscal policy on the GDP of Nigeria from the year 1986 to 2012. 1.2 STATEMENT OF THE RESEARCH PROBLEM. Over the years, there has been expansion in deficit financing and unstable fiscal policy, driven largely by oil prices between 1991 and 1992, and 2000 and 2002; revenue and expenditure have increased sharply. This, as typically seen, followed the reduction of expenditures as oil prices substantially decline, though at times with an interval after the decline in oil prices. The implications of such boom-burst fiscal policies include transmission of oil-price volatility to the stable provision of government services. This has added to the failure over the years of public spending and stagnancy in economic growth. The Nigerian economy started experiencing recession from early 1980s that led to a depression in the mid-1980s. This depression continued until early 1990s without recovering from it. As such, the government continually initiated policy measures that would tackle and overcome the dwindling economy. Drawing from the experience of the great depression, government policy measure to curb the depression was in the form of increased government spending (Nagayasu, 2003). According to Okunroumu (1993), the management of the Nigerian economy in order to achieve macroeconomic stability has been unproductive and negative, hence one cannot say the Nigerian economy is performing. This is evident in the adverse inflationary trend, government fiscal policies, rippling foreign exchange rates, the fall and rise of gross domestic product, unfavourable balance of payments as well as increasing unemployment rates which are
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all symptoms of growing macroeconomic instability. As such, the Nigerian economy is unable to function well in an environment where there is low capacity utilization attributed to shortage in foreign exchange as well as the volatile and unpredictable government policies in Nigeria (Isaksson, 2001). Studies have been conducted on the impact of fiscal policy on economic growth of Nigeria as seen in the literature review and it has been discovered that emphasis is not laid on the relative effectiveness of the fiscal policy components. Therefore, this research study will contribute to the stock of knowledge by considering the impact of fiscal policy on economic growth from 1986 to 2012 and the relative effectiveness of the fiscal policy instruments. Therefore, the following questions will be examined in this study: 1. What is the trend and pattern of government expenditure, government debt, tax revenue, and economic growth in the country? 2. What are the effects of these fiscal variables on the economic growth of Nigeria? 1.3 OBJECTIVES OF THE STUDY. The broad objective of this study is to examine the effect of fiscal policy on economic growth in Nigeria from1986 to 2012. However, this broad objective is subdivided into the following specific objectives: a) To analyze the trend and pattern of fiscal variables and economic growth in Nigeria from 1986 to 2012. b) To examine the effects of Government expenditures, Taxation, and Public debts on economic growth in Nigeria.
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1.4 JUSTIFICATION OF THE STUDY. The issue of economic growth among scholars has received recognized attention. According to Appah (2010), classical studies estimate that economic growth is largely linked to labour and capital as factors of production, but the emergence of endogenous growth theories has compelled specialists to go in search of other factors in explaining the growth phenomenon (Bogdanov, 2010). Therefore, taxation, government expenditure, and public debt are put up as instruments of fiscal policy which may determine changes in national income in a developing country like Nigeria. In Nigeria today, diverse plans have been and are being put in place to ensure sustainable economic growth and the achievement of other macroeconomic objectives, of these plans are: the 7-point agenda, the Vision 20:2020, the Millennium Development Goals and currently, the Transformation agenda of President Goodluck Ebele Jonathan. Substantial amounts have been expended on these plans to ensure the achievement of their aims and objectives, yet we see the economy lingering in growth at 5.4% in 2013 (World Bank Development Indicator).
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Source: Author’s Computation (E-Views) FIGURE 1: Trend of Real GDP and Fiscal Policy Variables (1986-2012) Also, according to the CBN statistical bulletin on public finance (as depicted by Figure 1), the tax revenue of the government grows every year and this should ideally contribute to the growth of the GDP since this growth implies an increase in the disposable income of the government. But the rise in government’s tax revenue has not really been as impactful as expected on the economic growth. Furthermore, we have the Federal Government engage in a number of external and domestic borrowing but despite the amount of resources it places at the government’s disposal, little is to be told on how this impacts the country’s economic growth. Therefore, this study seeks to establish the effectiveness of the fiscal policy in combating basic economic problems which when adequately dealt with, creates an enabling environment for economic agents to operate in, which then spirals into economic growth. It will also help in analyzing the relative effectiveness of fiscal policy components so as to identify the ones emphasis should be placed on if we are to record a significant growth in our GDP. It should however be noted that the relative
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effectiveness of a component does not render other component unimportant as all components are to be used concurrently to stimulate economic growth. 1.5 SCOPE OF THE STUDY This study focuses exclusively on fiscal policy and its relationship with gross domestic product (GDP) in Nigeria. The study appraises the impact of fiscal policy actions of the government for the period 1986 to 2012. This period of time is chosen due to the availability of data on the subject matter and the change in the economic structure of Nigeria in the year 1986. The study would make use of key variables such as tax, government debt, and government expenditure. 1.6 ORGANISATION OF THE STUDY This study is divided into six (6) chapters. Chapter One discloses information on the essence of the study, stating its objectives and the need for the study. Chapter two covers theoretical review, empirical review, and the theoretical framework. Chapter three unveils the research methodology, showing the model specification, estimation techniques, sources of data, and data description. Chapter Four would deal with the discussion of the history of fiscal policy in Nigeria. Chapter Five entails the analysis of the data and interpretation of the results of the analysis. Lastly, Chapter Six gives the summary of the whole research findings, the policy recommendations, and the conclusion.

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