EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The Nigeria economy has been plagued with several challenges

over the years. Researchers have identified some of these challenges as; Gross mismanagement/misappropriate of public funds (Okemini and Urata,2008). Corruption and ineffective economic policies (Gbosi, 2007); jack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policies (Onoh,2007); inappropriate and ineffective policies (Anyanwu,2007). Imprudent public spending and weak sectoral linkages and other socioeconomic maladies constitute the bane of rapid economic growth and development (Amadi et al, 2006). It is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment.

Fiscal policy as a macroeconomic tool became necessary in Nigeria given the enlargement in the size and growth of the public sector. There has been a tremendous growth in the public sector in Nigeria over the years. This can be traced to several factors among which includes the need for reconstruction after me civil war which was facilitated by the enhanced that accrued from the oil boom of 1970s; the militarization of governance and the oil glut of 1980s. Following the fall in the international price of oil in the 1980s, government revenue dwindled and poverty revenue widespread and pervasive. It became imperative that government intervention is needed to correct the perceived imbalance resulting from the oil shock. In view of this, several fiscal measures were introduced during this period including Structural Adjustment Programme (SAP).  The broad objective of SAP was to totally restructure the productive base of the  economy with particular references to agricultural sector and import substitution industries with a view to preserving  the nation’s foreign exchange.  This being the case however, the nation’s economic problems remained intractable even with SAP.

 The problems were the continued depreciation  of naira in the foreign exchange market, stow growths, high at volatile  interest rates, and near paralysis of the real sector, increasing fiscal deficits, inflation, increasing unemployment and reduction me standard of living if most Nigeria   The end result was that SAP  failed to achieve its intended objectives and was subsequently suspended in 1993.

In spite of many and frequently changing, fiscal, monetary and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development (Ogbole, 2010). It is against this background that this researcher wants to systematically investigate and empirically test the effect of fiscal policy on economic growth in Nigeria.

1.1      Problem Statement

This study assesses the effect of fiscal policy on economic growth in Nigeria. The choice of this topic is induced by the poverty situation in the country. The country has a great potential for economic advancement based on its vast material and human resources. Yet, these are not utilized to advance the course of welfare in the society. Fiscal policy is still widely organized as a potent toot for enhancing growth, redistributing income and reducing poverty (though the Nigeria experience is tending to suggest otherwise).  These are the problem statement of the research:

1.  What is the impact of public expenditure on economic growth,

       in Nigeria?

  2.   What is the impact of government revenue on economic growth in nigeria?

These are crucial questions to ask given the renewed interest of the current democratic dispensation in achieving economic growth and given the effort of the government to meet up with the millennium development goals and vision 2010.

1.2 Objectives of the Study

The broad objective of this study is to systematically examine the effect of fiscal policy on economic growth in Nigeria.

The specific objectives are

1.            To determine the impact of public expenditure on economic

growth, in Nigeria.

2.             To determine the impact of government revenue on economic growth in nigeria

1.3   Statement of Hypothesis

The working hypothesis of this study is to investigate into the effect of fiscal policy on economic growth in Nigeria.  The specific objectives are:

1.  To determine the impact of public expenditure on economic growth,

  2. To determine the impact of government revenue on poverty reducing.

1.4   Statement of Hypothesis

The working hypothesis of this study is to investigate into the effect of fiscal policy on economic growth in Nigeria. To this end, the hypothesis  is stated thus:

H₀:   -       government public expenditure has no effect on economic   growth in Nigeria.

H₀:   -       government revenue has no effect on economic growth in Nigeria.

1.5   significance of the Study

  Policy is a vital instrument in the macro-economic management country. As a result, the stability or otherwise of any economy depends on the efficient management of fiscal policy in the economy, In view of this, this  research work is designed to serve the interest of policy makers and government alike in policy formulation and implementation. Researchers and students of economics will equally find the work useful.

1.6 Scope and Limitation of The Study

The primary focus of this study is on the Nigerian economy. In conducting this research, GDP is used as proxy for economic growth while government revenue (comprising oil revenue and non oil revenue), government expenditure (comprising capital and recurrent expenditure), public dept (comprising domestic and external debt)1 and public transfer are used as fiscal policy variables. The study spans the period of 40 years covering from 1970 to 2010. Data is sourced from the Central Bank of Nigeria (CBN) statistical bulletin Vol.15 2007.

1.7   Definition Of Terms

1.7.1   Fiscal Policy

Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. Fiscal policy also involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and  growth of aggregate demand, output and employment.  Anyanwu (1999) defined fiscal policy as that part of government policy concerning the raising of revenue through taxation and other means and deciding on the level and pattern of expenditure for the purpose of influencing economic activities or attaining some desirable macroeconomic goals. Furthermore, he defined it as the policy of the government with respect to the level of government expenditure (on purchases of goods and services, and on transfers), the tax structure, and debt operations. That is, government areas on three major macro-economic activities; such as:

(a)    Spending on goods and services, and transfer;

(b)    Taxing, and;

(c)    Borrowing.

Jhingan (2OC’5 defined fiscal policy as government actions affecting its receipts and expenditures which are ordinarily taken as measured by the government’s  net receipts its surplus or deficit.

1.1.2 Economic Growth

Economic growth is defined as the increase overtime of an economy’s capacity to produce. The amount of goods and services needed to improve the wellbeing of the citizen in increasing numbers and diversity. It is the steady process of by which the production capacity of the economy is increased overtime to bring about rising levels of national income  (Todaro,1977). It is conventionally measured as the percent rate of increase in real GDP. Growth is usually calculated in real terms, i.e. Inflation adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. Thus, in discussing growth, it is imperative to examine the behavior of the population overtime. This is because economic growth becomes a useful concept if it leads to an improvement in well being of society overtime and this can happen only if the rate of population lags behind that of economic growth overtime. Thus, growth is a steady process of increasing the productive capacity of the economy and hence of increasing national income being characterized by ç; rates of increase of per capita output and total factor productivity,  labor productivity.

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