CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Fiscal policy is seen as that part of
government policy concerned with the raising of government revenue through
taxation and other means and the decision on the level and pattern of
expenditure for the purpose of influencing economic activities or attaining
some desirable macroeconomic goals. Economic growth on the other hand may be
defined in terms of the total physical output, or real income, of an economy
(Udabah, 2002). Fiscal policy can foster growth and human development through a
number of channels such as increase in investment and productivity.
Macroeconomic instability is particularly damaging to the poor in a nation, as
their earnings are not indexed to inflation and they have limited opportunities
to invest in assets that provide a hedge against inflation. But macroeconomic
stability associated with prudent fiscal policy yields greater benefits,
including higher rates of investment and educational attainment, as expected
rates of return can better be achieved in an environment of low inflation. Prudent
fiscal policy can help enhance factor productivity, leading to higher growth
and consequently poverty reduction. The vast literature on endogenous growth
theory suggests that fiscal policy can either promote or retard economic growth
through its impact on decisions regarding investment in physical and human
capital. In particular,increased spending on education, health, infrastructure,
and research and development can boost long term growth. Higher growth, in
turn, generates greater fiscal resources to finance spending on human capital,
further bolstering the dynamism of the economy.
Effectively and efficiently implemented government spending on
infrastructure increases private sector productivity by providing complementary
public inputs (for example, through spending on roads and bridges that
facilitate trade in rural areas) Ineffective fiscal policy, on the other hand,
can harm the growth process of an economy. Dead-weight loss from taxes that
finance public spending, and the associated adverse factor-supply effects are
good examples that readily come to mind.
Unproductive public spending can take various forms, including:
expenditure on wages and salaries of unproductive employees. Such resources can
be deployed to more productive initiatives that would enhance increased
productivity in the economy. Rent-seeking incentives reduce growth by diverting
higher human capital away from productive activities with adverse impact on the
index of productivity.Macroeconomic dynamics in Nigeria has been dominated in
the past by fiscal instability. There have been a strong deficit and debt bias
stemming from government revenue volatility. With about 75 percent of revenue
from oil and gas, fiscal policy in Nigeria has been heavily influenced by oil
driven volatility impacting both revenue and expenditure. Since 1970, both
revenue and expenditure have been very volatile while increasing over time. In
periods with high oil prices, such as in1979-82, 1991-92 and more recently in
2000-02, revenue and expenditure have increased sharply. The implications of
such boom-bust fiscal policies include the transmission of oil volatility to
the rest of the economy as well as disruptions to the stable provisions of
government services (Thomas 2003).
Since
the late 1980s, fiscal (budget) policy has become a major tool/instrument in
Nigeria. The reasons for this are not inconsiderable. First is the dominant
role of the public sector in major (formal) economic activities in Nigeria.
This can be traced to several factors. Among them are the oil boom of the early
1970s, the need for reconstruction after the civil war, the industrialization
strategy adopted at the time (import substitution industrialization policy) and
the militarization of governance. The second reason for the increasing
dominance of fiscal policy in the management of the economy is the fall in the
international price of oil in the late 1980s. Furthermore, the persistent
fiscal deficit since the early 1970s (and given the decline in oil revenue)
required a new fiscal focus that saw the emergence of the public sector in
major economic activities (Obi,2007). Although the democratically elected
government in 1999 adopted policies to restore fiscal discipline, the rapid
monetization of foreign exchange earnings between 2000 and 2004, another era of
oil windfall, resulted in large increases in government spending. In 2005
alone, government spending increased to 19 percent of GDP from 14 percent in
20000(CBN bulletin 2015). Extra budgetary outlays not initially included in the
budget increased. Worst till, most of this spending were not directed towards
capital and socio-economic sectors. Corollary primary deficit worsened from an
average of 2.6 percent of GDP in 1980s to one of 6.2 percent in 1990s. In 2002
alone, primary deficit increases to 5 percent of GDP from 2 percent in 2000.
These increases in deficits result in a mounting stock of debt, ranging from 88
percent of GDP in 1980s to 96 percent of GDP in 1990s. In 2002 alone, the stock
of debt increased to 91 per cent of GDP from 45 per cent in 2000 (Cashin,
1995). However, considering the uncertain fiscal dynamics in Nigeria, the
recent fiscal adjustment witnessed in 2005 might still not be sustained.
Nigeria’s fiscal revenues are largely coincided with oil revenue accounting for
nearly 80 percent of government revenues, which implies that the economy is
highly exposed to price fluctuations in the world oil markets. Naturally, oil
revenue is very volatile due to world oscillation in oil prices and to
unpredictable changes in OPEC assigned oil quota of which Nigeria has been a
member since 1958 following the commercial discovery of oil in Oloibiri in
River State, Nigeria in 1956. Absence of suitable fiscal rules and a proper
finance management framework for oil related risks over the past two decades in
Nigeria have led to boom and-bust type fiscal policies that have generated
large and unpredictable movements in government finances. Consequently, this
has been a recurrent source of destabilizing effect of fiscal surprises on the
domestic prices and exchange rate as well as financial system. Issues connected
to budgetary (fiscal) policy have become major issues in our polity. The 2012
budget has attracted a lot of criticism. One of the major issues raised against
Nigeria’s 2012 budget is the high rate of recurrent expenditure, despite
government’s reduction from 74.4 per cent in 2011 to 72 per cent in 2012. Based
on the 2012 budget, government proposed spending most of its money on running
the administration rather than on badly needed infrastructure projects to
create jobs and boost growth in the continent’s second-largest economy. 2014
budget was incremental in nature, the figures shows sharp increases in
expenditure and that Nigeria has spent more than she has earned. Within the period,
total revenue has witnessed an average increase of 29%, while total expenditure
exceeded that by 15%. Between 2015 and 2016 average increase in expenditure was
lower than revenue. This may be partly due to the negative impact of
insurgency, recession etc. that significantly reduced government revenue. The
figure also shows that government expenditure responds to changes in total
revenue. Between 2014 and 2016 when government revenue dropped on the average
by 0.82% due to significant decline in oil prices, government expenditure also
shaded an average of 1.20% within the period. This suggests that Nigerian
economy follows pro cyclical fiscal policies to changes in government revenue.
Based on the above analysis, this investigation is primarily aimed at assessing
the impact of fiscal policy on the economy of Nigeria.
1.2 Statement
of the Problem.
In
Nigeria, despite the importance of existing policies to achieve economic
objectives of viable economic growth, the use of fiscal policy for the
realization of these growth objectives is still highly questionable. The
Nigerian economy has been plagued with several challenges over the years.
Researchers have identified some of these challenges as: gross mismanagement/
misappropriation of public funds, (Okemini and Uranta, 2008), corruption and
ineffective economic policies (Gbosi, 2007); lack 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 sectorial linkages and other socioeconomic
maladies constitute the bane of rapid economic growth and development (Amadi
and Essi, 2006). It is evident that one of Nigeria’s greatest problems today is
the inability to efficiently manage her enormous human and material endowment.
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). These policies span
through two broad periods, which can be classified as “regulation” and
“deregulation”. Our main focus is the differential in fiscal policy failed to
achieve a satisfactory level of welfare for the society by providing an equitable
or fair distribution of income and wealth, or all of these (Ogiji, 2004). The
1930s Great Depression was a confirmation of the reality of the failure of the
market economy which led to the evolution of Keynesian economics. Keynes
submitted that the lingering unemployment and economic depression were a result
of failure on the part of the government to control the economy through
appropriate economic policies (Iyoha and Fischer (1990). Consequently, Keynes
proposed the concept of government intervention in the economy through the use
of macroeconomic policies such as fiscal and monetary policies. Fiscal policy
deals with government deliberate actions in spending money and levying taxes
with a view to influencing macro-economic variables in a desired direction.
This includes sustainable economic growth, high employment creation and low
inflation (Microsoft Corporation, 2004). Thus, fiscal policy aims at
stabilizing the economy. Increases in government spending or a reduction in
taxes tend to pull the economy out of a recession; while reduced spending or
increased taxes slow down a boom (Dornbusch and Fischer, 1990). Government
interventions in economic activities are basically in the form of controls of
selected areas/sectors of the economy. These controls differ, and depend on the
specific needs or purpose the government desires to achieve. Samuelson and
Nordhaus(1998), distinguished between two forms of regulation, namely:
1.
Economic regulation (involving control
of prices, entry and exit conditions, regulation of public utilities, such as
transportation and media organizations, regulation of the financial sector
operations.
2.
Social regulation (aimed at protecting
the health and safety of workers at work place, the environment, and protection
of consumer rights. our focus is on economic regulation. Aregbeyen (2007), Ekpo
(1994), Amin (1998), Devarajan and Ekpo (1994). (Fuente (1997), Kneller and
Galor (2005). Bose, Tanzi, and Zee (1996), established positive relationship
between fiscal policy (public spending) and economic growth. Bose et al. (2003)
in Aregbeyen (2007) found that the share of government capital expenditures in
the gross domestic product is positively and significantly correlated with
economic growth, while the growth effect of current expenditure is
insignificant. Aregbeyen (2007) believed that although government expenditures
were necessary for economic growth, yet the impact of such expenditures on the
economy is of primary importance. He concluded that the key to rapid economic
growth constituted capital and public investment expenditure and that increased
government budget deficits do not automatically guarantee rapid economic
growth.It is interesting to know that the available evidence shows that over
the years, under review (1981- 2015), Nigeria’s fiscal operations have resulted
in persistent overall deficit. Nigeria has recorded over thirty years of
deficits. Deficits are meant to accelerate economic activities through
investments and induced aggregate demand. But this has become a serious problem
to know that despite the fact that Nigeria has been operating deficits over
these periods and found itself in a situation of less than full employment, her
economy has been in distress, the opposite view of the essence of deficits
occur. There is obvious fall in the standard of living of the citizens, decline
in the growth of the economy, persistent unfavorable balance of payment,
increased public debt; local and foreign, continued depletion of the foreign
reserve, little or no savings, decline in exports, increased inflationary
pressure, continuous dependence on external economies etc. Finally, it is
evident that one of Nigeria’s greatest problems today is the inability to
efficiently manage her enormous human and material endowment. In spite of many,
and frequently changing, fiscal, and other macro-economic policies, Nigeria has
not been able to harness her economic potentials for rapid economic development
(Ogbole, 2010). Thus the aim of this
research is to empirically investigate the impact of fiscal policy on the
economy by examining the case of Nigeria. According to Adeoye (2006), “The
debate on the effectiveness of fiscal policy as a tool for promoting growth and
development remains.
1.3 Research Questions
Therefore,
this study aims to empirically investigate the aforementioned problems so as to
bridge the gap in knowledge and contribute to existing literature. Thus, this
study shall examine and address the following research questions:
1. What is the impact of government
revenue (Tax) on economic growth in Nigeria?
2.
What is the impact of government expenditure on economic growth in Nigeria?
3.
What is the impact of domestic debt on economic growth in Nigeria?
4. What is the direction of
causality between the fiscal policy components and economic growth in Nigeria?
1.4 Objectives
of the Study
The broad objective of this study is to
empirically investigate/assess the impact of fiscal policy on Nigeria economic
growth from 1981 to 2015.More specifically, this study intends to achieve the
following:
1. To
evaluate the impact of government expenditure on economic growth in Nigeria.
2. To
determine the impact of government revenue (Tax) on economic growth in Nigeria.
3. To
evaluate the impact of domestic debt on economic growth in Nigeria.
4. To
ascertain the direction of causality between the fiscal policy components and
economic growth in Nigeria?
1.5
Statement of Hypothesis
In carrying out this study, the
following hypotheses would be tested and either accepted or rejected, based on
the research findings.
1. H01: Government
expenditure has no significant impact on economic growth in Nigeria.
2. H02: Government
revenue has no significant impact on economic growth in Nigeria.
3. H03:
Domestic debt has no impact on economic growth in Nigeria
4. H04:
Fiscal policy variables have no causal relationship with economic growth in
Nigeria.
1.6. Significance of the Study
The findings of this study will be
beneficial to individuals, cooperate bodies, researchers and the government and
its agencies at large. At the level of the corporate bodies or the individual
level, it will help them understand the way the government conducts its revenue
and expenditure programs and to know how to respond to such programs and
policies. It will also aid the government to predict with accuracy the impact
that its revenue and expenditure program will have on the economy at large.
This research work will also serve as a reference point for other researchers
and the academic. Above all, it will add to existing stock of knowledge thereby
filling up the knowledge gap.
1.7
The Scopes and Limitation of the Study
This work is set to do a thorough
assessment of the impact of fiscal policy on Nigeria economic growth. The scope
of this study will cover the period 1981-2015. Government expenditure, revenue
and budget deficit financing will be used as fiscal policy instruments. The
data to be used for analysis will be secondary data sourced from the 2010 and
the golden jubilee edition of Central Bank of Nigeria statistical bulletin.
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