Impact of fiscal policy on Nigeria economic growth within the period of 1981-2016. Download the full project work below in an doc editable format. Despite the lofty place of fiscal policy in the management of the economy, the Nigerian economy is yet to come on the path of sound growth and development. Studies by Agiobenebo (2003), Gbosi (2002) and Okona (1997) indicate that the economy is still married by chronic unemployment, rising rate of inflation, dependence on foreign technology, monoculture foreign exchange earnings from crude oil, and more.
1.1 Background of the Study
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, corruption and ineffective economic policies, lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policies as well as inappropriate and ineffective policies. Imprudent public spending and weak sectorial linkages and other socioeconomic maladies constitute the bane of rapid economic growth and development (Amadi, 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 is the budgetary policy of the government relating to taxes, public expenditure, public borrowing and deficit financing (Sanni, 2012). Thus, fiscal policy aims at stabilizing the economy. As noted by Anyanwu (1993), the objective of fiscal policy is to promote economic conditions conducive to business growth while ensuring that any such government actions are consistent with economic stability.
Economic Growth on the other hand is an increase in real output or real per capita output of an economy (Udabah, 1999). Similarly, Kuznets (1973) also defined economic growth as a long term rise in capacity to sustain increasingly, diverse economic goods and services to its population, growing capacity based on advancing technology, institutional and ideological adjustments that it demands. The interpretation of economic growth emphasizes a “sustained” rise in the output level which is the only manifestation of economic growth.
The relationship between fiscal policy and economic growth has continued to generate series of debate among scholars. Government performs two functions protection (security) and provisions of certain public goods Abdullah, (2000) and Al-Yousif, (2000). Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks of criminality, protect life and property, and the nation from external aggression.
Under the provisions of public goods are defense, roads, education, health, and power, to mention a few. Some scholars argue that increase in government expenditure on socio-economic and physical infrastructures encourages economic growth. For example, government expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power, reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth. Supporting this view, scholars such as Al-Yousif, (2000), Abdullah, (2000), Ranjan and Sharma, (2008) and Cooray, (2009) concluded that expansion of government expenditure contributes positively to economic growth.
Researchers on fiscal policy and related topics have been many and varied and so are the theories. For instance Ram (1986) found that a stronger positive relationship exists between fiscal policy and economic growth in lower income countries than in higher income countries. In contrast, Landan (1983, 1985 and 1986) concluded that the data he examined support the view that government spending is associated with a reduction in a country’s capacity to grow.
Easterly (1992) seems to support Landan’s results as he implied that government consumption spending is negatively associated with economic growth and GDP per capita. Ezirim and Muoghalu (2006) investigated the extent to which factors like population growth, urbanization effects and taxation affect the size of public expenditure in less developed countries like Nigeria; and concluded that inflation constituted the most important factor that accounted for changes in government financial management. Offurum (2005) in an extensive study investigated the impact of public expenditure on economic growth.
However, some scholars did not support the claim that increasing fiscal policy promotes economic growth, instead they assert that higher government expenditure may slowdown overall performance of the economy. For instance, in an attempt to finance rising expenditure, government may increase taxes and/or borrowing. Higher income tax discourages individual from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms. Moreover, if government increases borrowing (especially from the banks) in order to finance its expenditure, it will compete (crowds-out) away the private sector, thus reducing private investment.
Diamond (1990) notes that in Nigeria, less attention has been given to examining the productiveness of the various components of public spending. Longe (1984) examines the growth and structure of fiscal policy in Nigeria with a view to ascertaining if the pattern fits with the result of other countries. Thus, his study revealed that government expenditure has shown many considerable structural shifts over the review period and that the ratio of government expenditure to GNP has been rising and corresponds with the rising share hypothesis.
For instance, government capital expenditure on economic services, social and community services, and transfers increased from N15.5 million N1.4 million and N100.7 million respectively in 1970 to N809120.5 million, N120049.2 million and N211758.1 million respectively in 2009, recurrent expenditure on same services increased from N25.95 million, N43.55 million and N511.42 million respectively in 1970 to N340193.77 million, N346071.95 million and N622171.10 million respectively in 2009. About 60 percent of the population lives on less than US$1 per day. This is inspite of astronomical increases in various fiscal policies over the years. It is on this background that this study would investigate the impact of fiscal policy on the economic growth of Nigeria.
1.2 Statement of the Problem
There exists a consensus in the literature that an adequate and effective macroeconomic policy is critical to any successful development process aimed at achieving high employment, sustainable economic growth, price stability, long-viability of the balance of payments and external equilibrium.
Despite the lofty place of fiscal policy in the management of the economy, the Nigerian economy is yet to come on the path of sound growth and development. Studies by Agiobenebo (2003), Gbosi (2002) and Okona (1997) indicate that the economy is still married by chronic unemployment, rising rate of inflation, dependence on foreign technology, monoculture foreign exchange earnings from crude oil, and more. Furthermore, stagnating revenue mobilisation in particular and some upward movements in expenditures led to a reversal of the fiscal stabilisation process since the second half of the Nineties. An improved fiscal performance during 2003-04 engendered by containment of the non-planned expenditures and supported by high revenue mobilisation on the back of buoyant real activity paved the way for renewed commitment towards fiscal consolidation in Nigeria.
The poor growth performance of the Nigerian economy since 1986 has generated interest in issue of growth and development. From 1970 to 1985 there was financial repression. However, financial liberalisation was introduced in 1986 to realise necessary finance to promote growth. This has made it necessary to study and understand the relationship between finance and growth. Nigeria is endowed with enormous potential for growth and development with her vast oil and gas resources, rich and expensive agricultural land, solid minerals and abundant human resources. Despite these factors, since 1960 when she got her independence from Britain, the successive governments have not done enough to put the nation’s resources to effective productive use as to chart the path of growth and development. The net result is that the Nigerian economy is now performing below her potential as the “crown prince of the Gulf of Guinea”.
Prior to 1975, there was lots of uncontrolled spending in the economy. The monetary control was minimal in the domestic science, ports were congested, the civil service was overloaded and largely corrupt and the economy lacked positive thrust. Data available indicate that by 1985, government expenditure was N13040.9 million, by 1990, it increased to N60268.2 million and N254038 million in 1995. In 1998, the total expenditure of the federal government recurrent and capital was N443,563.3 billion, increased by N87,3010 billion or 2.45% above N356,262.3 billion for the period of 1997. The expenditure also exceeded the 1998 budget estimate of N370, 000 billion by N73,563.3 billion or 19.9% also between the year 2005 and 2009, the general government expenditure has also been increasing rapidly. In 2005, it was N3986.2 billion representing 28.67% of the gross domestic product (GDP). It increased to N4290.7 billion in 2006 which constitute 23.23% of GDP, in 2007, it moved up to N5394.4 billion making up about 28.7% of the GDP, in the same manner, it increased to N7644.6 billion in 2008 which represented about 28.2% of the GDP and N7258.0 billion in 2009 which represent about 30.3% of GDP. At N7,258.0 billion, the aggregate expenditure of the federal government fell by 5.1% from the level in 2008.
The question then is what form of fiscal policy rules will perform better in reducing debt accumulation and promote the necessary medium term budget deficit stability. Can fiscal policy curb the problem of economic growth and development in Nigeria? What tier of government should influence the level of economic growth in Nigeria? The answers to these questions are the concern of this study for proper economic management in Nigeria. Arising from the issue above, this paper seeks to examine the impact of fiscal policy in Nigeria and thus fill the gap in knowledge.
1.3 Research Questions
To serve as study guide, we provide the following lead questions for which this study seeks to provide the answers:
- Does fiscal policy have any significant impact on the Economic growth of Nigeria?
- To what extent does long-run relationship exist between fiscal policy and economic growth in Nigeria?
1.4 Objectives of the Study
The objective of this work includes;
- Ascertain if fiscal policy has contributed significantly on stabilization of Nigeria’s economy.
- Determine the extent to which long-run relationship exists between fiscal policy and economic growth in Nigeria.
1.5 Hypothesis of the Study
H0: Fiscal Policy have no significant impact on stabilization of Nigeria economy.
H0: There is no long-run relationship between fiscal policy and economic growth of Nigeria.
1.6 Significance of the Study
The study will be of benefit to Government and hence will help public fund managers in making adequate financial planning, forecast as well as mending the needed areas in public expenditure. Also it will encourage government in finding lasting solution to the problem of income inequality and rising poverty across the country.
All stakeholders in the public sector will find the work valuable as it redirect and re-orientate the thinking of managers of public fund to the benefit of all Nigerians.
Individuals and groups will also benefit from this study as it will provide the avenue for better public participation in budget and budgetary implementation and tracking.
This research work will be of great intellectual value to students of economics and other discipline who would want to make further research on economic growth and public expenditure as an evaluation of the effectiveness of fiscal policy in Nigeria.
Lastly, it will add to already existing body of knowledge on this topic as it will provides a new window for further research.
1.7 Scope and Limitation of the Study
The major aim of this study is to determine the impact of fiscal policy on the economic growth of Nigeria over the period (1981 – 2016). The choice of the period is as a result of data availability and thus, helps to capture the various fiscal regimes under the different government regimes experienced in Nigeria. Also, these have been informed by the variables to the study. Annual time series data will be employed by this study to conduct the investigation.
The researcher encountered the following constraints in the course of this work, data constraint, financial constraint, limited information due to the type of research work and time constraint. This research work is also limited to the use of secondary data gotten from secondary sources, as such if there are any errors made by those who generated these data; this research work incorporates such errors.
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