EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study examined the impact of fiscal policy on economic growth of Nigeria for the period of 1981-2014 the study adopted the empirical analysis that was carried out to achieve the objectives mentioned were diagnostic tests such as unit root, co-integration, and ordinary least square (OLS), in which in GDP was regressed on government expenditure (GEXP) and inflation (INF) using annual time series data from CBN statistical bulletin. The study showed that GDP has a positive and significant relationship with government expenditure and inflation has a negative and insignificant relationship with GDP thus it was recommended that government  spending should be controlled in order to control inflation rate as evidence this study has shown that inflation affects growth negatively.

CHAPTER ONE

• INTRODUCTION

1.1     Background of the Study

The Nigerian government has consistently embarked on diverse macroeconomic policy options to tinker the economy on the path of growth and development, amongst the policy options readily employed is the fiscal policy (Iyeli and Azubuike, 2013). Fiscal policy entails government’s management of the economy through the control of its income and spending power to achieve certain desired macroeconomic objectives amongst which is economic growth (Gbosi, 2008).

Fiscal policy refers to the use of government revenue collection and expenditure (spending) to influence the economy. Fiscal policy as a tool for economic management focuses on the effect of changes in government budget on the overall economy. The two main fiscal policy instruments are taxes and government expenditure. Fiscal policy can either be expansionary or contractionary. Expansionary fiscal policy are those policies that are used to expand the economy ( Engen, 1992), which comprise reducing tax rates. Contractionary fiscal policies are those policies that are used to contract or slow down an economy. They include measures such as: increasing taxes and decreasing government spending. (Adebayo 1991,)

The immediate effect of fiscal policy in an economy is to change the aggregate demand for goods and service. A fiscal expansion for example raises aggregate demand through one of these two channels: first, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payment, households’ disposable income rises and they will spend more on consumption. The rise in consumption will in turn raise aggregate demand. Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced- that is, the gross domestic product. (Adebayo, 1991)In a recession, the government can run an expansionary fiscal policy, thus helping to restore output to its normal level and to put unemployed workers back to work. During a boom when inflation is perceived to be higher than unemployment, the government can run a budget surplus, helping to slow down the economy. Fiscal policy is especially difficult to use for stabilization because of the inside lag, that I the gap between the time when the need for fiscal policy arises and when it is being implemented. A fiscal expansion affects a country’s output level in the long run because it affects the country’s saving rate.

Fiscal policy was not generally recognized as important until the birth of Keynesian Economics in the mid-nineteen thirties which enhanced its significance as a policy tool to overcome the economic depression of Western Europe and North America (Babalola, 2015). The threat of inflation in the immediate post-war years and the desire to maintain continuous full employment following World War II has also meant the continued use of fiscal policy in these same economies (Babalola, 2015). In more recent years, however, the limited success in the achievement of the above objectives has brought into sharp focus the question of the effectiveness of fiscal policy in relation to other policies especially monetary policy (Babalola, 2015).While in the developing economies, the economic policy objectives of fiscal policy have been pursued to a greater or lesser degree, the one and overriding objective, the furtherance of which has relied greatly on fiscal policy, is economic development, defined not only as a continuous and sustained growth in total output as well as in output per head, but also as the structural transformation from the basically underdeveloped agricultural economies to fully industrialized ones (Olaloku, 1987).

The aim of this paper, therefore, on a general term, is to assess the effect of fiscal policy on economic growth in the Nigeria economy between 1981 and 2014 fiscal years.

1.2     Statement of the Problem

From economic literature, fiscal policy is the government actions affecting its receipts (revenue) and expenditure. The use of fiscal policy is very paramount in every society most especially in the less developed countries (LDCs) as a major tool for stabilization and for development to be sporadic, when the government uses government revenue and expenditure policies to regulate and stabilize the economy toward development, the action is fiscal policy (Babalola, 2015). It thus serves as an economy’s “shock- absorber” in specific areas of development.

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). Reckless public spending and weak sectorial linkages and other socio- economic maladies constitute the bane of rapid economic growth and development (Amadi et al., 2006). Also according to Ogbole, et al (2011) it is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment.

During 1981-1999 total capital expenditure amounted to N1694.04billion with an average of 5.33% of total GDP while from 2000-2014 it was averaged at 3.68% with and all time high of 11% in the year 2014 lowest of 1.23% in the year 2012 CBN (2014).  In the year 1993 government expenditure more than doubled and grew by 106% whereas GDP grew at 2%. Interestingly in the year 2000 government expenditure dropped by 26% whereas GDP grew by 5%. However by 2013 government expenditure grew by 13% which was accompanied by a growth in GDP by 7%. Over the years (1981-2014) the trend pattern between economic growth and GDP has been somewhat fluctuating (CBN, 2014). From the above it can be deduced that irrespective of the fact that there is a sharp increase in government expenditure the resulting effect does not trickle down to economic growth rather there is a slow growth rate in the G DP as compared to the government expenditure

There have been several fluctuations in the revenue of government. During 1982 government revenue dropped by 13.97% which was followed by a decline of the GDP by 1.72% however in the year 1995 government revenue increased by 127.82% but despite this sharp rise the economic growth rate at same date was averaged at 2.25% also similarly in 2009 government revenue dropped by 38.42% as a result of world financial crisis of 2009 but interestingly economic growth recorded a growth rate of 6.96% (CBN, 2015). Given these fluctuations in government instrument of revenue and expenditure, the main thrust of this study is to empirically investigate the effect of government fiscal policy on economic growth.

1.3 Research Questions

The above statement does give rise to the following research questions

1. Does government expenditure have any significant effects on economic growth in Nigeria?
2. Does inflation have any significant effect on economic growth in Nigeria?

1.4     Objective of the Study

The broad objective of the study is to examine the effect of fiscal policy on economic growth in Nigeria. However in achieving this objective the specific objective is thus stated as follows;

1. To determine the effect of government expenditure on economic growth

in Nigeria.

2. To determine the effect of inflation on economic growth in Nigeria.

1.5     Research Hypothesis

The hypothesis below was formulated for the purpose of this research work:

1. H₀: government expenditure does not have significant effect on economic growth in Nigeria.
2. H₀: inflation does not have any significant effect on economic growth in Nigeria.

1.6     Limitation of the Study

One limitation of this study is with the issue of time, as the researcher is also a student who needs to allocate time to other course work. And the issue of unavailability of finance to carry out a more comprehensive research and funds for travelling to necessary institutions to obtain relevant materials limited the researcher’s work.

1.7     Significance of the Study

The study will be of relevance to policy analyst for decision making, government agencies for policy formulation and business analyst to make profitable business decisions. It will also serve as a bed rock for further research by students and other researchers.

 1.8    Scope of Study

This study is based on an empirically analysis of the effect of fiscal policy on economic growth in Nigeria and will cover the period of 34 years (1981-2014) and data will be sourced from statistical bulletin, and also the relationship between fiscal policy and economic growth would be estimated using eviews8.

ABSTRACT

This study examined the impact of fiscal policy on economic growth of Nigeria for the period of 1981-2014 the study adopted the empirical analysis that was carried out to achieve the objectives mentioned were diagnostic tests such as unit root, co-integration, and ordinary least square (OLS), in which in GDP was regressed on government expenditure (GEXP) and inflation (INF) using annual time series data from CBN statistical bulletin. The study showed that GDP has a positive and significant relationship with government expenditure and inflation has a negative and insignificant relationship with GDP thus it was recommended that government  spending should be controlled in order to control inflation rate as evidence this study has shown that inflation affects growth negatively.

CHAPTER ONE

• INTRODUCTION

1.1     Background of the Study

The Nigerian government has consistently embarked on diverse macroeconomic policy options to tinker the economy on the path of growth and development, amongst the policy options readily employed is the fiscal policy (Iyeli and Azubuike, 2013). Fiscal policy entails government’s management of the economy through the control of its income and spending power to achieve certain desired macroeconomic objectives amongst which is economic growth (Gbosi, 2008).

Fiscal policy refers to the use of government revenue collection and expenditure (spending) to influence the economy. Fiscal policy as a tool for economic management focuses on the effect of changes in government budget on the overall economy. The two main fiscal policy instruments are taxes and government expenditure. Fiscal policy can either be expansionary or contractionary. Expansionary fiscal policy are those policies that are used to expand the economy ( Engen, 1992), which comprise reducing tax rates. Contractionary fiscal policies are those policies that are used to contract or slow down an economy. They include measures such as: increasing taxes and decreasing government spending. (Adebayo 1991,)

The immediate effect of fiscal policy in an economy is to change the aggregate demand for goods and service. A fiscal expansion for example raises aggregate demand through one of these two channels: first, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payment, households’ disposable income rises and they will spend more on consumption. The rise in consumption will in turn raise aggregate demand. Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced- that is, the gross domestic product. (Adebayo, 1991)In a recession, the government can run an expansionary fiscal policy, thus helping to restore output to its normal level and to put unemployed workers back to work. During a boom when inflation is perceived to be higher than unemployment, the government can run a budget surplus, helping to slow down the economy. Fiscal policy is especially difficult to use for stabilization because of the inside lag, that I the gap between the time when the need for fiscal policy arises and when it is being implemented. A fiscal expansion affects a country’s output level in the long run because it affects the country’s saving rate.

Fiscal policy was not generally recognized as important until the birth of Keynesian Economics in the mid-nineteen thirties which enhanced its significance as a policy tool to overcome the economic depression of Western Europe and North America (Babalola, 2015). The threat of inflation in the immediate post-war years and the desire to maintain continuous full employment following World War II has also meant the continued use of fiscal policy in these same economies (Babalola, 2015). In more recent years, however, the limited success in the achievement of the above objectives has brought into sharp focus the question of the effectiveness of fiscal policy in relation to other policies especially monetary policy (Babalola, 2015).While in the developing economies, the economic policy objectives of fiscal policy have been pursued to a greater or lesser degree, the one and overriding objective, the furtherance of which has relied greatly on fiscal policy, is economic development, defined not only as a continuous and sustained growth in total output as well as in output per head, but also as the structural transformation from the basically underdeveloped agricultural economies to fully industrialized ones (Olaloku, 1987).

The aim of this paper, therefore, on a general term, is to assess the effect of fiscal policy on economic growth in the Nigeria economy between 1981 and 2014 fiscal years.

1.2     Statement of the Problem

From economic literature, fiscal policy is the government actions affecting its receipts (revenue) and expenditure. The use of fiscal policy is very paramount in every society most especially in the less developed countries (LDCs) as a major tool for stabilization and for development to be sporadic, when the government uses government revenue and expenditure policies to regulate and stabilize the economy toward development, the action is fiscal policy (Babalola, 2015). It thus serves as an economy’s “shock- absorber” in specific areas of development.

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). Reckless public spending and weak sectorial linkages and other socio- economic maladies constitute the bane of rapid economic growth and development (Amadi et al., 2006). Also according to Ogbole, et al (2011) it is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment.

During 1981-1999 total capital expenditure amounted to N1694.04billion with an average of 5.33% of total GDP while from 2000-2014 it was averaged at 3.68% with and all time high of 11% in the year 2014 lowest of 1.23% in the year 2012 CBN (2014).  In the year 1993 government expenditure more than doubled and grew by 106% whereas GDP grew at 2%. Interestingly in the year 2000 government expenditure dropped by 26% whereas GDP grew by 5%. However by 2013 government expenditure grew by 13% which was accompanied by a growth in GDP by 7%. Over the years (1981-2014) the trend pattern between economic growth and GDP has been somewhat fluctuating (CBN, 2014). From the above it can be deduced that irrespective of the fact that there is a sharp increase in government expenditure the resulting effect does not trickle down to economic growth rather there is a slow growth rate in the G DP as compared to the government expenditure

There have been several fluctuations in the revenue of government. During 1982 government revenue dropped by 13.97% which was followed by a decline of the GDP by 1.72% however in the year 1995 government revenue increased by 127.82% but despite this sharp rise the economic growth rate at same date was averaged at 2.25% also similarly in 2009 government revenue dropped by 38.42% as a result of world financial crisis of 2009 but interestingly economic growth recorded a growth rate of 6.96% (CBN, 2015). Given these fluctuations in government instrument of revenue and expenditure, the main thrust of this study is to empirically investigate the effect of government fiscal policy on economic growth.

1.3 Research Questions

The above statement does give rise to the following research questions

1. Does government expenditure have any significant effects on economic growth in Nigeria?
2. Does inflation have any significant effect on economic growth in Nigeria?

1.4     Objective of the Study

The broad objective of the study is to examine the effect of fiscal policy on economic growth in Nigeria. However in achieving this objective the specific objective is thus stated as follows;

1. To determine the effect of government expenditure on economic growth

in Nigeria.

2. To determine the effect of inflation on economic growth in Nigeria.

1.5     Research Hypothesis

The hypothesis below was formulated for the purpose of this research work:

1. H₀: government expenditure does not have significant effect on economic growth in Nigeria.
2. H₀: inflation does not have any significant effect on economic growth in Nigeria.

1.6     Limitation of the Study

One limitation of this study is with the issue of time, as the researcher is also a student who needs to allocate time to other course work. And the issue of unavailability of finance to carry out a more comprehensive research and funds for travelling to necessary institutions to obtain relevant materials limited the researcher’s work.

1.7     Significance of the Study

The study will be of relevance to policy analyst for decision making, government agencies for policy formulation and business analyst to make profitable business decisions. It will also serve as a bed rock for further research by students and other researchers.

 1.8    Scope of Study

This study is based on an empirically analysis of the effect of fiscal policy on economic growth in Nigeria and will cover the period of 34 years (1981-2014) and data will be sourced from statistical bulletin, and also the relationship between fiscal policy and economic growth would be estimated using eviews8.

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