Budget Deficit And It’s Impact On The Nigerian Economic Growth And Development

Project and Seminar Material for Economics

Budget Deficit And It’s Impact On The Nigerian Economic Growth And Development


Abstract


The policy of deficit budgeting had grown tremendously in Nigeria between 1985 and 2008.The essence was to help accelerate the growth of capital in Nigeria using the policy of deficit budgeting as formulated by Keynes. The statement of the problem is: To what extent is the policy of deficit spending applicable to Nigeria as a tool for economic growth and development bearing in mind that Nigeria is a newly emerging industrialized country and that the policy of deficit spending has prominence in the Keynesian macroeconomic model, which was developed for conditions appropriate for developed countries.

Categorically in Nigeria, the reverse seems to be the case. This is given to the fact that the major policy focus or thrust of SAP was to divest government in the operations of the economy and promote private sector driven economy through privatization programme. Yeit the government is still prominent in deficit spending. We seem to focus on classical ideas but tenaciously hold on to Keynesian conduct. Want to evaluate the impact budget deficit has on the economic growth of the economy. The study found out that a high positive relationship exists between Government Expenditure and the Economic Growth of the Nigerian Economy. From the analysis of hypothesis one the result represents a high positive relationship. A high positive influence of the budget deficit on the Nigerian economic growth.

The analysis of hypothesis two depicted a very high positive influence of budget deficit on Nigerian economic growth. It is recommended that: at the present time states can only use public loans in order to cover the surplus of public expenditures over current incomes. As it supposes temporary redistribution processes of disposable resources already existent in the economy, this way of financing budget deficits generally does not have an inflationary character; the continuous concern of contemporary governments to reduce or to maintain, within acceptable limits, the budget deficits is justified, in order to fight against inflation and its negative effects; effort should be made by the government to settle the outstanding domestic debt. This will give room for proper conduct of monetary policy in the economy; it will be healthy if the government strive to finance budget deficit by improving on the present revenue base rather than resulting to domestic borrowing. This can be achieved by improving its revenue sources and efficient pursuit of tax reforms.


Chapter One


Introduction

1.1 Background to the Study

It is important to understand budget deficit and its impact on the economic growth in Nigeria. The argument over the involvement of government in running the economic affairs of a country was put to rest by a renowned British economist, John Maynard Keynes.

Before Keynes, emphasis had been placed on the concept of æthe invisible handÆ where the economy is self adjusting. The role of the government as embodied in its fiscal operations in determining aggregate demand, income, prices and more recently, the balance of payments, is the outcome of Keynesian economists which came into being after Great Depression of the 1930’S. A major recognition by Keynes is that an economy could converge to a stable equilibrium which may be undesirable, since it might involve some involuntary unemployment and, in the Keynesian model, only government has the will and means through fiscal policy to move the economy towards a regulation of its revenue and expenditures.

There has been urgent need for rapid economic development in most developing countries. The need for the government to be involved in the process is more pronounced because the question of development cannot be answered without a conscious planning.

Although in some of the countries, particularly in Nigeria, the government often tends to pre-occupy itself with the issue of development and the breaking of vicious cycle of poverty, (that is, low income per capita leading to low saving, leading to low
9

investment, and eventually low productivity). However, it is known that a very sound financial and capital market is needed as prerequisite for development. But due to structural problems associated with financial markets (credit institutions) in Nigeria, such as, inhibitive policy environment; capital inadequacy; liquidity problem and management; necessary funds needed for development have not been forth coming coupled with low revenue from taxation and non-tax sources resulting from a generally low income, under-developed tax and accounting system, inadequate external aid, and many others, hence, the need for in-depth study of the impact of deficit budgeting.

Deficit budgeting as used in this study is viewed as a conscious or deliberate plan by government for an excess expenditure over revenue in its budgetary allocation over a long period of time. For instance, between : 1985-1990, 3.87% of deficit to the gross Domestic Product (GDP), while between 1991-1995, 1996-2000, 2001-2005, 2006-2007 are 4.96%, 0.16%, 2.30% and 2.65 respectively (NBS, 2008).

Several arguments have ensued over the involvement of government in running the Nigerian economy. The liberal economists believed that the only way to economic growth and development in Nigeria is through the sale of government enterprises and allowing the market forces to determine or control the productive resources of the economy; while the non-liberals maintain the opposite view.

Prior to 1986, Nigeria had been operating on a project based planning technique which makes government to spend more than its income in order to cushion the effect of the fall in price of crude oil in the early 80Æs. The country adopted a new planning technique in 1986 which was encapsulated in the policy of Structural Adjustment Programme (SAP). But, because of improper implementation, the programme failed, though, the country still uses the policy based planning technique in line with international practices in the developed economies.


1.2 Statement to the Problem

The policy of deficit budgeting had grown tremendously in Nigeria between 1985 and 2008.The essence was to help accelerate the growth of capital in Nigeria using the policy of deficit budgeting as formulated by Keynes. The statement of the problem is: To what extent is the policy of deficit spending applicable to Nigeria as a tool for economic growth and development bearing in mind that Nigeria is a newly emerging industrialized country and that the policy of deficit spending has prominence in the Keynesian macroeconomic model, which was developed for conditions appropriate for developed countries. Categorically in Nigeria, the reverse seems to be the case. This is given to the fact that the major policy focus or thrust of SAP was to divest government in the operations of the economy and promote private sector driven economy through privatization programme. Yeit the government is still prominent in deficit spending. We seem to focus on classical ideas but tenaciously hold on to Keynesian conduct. Want to evaluate the impact budget deficit has on the economic growth of the economy.


1.3 Research Question

In the process of evaluating the policy implication of deficit spending of the government on economic growth between 1985 and 2008, some questions arises which needs to be answered. These questions are:

  1. Has the policy of deficit budgeting increased real GDP?
  2. What are its implications of Public Debt?
  3. Is there any correlation between economic growth and deficit budgeting?
  4. What is the impact of budget deficit on Economic growth?

1.4 Objectives of the Study

The objective of this study among other things shall mainly focus on the following:

  1. To determine the effect of government spending on real GDP.
  2. To determine the impact of government deficit budgeting on the inflation rate.
  3. To determine the relationship between budget deficit and economic growth.
  4. To determine the impact of budget deficit on economic growth?

1.5 Research Hypothesis

The hypothesis is presented in the form of Null (H0) and Alternative (H1) hypotheses.

  1. H0: There is no relationship between Government Expenditure and Economic Growth of the Nigerian Economy.
    H1: There is a relationship between Government Expenditure and Economic Growth of the Nigerian Economy.
  2. H0: Budget Deficit has no influence on the Nigerian Economic Growth.
    H1: Budget Deficit has an influence on the Nigerian Economic Growth.

1.6 Significance of the Study

The policy of deficit budgeting is the Keynesian macroeconomic model designed for conditions appropriate for developed countries. It is pertinent therefore, to evaluate, if the impact of deficit budgeting in relation to economic growth and development in Nigeria is positive or otherwise. The reason for the research is to ascertain the extent at which deficit budgeting contributed to economic growth and development in Nigeria between 1985 and 2008

This work is significant on the grounds of the questions raised by the researcher, which few research works related to this one have not answered. Also, the work includes an individual examination of the relationship between Deficit Spending and Inflation/Unemployment, Gross Fixed Capital Formation and economic growth in Nigeria. Attempt shall be made to explain changes in domestic price level with magnitude of deficit spending via the vehicle of budgetary allocation in Nigeria. Other researchers have neglected the cost (that is, adverse effect) of the policy of deficit budgeting; but, the researcher has included them in his work.


1.7 Scope of the Study

The scope of this study spans .through ten years, from 1998-2008.In this study, only deficit of the federal government will be given close attention while the financial profile (revenue and expenditure) of the other two tiers of government, that is, local and state governments will not be considered. Also, we shall consider in our study, the range of years the federal government experience budget deficit.


Chapter Five


Summary, Conclusions and Recommendations

5.1 Summary

This research work identified the relationship between the Government Expenditure and Economic Growth, and also the impact of budget deficit on economic growth. The research work answered the research questions and test hypotheses formulated in chapter one. The study adopted a Non-Probabilistic Sampling Technique and this naturally limited the generalization of the research finding on the entire population.

Looking at our first hypothesis we observed that the Coefficient of Correlation between Government Expenditure and Economic Growth of the Nigerian Economy is implying a positive correlation with 0.97995 (97.995%). The observation is statistically significance because the calculated t – test value 14.75587 is greater than the critical table – value t (0.025) 9, = 2.26216. We therefore, reject the H0 and accept the H1.

On the other hand, the second hypothesis, it is observed that the Coefficient of Correlation between the Budget deficit and the Nigerian economic growth (GDP) is 0.66415 (66.415), implying a positive correlation. It is also observed that the calculated t – value 2.63849 is greater than the critical t – value t (0.025) 9, = 2.26216, we therefore also have to reject the H0 and accept the H1.

it is also observed that the Nigerian investing public has renewed confidence in the economy in terms of entrepreneurship which had led to increase in small and medium scale enterprise which lead to increase in economic activities. There is a growth in the government’s expenditure which call for borrowing in order to meet up with the economic budget this had lead to an increase in its GDP (i.e. Economic Growth). The fluctuation and the hike in inflation from 2001 to 2011 can be linked with the growth in the government’s expenditure being experienced in the country. There is an upward astronomical growth in budget deficit amount in the economy.


5.2 Conclusion

The framework for the study has its basis on the Keynesian and endogenous growth models. The Keynesian model states that expansion of government expenditure accelerates economic growth. Although, endogenous growth models do not assign any important role to government in the growth process, authors like Barro (1990), Barro and Salai (1992), and Easterly and Rebelo (1993) emphasized the importance of government (activity) policy in economic growth. Moreover, some authors focused on the components of government expenditure that are productive or unproductive Kneller et al (1999), while others submitted that composition of government expenditure might exert more influence compare to the level of government expenditure Nijkamp and Poot (2004). The level of government expenditure and composition of government expenditure are important determinants of growth. Thus, our model expresses economic growth as a function of various levels and components of government expenditure that include total capital expenditure, total recurrent expenditure, expenditures on defense, agriculture, transport and communication, education and health. In addition, we include inflation and overall government fiscal balance, since they can have lasting impact on economic growth.

Unfortunately, rising government expenditure has not translated to meaningful growth and development, as Nigeria ranks among the poorest countries in the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than US$2 per day. Couple with this, is dilapidated infrastructure (especially roads and power supply) that has led to the collapse of many industries, including high level of unemployment. Moreover, macroeconomic indicators like balance of payments, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of years CBN (2011).

The two main alternatives at governments’ disposal in order to cover their budget deficits (namely the monetary financing and the nonmonetary financing) have a different impact on inflation. As the monetary financing supposes the creation of new money in order to finance budget deficits, it generally involves a greater probability of an inflationary increase of prices to incure, directly depending on the destination of the resources collected by governments in this way. Because of the negative effects inflation has at different levels of economic and social life, it was prohibited by law in most of contemporary economies that state authorities directly resort to the resources of the central bank in order to finance the budget deficit.

Whether it is better to have a budget surplus or a deficit, the budget has clear-cut consequences for the economy. In the short run, whether the budget is in surplus, makes little difference to economic performance. In the short run, it is changes in the surplus or deficit that can affect the rate of economic growth. A reduction in the deficit would tend to be contractionary, while an increase in the deficit would tend to be stimulative. Those effects, however, are likely to be short lived.

In the long run, a shift from a budget surplus to a deficit represents a reduction to national saving. Less saving means a shift from future to present consumption. Consuming more now means less investment now, a lower level of output of goods and services in the future, and thus, less to consume in the future than otherwise would have been the case. To the extent that investment is financed by importing capital from abroad, some of that higher output will be paid to foreigners. Even with a budget deficit, the outstanding federal debt may still fall, relative to GDP, but that depends on the size of the deficit, and of the interest payment on the outstanding debt. A rising debt-to-GDP ratio eventually poses the risk of accelerating inflation.


5.3 Recommendations

The following recommendations are based on the research findings. Care has been taken by the researcher while making generalization, as the limitation created by the sample size is not overlooked. Below is a list of recommendations.

  1. This way, at the present time states can only use public loans in order to cover the surplus of public expenditures over current incomes. As it supposes temporary redistribution processes of disposable resources already existent in the economy, this way of financing budget deficits generally does not have an inflationary character.
  2. The continuous concern of contemporary governments to reduce or to maintain, within acceptable limits, the budget deficits is justified, in order to fight against inflation and its negative effects.
  3. Effort should be made by the government to settle the outstanding domestic debt. This will give room for proper conduct of monetary policy in the economy.
  4. It will be healthy if the government strive to finance budget deficit by improving on the present revenue base rather than resulting to domestic borrowing. This can be achieved by improving its revenue sources and efficient pursuit of tax reforms.
  5. Commitment to budget should be encouraged for fiscal discipline on the part of the government and its agencies. The government and the Debt Management Office (DMO) should drawn up guidelines to limit the growth of future domestic debt.
  6. Effective mechanism should be put in place to ensure that any new borrowing is judiciously utilized to contribute to economic growth.

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