Estimating The Relationship Between Fiscal Policy And Nigerian Economy (1980-2018)

Project and Seminar Material for Economics

Chapter One

Introduction

1.1 Background of the Study

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation and economic growth. Cliff (2013). According to O’Sullivan, Arthur, Sheffrin, Steven M. (2003), Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. Fiscal policy is often used to stabilize the economy over the course of the business cycle. The government can use fiscal policy to affect the economy, for example, during a recession government might lower tax rates to increase aggregate demand and fuel economic growth; this is known as expansionary fiscal policy. The effect is that when people pay lower taxes, they have more money to spend or invest, which leads to higher demand. Which in turns leads firms to hire more, thereby decreasing unemployment. These raises wages and provide consumers with more income to spend and invest. Also, instead of reducing taxes, the government might seek economic expansion through increases in spending. For example, the building of more highways could increase employment, push up demand and lead to economic growth. Expansionary fiscal policy is usually characterized by deficit spending, when government expenditures exceed receipts from taxes and other sources. In practice, deficit spending tends to result from a combination of tax cuts and higher spending. The Changes in the level and composition of taxation and government spending can affect the following macroeconomic variables, amongst others: Aggregate demand and the level of economic activity; Saving and investment; Income distribution. Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply and interest rates and is often administered by a committee called Monetary Policy Committee. The research proffers a study on estimating the relationship between fiscal policy and Nigerian economy 1980-2018.

1.2 Statement of the Problem

The Nigerian economy has in recent time undergone many economic challenges which has left the economy under recession. In response the federal government has deployed the fiscal policy as a measure to further boost the economy. Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation and economic growth. Cliff (2013).Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. Fiscal policy is often used to stabilize the economy over the course of the business cycle. However the Changes in the level and composition of taxation and government spending can affect the following macroeconomic variables, amongst others: Aggregate demand and the level of economic activity; Saving and investment; Income distribution. The problem confronting the study is to estimate the relationship between fiscal policy and Nigerian economy 1980-2018.

1.3 Objectives of the Study

The Main Objective of the study is estimating the relationship between fiscal policy and Nigerian economy 1980-2018;

The specific objectives include:

To describe the relationship between GDP and fiscal policy (FIS) in Nigeria.
To determine the causal relationship between GDP and fiscal policy in Nigeria.

1.4 Research Questions

What is the relationship between GDP and fiscal policy (FIS) in Nigeria?
What is the causal relationship between GDP and fiscal policy in Nigeria?

1.5 Statement of the Hypothesis

Ho: There is no relationship between fiscal policy and Nigerian economy.

1.6 Significance of the Study

The study addresses the relationship between fiscal policy and Nigerian economy 1980-2018. It provides relevant data for the effective formulation and implementation of policies which will further stimulate the economy to economic growth and development.

1.7 Limitation of the Study

The study was confronted with logistics and geographical factors.

1.8 Definition of Terms

Fiscal Policy Defined

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation and economic growth.

Deficit Spending Defined

Deficit spending is defined as a condition when government expenditures exceed receipts from taxes and other sources. In practice, deficit spending tends to result from a combination of tax cuts and higher spending.

Monetary Policy Defined

Monetary policy is the process of controlling the supply, availability, cost of money or rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy.

Employment Rate Defined

This is the percentage of the labor force that is employed and also constitute one of the economic indicators that economists examine to help understand the state of the economy.

Unemployment Rate Defined

This constitutes the number of people actively looking for a job as a percentage of the labour force. The unemployment rate is defined as the percentage of unemployed workers in the total labor force. Workers are considered unemployed if they currently do not work, despite the fact that they are able and willing to do so.