An Analysis Of The Impact Of The Fiscal Policy On Economic Growth In Nigeria

Project and Seminar Material for Business Administration and Management BAM

Abstract

This study sough to analyse the impact of fiscal policy on economic growth in Nigeria using time series annual data from 1986-2019 which constitutes 34 years observations. This study used secondary data obtained from the CBN annual statistical bulletin. Fiscal policy instrument was proxied with government recurrent expenditure, government capital expenditure, public domestic debt, and public external debt while economic growth was proxied with Gross Domestic Product (GDP). The data were analysed using Ordinary Least Square method and vector error correction mechanism was conducted. The study found that recurrent expenditure and public domestic debt exert negative relationship while the capital expenditure and external debt exert positive relationship in the long run on the economic growth (GDP) and in the short-run the entire variables are having positive influence except REC (recurrent expenditure) on the economic growth (GDP). The study recommends that the government should put in place effective debt management strategies and fight the problem of corruption because without a reduction of the level of corruption in the country, fiscal policy components will not achieve the required level of economic growth in Nigeria.

Table of Content

Preliminary Page(s)

Title Page
Declaration
Approval
Dedication
Acknowledgement
Abstract
Table of Content

Chapter One

1.0 Introduction

1.1 Background of the Study
1.2 Statement of Problem
1.3 Research Objective
1.4 Research Questions
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Definition of Terms
1.8 Organization of Study

Chapter Two

2.0 Literature Review

2.1 Concept of Fiscal Policy
2.2 Concept of Economic Growth
2.3 Empirical Review
2.4 Theoretical Framework
2.4.1 Endogenous Growth Theory
2.4.2 Keynesian Theory

Chapter Three

3.0 Methodology

3.1 Research Design
3.2 Sources of Data
3.3 Model Specification
3.4 Measurement of Variable
3.5 A Priori Expectation
3.6 Data Analysis

Chapter Four

4.0 Results And Discussion

4.1 Results
4.2 Discussion of Results

Chapter Five

5.0 Conclusion and Recommendation

5.1 Conclusion
5.2 Recommendation
References
Appendix

Chapter One

1.0 Introduction

1.1 Background of the Study

The current dwindling concern is that large and growing governments have deleterious effect on the long-run growth of their economies. The usual policy prescription calls for a scaling back of government activity and budgets, constraining public spending from growing faster than output. In countries facing fiscal imbalances and high debt burdens, this has prompted wide-ranging fiscal consolidation programs to reduce government spending (IMF, 2003). However, parallel to this thrust has been a call for fiscal space in which governments argue for room in their budgets to allow for the provision of productive public goods that will foster economic growth (Heller, 2005). The realization of this growth undoubtedly is not automatic but requires policy guidance, which are Fiscal and Monetary policy instruments which are the main instruments of achieving the macroeconomic targets. The basic fiscal policy instruments are Government Expenditure and Tax revenue. To most economist all over the world, fiscal policy has been an important growth determinant of any country, this deep seeded belief that increase in taxation, public investment, Maintaining Surplus Budget, wage control, inflation and other aspect of fiscal policy instrument contribute more to the growth determinant of any country both developed and developing countries.

Vast researches have been done on the nature of fiscal policy and the economic growth for years, most of the studies considered fiscal policy impact on the development of economy in both the developed and developing countries. However, recent literatures have justified the need to jointly take into consideration fiscal policy and economic growth in an economic model and economic techniques for unbiased result. Marzie and Safdari (2011) asserted that there is a linkage between fiscal policies variables of gross domestic product growth rate, growth of exchange rate, growth of the price index of goods and services, and growth of government. This conclusion was in conformity with several studies that have been carried out worldwide to investigate the nature of relationship that exists between fiscal policy and economic growth, but not much have been done in Africa most especially in Nigeria. studies carried out in Nigeria have not been able to effectively resolve the issues on the problem of fiscal policy and economic growth ,some of them propose that there is no positive relationship between fiscal policy and economic growth while a few of them find the evidence to support the motion, as some of them make use of the Keynesian approach and while some focus on the effectiveness of this policy measure in stimulating economic growth in this country during regulation and deregulation periods. Based on these divergent findings the researcher considers this area of interest and re-examine the dynamic impact of fiscal policy instruments on the Nigerian economic growth using multiple regression and vector error correction mechanism using time series data from 1981 to 2014.

Theoretically, both fiscal and monetary policies aim at achieving macroeconomic stability (Folawewo and Osinubi, 2006). Over the years, two issues have been subjects of debate in this regard. First is the effectiveness of each of these policies in the achievement of macroeconomic stability. While Keynesians (1956) argued that fiscal policy is more potent than monetary policy, the monetarists led by Milton Friedman (1968) on the other hand believed the other way round. Although the focus of this study is neither to join in nor extend the debate, but based on the country’s experience and the fact that fiscal policy plays a vital role in preventing the occurrence of fundamental disequilibrium in the economy, the study will analyze the impact of fiscal policy in tackling macroeconomic stability in Nigeria.

The second relates to the issue of macroeconomic stability. Ocampo (2005), in his study, recommends a broad concept of macroeconomic stability, whereby “sound macroeconomic frameworks” include not only price stability and sound fiscal policies, but also a well-functioning economy, sustainable debt ratios and healthy public and private sector balance sheets. These multiple dimensions imply using multiple policy instruments that involves active use of counter-cyclical macroeconomic policies (fiscal and monetary), together with capital management techniques (capital account regulations and prudential rules incorporating macroeconomic dimensions). It also explores the role of international financial institutions in facilitating developing countries’ use of counter-cyclical macroeconomic policies.

In his words, Ocampo (2005) posited that the concept of macroeconomic stability has undergone considerable changes in the economic discourse over the past decades. During the post-war years dominated by Keynesian thinking, macroeconomic stability basically meant a mix of external and internal balance, which in turn implied, in the second case, full employment and stable economic growth, accompanied by low inflation. Over time, fiscal balance and price stability moved to centre stage, supplanting the Keynesian emphasis on real economic activity. This policy shift led to the downplaying and even, in the most radical views, the complete suppression of the counter-cyclical role of macroeconomic policy. Although this shift recognized that high inflation and unsustainable fiscal deficits have costs, and that “fine-tuning” of macroeconomic policies to smooth out the business cycle has limits, it also led to an underestimation of both the costs of real macroeconomic stability and the effectiveness of Keynesian aggregate demand management.

This shift was particularly sharp in the developing world, where capital account and domestic financial liberalization exposed developing countries to the highly pro-cyclical financial swings characteristic of assets that are perceived by financial markets as risky, and thus subject to sharp changes in the “appetite for risk”. In the words of Stiglitz (2002), such exposure replaced Keynesian automatic stabilizers with automatic destabilizers. Thus, contrary to the view that financial markets would play a disciplining role, dependence on financial swings actually encouraged the adoption of pro-cyclical monetary and fiscal policies that increased both real macroeconomic instability and the accumulation of risky balance sheets during periods of financial euphoria which led, in several cases, to financial meltdowns

Thus, the goal of macroeconomic policies has broadened in recent years. We have only come part of the way, however, to the full recognition that macroeconomic stability involves multiple dimensions, including not only price stability and sound fiscal policies, but also a well-functioning real economy (Ocampo, 2005). A well-functioning real economy requires, in turn, smoother business cycles, moderate long-term interest rates and competitive exchange rates, all of which may be considered intermediate goals of the ultimate Keynesian objective: full employment. Such a broad view of macroeconomic stability should recognize, in any case, that there is no simple correlation between its various dimensions and, thus, that multiple objectives and significant trade-offs are intrinsic to the design of “sound” macroeconomic frameworks. This view would lead to the recognition of the role played by two sets of policy packages, whose relative importance will vary depending on the structural characteristics, the macroeconomic policy tradition and the institutional capacity of the country.

1.2 Statement of Problem

Advocates of government intervention in economic activity maintain that such intervention can spur long term growth. They cite government’s role in ensuring efficiency in resource allocation, regulation of markets, stabilization of the economy, and harmonization of social conflicts as some of the ways in which government could facilitate economic growth. In the context of endogenous growth, government role in promoting accumulation of knowledge, research and development, productive public investment, human capital development, law and order can generate growth both in the short- and long-run [Osuala & Jones, (2014), Success, Success & Ifurueze, (2012), Okafor, (2012), Rena, R. (2011)]. Opponents hold the view that government operations are inherently bureaucratic and inefficient and therefore stifle rather than promote growth. It seems then that as to whether government’s fiscal policy stimulates or stifles growth remains an empirical question. Even so, the existing empirical findings are mixed, with some researchers finding the relationship between fiscal policy and growth either positive, negative, or indeterminate.

Nations the world over device comprehensive strategies directed towards attainment of distinctive national goals. The transformation agenda of the present government is one of such steps. Nigeria has always witnessed well-articulated economic and social reforms intended to launch the nation on the path of meaningful development, (Abdul-Rahamoh, Taiwo &. Adejare, 2013). The problem with past governments in Nigeria has always been non achieving of the required results. However, results can only be achieved when the vision is clear to all, the goals are broken down into simple manageable success milestones and responsibility delegated on the basis of competence and result periodically reviewed and laced with implementable fiscal policy framework, (Babalola & Aminu, 2011). The transformation Agenda is achievable only if we can break from the past and chart a new course in the implementation process more especially as it concerns fiscal policy management. We must realize that the primary goal of governance is to ensure that the services of a state are properly harnessed towards achieving an optimal quality of life for the people derived from the most feasible outcome of real gross domestic products’ measurement in Nigeria otherwise called good economy.

The main objective of this study to examine the impact of fiscal policy on the Nigerian economy. The study hopes to shed some useful light by considering the effects of various public expenditure and taxation components on growth. Economic theory tells us that the nature of the tax regime can harm or foster growth. A regime that causes distortions to private agents’ investment incentives can retard investment and growth. The same applies with the nature of government expenditure: excessive spending on consumption at the expense of investment is likely to deter growth and vice versa.

1.3 Research Objective

The overall objective of this study is to analyse the impact of fiscal policy on economic growth in Nigeria. However the specific objectives of the study are to;

Examine the impact of government capital expenditure on the Nigerian economic growth;
Access the impact of government recurrent expenditure on the Nigerian economic growth;
Examine the impact of public external debt on the Nigerian economic growth;
Access the impact of public domestic debt on the Nigerian economic growth.

1.4 Research Questions

The following research questions would be useful to aid the study;

What impact does government capital expenditure has on the Nigerian economic growth?
What impact does government recurrent expenditure has on the Nigerian economic growth?
Does public external debt have impact on the Nigerian economic growth?
Does public domestic debt have impact on the Nigerian economic growth?

1.5 Research Hypotheses

The research Hypotheses for the study was formulated in their null forms as follows;

HO1: Recurrent expenditure has no significant impact on the Nigerian economic growth;
HO2: Capital expenditure has a significant impact on the Nigerian economic growth;
HO3: Public external debt has no significant impact on the growth of Nigeria economy;
HO4: Public domestic debt has no significant impact on the growth of Nigeria economy.

1.6 Significance of the Study

The research will be of immense benefit to the following:

i. Government and her agencies (CBN):

The various findings of this study would enable the government and financial authorizes to devices, modify and adopt a better fiscal policy on the economy that is policy makers of the central bank of Nigeria who issue guideline governing international trade practices.

ii. Banks especially the commercial banks:

Importantly, this study would help banks to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits their activities. This will definitely enhance growth and development of the economy of commercial banks in Nigeria.

iii. Students of financial and banking:

Who might take a cue from the work done have to further research into the field of exchange rate fluctuations and international trade. Hence, the study will also serve as a guide to future researchers on this subject.

iv. The general public:

Who have a right to contribute and informed to the activities of our banking institutions. It is hoped that the, findings and recommendations of this study will be of great importance to the above-mentioned group.

1.7 Definition of Terms

Fiscal Policy:

Refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.

Economic Growth:

Can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in real gross domestic product, or real GDP.

1.8 Organization of Study

The study comprises of 5 chapters. In chapter one, the concepts are introduced and the problem of the study is established with the research objectives and questions. Chapter two presents the literature review while chapter three presents the research methodology. The fourth chapter presents the results and discussion, and the last chapter presents the conclusion and recommendation.

Chapter Five

5.0 Conclusion and Recommendation

5.1 Conclusion

Based on the findings, the study concludes that fiscal policy instrument has significant impact on economic growth in Nigeria.

5.2 Recommendation

Based on the findings and conclusion, the following suggested recommendations were made by the study and should be taken into action in order to achieve the macro-economic objectives of fiscal policy:

Government fiscal policy should refocus and redirect government expenditure towards production of goods and services so as to enhance GDP growth. This can be achieved by setting specific goals/targets for each state and for the Federal Government. Attention should focus on the real sector in Nigeria in other to attain the standard level of economic growth.
Fiscal policy should give priority attention to capital and public investments by making them of higher proportion in gross government expenditure, thereby creating more jobs and enhancing the quality of public spending and the attainment of sustainable growth and development. Emphasis should be on the development of basic infrastructure (example. transportation, productivity, energy and communication). Human capital development should be a priority.
The government should ensure that policy consistencies and policy reversals are properly checked for both short and long run effects on the economy. Government should fight the problem of corruption because without a reduction of the level of corruption in the country, fiscal policy components will not achieve the required level of economic growth in Nigeria. There is need for an improvement in government expenditure on health, education and economic services, as components of productive expenditure, to boost economic growth.
The government has to put in place effective debt management strategies. This is to ensure that all public debts are directed towards the purpose for which they are applied for.

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