THE EFFECT OF DEFICIT FINANCING ON ECONOMIC GROWTH IN NIGERIA: 1981 – 2015

THE EFFECT OF DEFICIT FINANCING ON ECONOMIC GROWTH IN NIGERIA: 1981 – 2015

The central purpose of this study is to empirically investigate the effect of deficit financing on the output of Gross domestic product (a proxy for economic growth) in Nigeria from 1981 to 2015. Thus the specific purpose includes;

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CHAPTER ONE: INTRODUCTION

1.1     Background of the Study

A major policy challenge confronting both developed and developing economies is the process of determining how to raise, allocate and spend public resources, and the ways the resources are utilized goes a long way in determining how public policy objectives are achieved. In addressing these challenges of the country, the budget is often designed focusing on the preferred sectors of the economy. This is while in formulating the budget, the government makes several choices regarding its financing and how available resources are allocated to existing or new programs and institutions (Adrian, 2001; ODI, 2004).

With the budget, a clear statement of intent can be provided, often more accurate than the policies or plans on which they are based to attain the overall development of the country.

A budget is an estimation of revenue and expenses over a specified future period and is usually compiled and re-evaluated periodically. A budget can be a surplus budget which means profits are anticipated, a balanced budget means revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues. When the government spends more than it collects, a budget deficit exists. In other words, when the government collects more than it spends, a budget surplus exists, and when the government utilizes exactly equal amount it generated, it is a balanced budget the budgetary requirements are brought about and dictated by the rising needs and expectations of the country and people and governments ultimate responsibility of meeting and servicing them. (Roxas,2004).

When the government decides to have a deficit budget, there is the need to provide funds for the excess expenditure. That is since a deficit budget means that the overall government expenditure is greater than its anticipated revenue accumulated through taxes, the government necessarily has to look for money from alternative sources (mostly through borrowing) to bridge the gap between its expenditure and revenue. That is, the government has to finance the deficit.

Many developing countries undertake deficit financing as a means of achieving some macroeconomic objectives. In conventional settings, deficit financing is seen as a strategy that is mostly undertaken to address macroeconomic quagmires like depression and low output (Anyanwu, 1997). On the other hand, deficit financing still appears to be a strategy that tends to aggravate inflationary pressure and crowding out private sector investments and thereby worsening unemployment problems (Anyanwu, 1997).

1.2     Statement of the Problem

The Nigeria government has been running huge deficits since the civil war years. The deficits as a percentage of GDP have continued to be on the increase and one immediate result is the escalating public debt. Budget deficits have a deleterious effect on monetary policy. It has also been observed that large budget deficits cause an increase in money growth and inflation (Levy, 1981; Egwaikhide, 2005).

Large deficits are common features of most developing countries, such as Nigeria. The economic consequences of such deficit are inflation, devaluation, deteriorating gross domestic product, fiscal adjustment, which constitute an important element of the economic agenda. Deficits are often attributed to high government expenditure and are caused by rising public spending over and above public revenue. My fact to this is that the government has at its disposal various models of financing its spending. These include Taxation, the printing of money, and loans, and grants. Borrowing from the public is not a major source of funding deficits in developing countries since personal incomes are generally low, credit creation has often been used by developing countries as an alternative mode of financing. A major defect of this mode is however inflationary.

Fiscal deficits; a situation where current expenditure exceeds current expected income, this has become a recurring feature of public sector financing in Nigeria. The Keynesian demand-side economics emphasized the need for expansion in government expenditures even beyond current income, particularly during depressions when the economy suffers from an insufficiently of active demand, such as the Great Depression of 1929 to 1932 and more recently the 2008 Global financial and economic crisis. This will thereby increase the demand for productive output, resulting in unemployment being overcome (Anyanwu and Oaikhenan 2005, Ogboru, 2006).

Having identified all of this shortcoming, this study seeks to investigate the effectiveness of deficit financing as a tool for the acceleration of economic growth in the Nigerian economy from 1985 to 2018, which covers a period of 33years. The period incorporated is essential because it captures most policy reforms and changes over time, especially the economic meltdown of 2007/2008 and the current economic recession in the country. using multiple regression analysis.

1.3     Aim and objectives of the study

The central purpose of this study is to empirically investigate the effect of deficit financing on the output of Gross domestic product (a proxy for economic growth) in Nigeria from 1981 to 2015. Thus the specific purpose includes;

1. To examine the relationship between net revenue and gross domestic product in Nigeria.
2. To investigate the relationship between domestic debt and Gross Domestic Product in Nigeria.
3. To examine the relationship between external debt and Gross Domestic Product in Nigeria.

1.4     Research Questions

1. To what extent does net revenue affect the Gross Domestic Product in Nigeria?
2. To what extent does domestic debt affect the Gross Domestic Product in Nigeria in Nigeria?
3. To what extent does external debt influence Gross Domestic Product in Nigeria?

1.5     Research Hypotheses

The following null hypotheses guided the study:

Ho1: There is no significant relationship between net revenue and Gross Domestic Product

Ho2: There is no significant relationship between Domestic debt and Gross Domestic Product.

Ho3: There is no significant relationship between External debt and Gross Domestic Product.

1.6     Significance of the study

The importance of this study cannot be overemphasized because every sector of the economy stands to benefit one or two things from the researchers’ work. The major people who will benefit from this work are:

1. POLICYMAKERS: the study stands to enlighten them on the ways of finding the best policy to use when it comes to the issue of the Nations’ deficit financing techniques.
2. INVESTORS: the study will help them to realize the actual state of the economy, especially when the country’s budget is a deficit.
3. RESEARCHERS: they will find it rewarding as it will add to the rich collection of work in available literature due to the expansion of years covered and modification of the model.
4. ECONOMY: the study helps to reveal the stand of the economy in the face of a deficit budgeting system.

1.7     Scope of the study:

This research work will gather empirical data from 1985 to 2018 (33 years). It will also investigate the effect of budget deficit on economic growth in Nigeria. It will be restricted to the stated variables within the period under study (1985-2018). The independent variable which is economic growth is proxy by some selected microeconomic variables in Nigeria to measure economic growth. While the dependent variable which is budget financing which will be proxied by the Gross Domestic Product of Nigeria.

1.8     Definition of terms

Budge: A budget is an estimation of revenue and expenses over a specified future period and is usually compiled and re-evaluated periodically.

Budget Deficit: a status of financial health in which expenditures exceed revenue.

Gross Domestic Product (GDP):  The total value of all goods and services produced domestically by a nation during a year.

Economic Growth: An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured n normal terms, which are adjusted for inflation.

1.9     limitation of the study

Budget financing tends to affect so many macroeconomic variables in an economy, thus study will cover the effect of net revenue, domestic debt, external debt, total expenditure, and GDP of the Nigerian economy from 1985 to 2018, and the choice of the period is based on the availability of data.

1.10   Organization of the study

This project consists of five chapters.

Chapter one has already been done. It is the introduction that contained the background, Statement of the Problem, Purpose, research question, hypotheses, Signification, and limitation of the study, and so on.

Chapter two looks at the concepts, theories, and empirical findings relating to the effect of budget (and budget deficit) economic development. The areas reviewed include: Historical perspective to budget budgeting; the concept of deficit budget; the causes, effect, and solution to the budget deficit; theoretical framework, and empirical literature.

Chapter three is the explanation of the research methods adopted in the accomplishment of the project.

Chapter four is the analysis, presentation, and interpretation of the results. Chapter five is a summary, conclusion, and recommendations.