FISCAL POLICY AND ECONOMIC GROWTH IN NIGERIA

FISCAL POLICY AND ECONOMIC GROWTH IN NIGERIA

Abstract: The study investigates the impact of fiscal policy on economic growth in Nigeria for the period 1985-2018. Data were collected from the Central Bank of Nigeria (CBN) Statistical Bulletins. The study developed and specified a multiple regression model to establish the relationship between the dependent variable and the independent variables and the regression model was estimated accordingly using the Ordinary Least Square (OLS) technique. Data analysis was facilitated by Econometric Views (Eviews) 10. The results of the study showed that there is a positive and significant relationship between federal government recurrent expenditures, capital expenditures, and gross domestic product. However, the study shows that tax revenue has a positive and insignificant relationship with gross domestic product. In light of this, the study recommended that the Federal government should make fiscal policy to complement the adoption of effective monetary policy and maintain the rule of law to promote stability in the Nigerian economy. However, the government should ensure that capital expenditure and recurrent expenditure are properly managed in a manner that will raise the nation’s production capacity and accelerate economic growth. The government should also make an effort to ease the process of tax collection and also ensure the effectiveness of punishment for tax defaulters and evaders.

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Fiscal policy is how a government adjusts its level of spending to monitor and influence a nation’s economy. It is used along with the monetary policy which the central bank uses to influence the money supply in a nation. These two policies are used to achieve macroeconomic goals in a nation. These goals include price stability, full employment, reduction of poverty levels, high and sustainable economic growth, a favorable balance of payment, and reduction in a nation’s debt (Agu et. al., 2014).

Medee and Nembee (2011) define fiscal policy as the process of government management of the economy through the manipulation of its income and expenditure and to achieve certain desired macroeconomic objectives. Central Bank of Nigeria (2010) defined fiscal policy as the use of government expenditure and revenue collection through tax and the amount of government spending to influence the economy.

In finance, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure. Geoff (2012) contended that fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and job creation. It is the government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates, and government spending, to control the economy. Fiscal policy is how a government adjusts its levels of spending to monitor and influence a nation‟s economy.

From all this definition, it can be deduced that one of the regulatory policies used by the government in achieving its objectives to bring about economic growth is fiscal policy. Fiscal policy is an outgrowth of Keynesian economics; its logical analysis suggests that it offers a sure-fire means of stabilizing the economy. The goal of modern fiscal policy is to achieve economic efficiency and stability. In a modern economy, no sphere of economic life is untouched by the government. Two major instruments or tools are used by the government to influence private economic activity; taxes and expenditure but not limited to these two, it may include public debt, public work among others. This study, therefore, examines the effect of fiscal policy on the growth of the Nigerian economy.

1.2 Statement of Problem

Nigeria’s potential for growth and poverty reduction is yet to be realized. A key constraint has been the recent conduct of macroeconomics, particularly fiscal and monetary policies. This has led to rising inflation and a decline in real incomes because of fluctuations in government spendings. National economic management became a Herculean task as the economy has to contend with the volatility of revenue and expenditure. The widespread lack of fiscal discipline was further exacerbated by poor coordination of fiscal policy among the three tiers of government. Also, there is a weak revenue base arising from a high marginal tax rate with a very narrow tax base, resulting in low tax compliance; This is reaffirmed in Appah (2010).

Furthermore, Odewummi (2012) as a result of these and other factors opined that serious macroeconomic imbalances have emerged in Nigeria. A review of these macroeconomic indices shows that inflation has fluctuated in double-digit levels (from 13.72% in 2010 to 11.28% in 2018), this is as a result of a fluctuating government spending as it has not been constant and effective hence bringing about the fluctuation in consumer prices. It has also affected the unemployment rate in that in 2018, the unemployment rate for Nigeria was 22.6 %. The unemployment rate of Nigeria increased from 10.6 % in 2012 to 22.6 % in 2018 growing at an average annual rate of 16.02 %. This shows that government policies such as treasury account amount to several companies especially banks laying off of staff hence, increasing the unemployment rate. Moreso, their fiscal policies on borders as regards the importation of consumable goods Also brought about a low return of profit in business because of the high cost of production this has also led to unemployment and inflation. Unemployment is a major political and economic issue in most countries.

Generally, an increase in government expenditures and attendant proactive fiscal policy should lead to the reduced unemployment rate, the stability of prices and increased entrepreneurial spirit, but in Nigeria, the reverse is the case i.e as total expenditure increases, the rate of unemployment increases.  hence savings, new small scale enterprises, and stability of prices.

In light of this, this study aims at determining the extent to which Nigeria’s fiscal policy has impacted on the economy.

1.3 Purpose of the Study

The purpose of this research is to examine the impact of fiscal policy on the Nigerian economy from the period covering [1985 – 2018]. In pursuit of the above, the specific objectives of this study include:

1. Determine the extent to which government capital expenditure affects the growth of the Nigerian economy.
2. Assess the extent to which government recurrent expenditure affects the growth of the Nigerian economy.
3. Evaluate the extent to which tax revenue affects the growth of the Nigerian economy.

1.4 Research Questions

1. To what extent does government capital expenditure affects the economic growth of Nigeria?
2. What is the extent to which government recurrent expenditure affects the economic growth of Nigeria?
3. To what extent does tax revenue affect the economic growth of Nigeria?

1.5 Hypotheses of the Study

Based on the above-stated research questions, the following hypotheses can be made, all in null form:

H₀₁: There is no significant relationship between government capital expenditure and economic growth in Nigeria.

H₀₂: There is no significant relationship between the government’s recurrent expenditure and economic growth in Nigeria.

H₀₃: There is no significant relationship between tax revenue and economic growth in Nigeria.

1.6 Significance of the Study

This research empirically examines the impact of fiscal policy on economic growth in Nigeria. It will be of great significance to investors, citizens, government, and academia in the following ways:

It will be of benefit to students and research scholars and it provides them with the most current or latest empirical findings on the subject matter.

Empirical findings will enable government policymakers to ascertain the effectiveness or ineffectiveness of fiscal policy on the economic growth of Nigeria.

1.7 Definition of Terms

Gross domestic product (GDP)

The Gross domestic product measures the total market value of all final goods and services produced in a country in a given year, equal to total consumption, investment, and government spending, plus the value of exports, minus the value of imports. Its rate of growth is always associated with economic growth.

Government Capital Expenditure

Capital Expenditures or fixed capital formation (or government investment) are all government spending on goods and services intended to create future benefits, such as infrastructure investment in transport (roads, rail airports), health (water collection and distribution, sewage systems, communication (telephone, radio, and tv) and research spending (defense, space, genetics).

Government Recurrent Expenditure

Recurrent expenditure on goods and services is expenditure which does not result in the creation or acquisition of fixed assets (new or second-hand). It consists mainly of expenditure on wages, salaries, and supplements, purchases of goods and services and consumption of fixed capital (depreciation). All payments other than for capital assets, including on goods and services, (wages and salaries, employer contributions), interest payments, subsidies, and transfers.

Tax Revenue

Tax revenue is defined as the revenues collected from taxes on income and profits, social security contributions, taxes levied on goods and services, payroll taxes, taxes on the ownership and transfer of property, and other taxes. It is the income that is gained by governments through taxation. Taxation is the primary source of income for a state.

1.8 Limitations of the Study

The study covers the period of 1985-2018

(a) Geographical scope: This study is within the territorial boundaries of Nigeria. It covers the relationship between fiscal policy and economic growth.

(b) Content scope: This study is about the impact of fiscal policy on the economic growth of Nigeria. The study discusses such contents and fiscal policy government expenditure (both capital and recurrent expenditures), tax revenue, external debt and gross domestic product (GDP); the study covers the period 1985-2018.

1.9 Organization of the Study

This study is organized in five (5) chapters. Chapter one of this study gives a theoretical overview of the study, its significance, research questions, and hypotheses, the definition of terms, limitations, and objectives of the study. Chapter two of this study gives a theoretical framework and review of related literature. Chapter three states the research methodology used in the research. Chapter four gives data interpretation and analysis of the study and chapter five gives the conclusion and recommendation.