IMPACT OF FISCAL POLICY ON ECONOMIC GROWTH IN NIGERIAMENT OF ECONOMIC RECESSIONIN NIGERIA 2014- 2017

CHAPTER ONE

INTRODUCTION

1. 1. Background of the Study

 Fiscal policy is seen as that part of government policy concerned with the raising of government revenue through taxation and other means and the decision on the level and pattern of expenditure for the purpose of influencing economic activities or attaining some desirable macroeconomic goals. Economic growth on the other hand may be defined in terms of the total physical output, or real income, of an economy (Udabah, 2002). Fiscal policy can foster growth and human development through a number of channels such as increase in investment and productivity. Macroeconomic instability is particularly damaging to the poor in a nation, as their earnings are not indexed to inflation and they have limited opportunities to invest in assets that provide a hedge against inflation. But macroeconomic stability associated with prudent fiscal policy yields greater benefits, including higher rates of investment and educational attainment, as expected rates of return can better be achieved in an environment of low inflation. Prudent fiscal policy can help enhance factor productivity, leading to higher growth and consequently poverty reduction. The vast literature on endogenous growth theory suggests that fiscal policy can either promote or retard economic growth through its impact on decisions regarding investment in physical and human capital. In particular,increased spending on education, health, infrastructure, and research and development can boost long term growth. Higher growth, in turn, generates greater fiscal resources to finance spending on human capital, further bolstering the dynamism of the economy.  Effectively and efficiently implemented government spending on infrastructure increases private sector productivity by providing complementary public inputs (for example, through spending on roads and bridges that facilitate trade in rural areas) Ineffective fiscal policy, on the other hand, can harm the growth process of an economy. Dead-weight loss from taxes that finance public spending, and the associated adverse factor-supply effects are good examples that readily come to mind.  Unproductive public spending can take various forms, including: expenditure on wages and salaries of unproductive employees. Such resources can be deployed to more productive initiatives that would enhance increased productivity in the economy. Rent-seeking incentives reduce growth by diverting higher human capital away from productive activities with adverse impact on the index of productivity.Macroeconomic dynamics in Nigeria has been dominated in the past by fiscal instability. There have been a strong deficit and debt bias stemming from government revenue volatility. With about 75 percent of revenue from oil and gas, fiscal policy in Nigeria has been heavily influenced by oil driven volatility impacting both revenue and expenditure. Since 1970, both revenue and expenditure have been very volatile while increasing over time. In periods with high oil prices, such as in1979-82, 1991-92 and more recently in 2000-02, revenue and expenditure have increased sharply. The implications of such boom-bust fiscal policies include the transmission of oil volatility to the rest of the economy as well as disruptions to the stable provisions of government services (Thomas 2003).

Since the late 1980s, fiscal (budget) policy has become a major tool/instrument in Nigeria. The reasons for this are not inconsiderable. First is the dominant role of the public sector in major (formal) economic activities in Nigeria. This can be traced to several factors. Among them are the oil boom of the early 1970s, the need for reconstruction after the civil war, the industrialization strategy adopted at the time (import substitution industrialization policy) and the militarization of governance. The second reason for the increasing dominance of fiscal policy in the management of the economy is the fall in the international price of oil in the late 1980s. Furthermore, the persistent fiscal deficit since the early 1970s (and given the decline in oil revenue) required a new fiscal focus that saw the emergence of the public sector in major economic activities (Obi,2007). Although the democratically elected government in 1999 adopted policies to restore fiscal discipline, the rapid monetization of foreign exchange earnings between 2000 and 2004, another era of oil windfall, resulted in large increases in government spending. In 2005 alone, government spending increased to 19 percent of GDP from 14 percent in 20000(CBN bulletin 2015). Extra budgetary outlays not initially included in the budget increased. Worst till, most of this spending were not directed towards capital and socio-economic sectors. Corollary primary deficit worsened from an average of 2.6 percent of GDP in 1980s to one of 6.2 percent in 1990s. In 2002 alone, primary deficit increases to 5 percent of GDP from 2 percent in 2000. These increases in deficits result in a mounting stock of debt, ranging from 88 percent of GDP in 1980s to 96 percent of GDP in 1990s. In 2002 alone, the stock of debt increased to 91 per cent of GDP from 45 per cent in 2000 (Cashin, 1995). However, considering the uncertain fiscal dynamics in Nigeria, the recent fiscal adjustment witnessed in 2005 might still not be sustained. Nigeria’s fiscal revenues are largely coincided with oil revenue accounting for nearly 80 percent of government revenues, which implies that the economy is highly exposed to price fluctuations in the world oil markets. Naturally, oil revenue is very volatile due to world oscillation in oil prices and to unpredictable changes in OPEC assigned oil quota of which Nigeria has been a member since 1958 following the commercial discovery of oil in Oloibiri in River State, Nigeria in 1956. Absence of suitable fiscal rules and a proper finance management framework for oil related risks over the past two decades in Nigeria have led to boom and-bust type fiscal policies that have generated large and unpredictable movements in government finances. Consequently, this has been a recurrent source of destabilizing effect of fiscal surprises on the domestic prices and exchange rate as well as financial system. Issues connected to budgetary (fiscal) policy have become major issues in our polity. The 2012 budget has attracted a lot of criticism. One of the major issues raised against Nigeria’s 2012 budget is the high rate of recurrent expenditure, despite government’s reduction from 74.4 per cent in 2011 to 72 per cent in 2012. Based on the 2012 budget, government proposed spending most of its money on running the administration rather than on badly needed infrastructure projects to create jobs and boost growth in the continent’s second-largest economy. 2014 budget was incremental in nature, the figures shows sharp increases in expenditure and that Nigeria has spent more than she has earned. Within the period, total revenue has witnessed an average increase of 29%, while total expenditure exceeded that by 15%. Between 2015 and 2016 average increase in expenditure was lower than revenue. This may be partly due to the negative impact of insurgency, recession etc. that significantly reduced government revenue. The figure also shows that government expenditure responds to changes in total revenue. Between 2014 and 2016 when government revenue dropped on the average by 0.82% due to significant decline in oil prices, government expenditure also shaded an average of 1.20% within the period. This suggests that Nigerian economy follows pro cyclical fiscal policies to changes in government revenue. Based on the above analysis, this investigation is primarily aimed at assessing the impact of fiscal policy on the economy of Nigeria.

1.2Statement of the Problem.

In Nigeria, despite the importance of existing policies to achieve economic objectives of viable economic growth, the use of fiscal policy for the realization of these growth objectives is still highly questionable. The Nigerian economy has been plagued with several challenges over the years. Researchers have identified some of these challenges as: gross mismanagement/ misappropriation of public funds, (Okemini and Uranta, 2008), corruption and ineffective economic policies (Gbosi, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policies (Onoh, 2007); inappropriate and ineffective policies (Anyanwu, 2007). Imprudent public spending and weak sectorial linkages and other socioeconomic maladies constitute the bane of rapid economic growth and development (Amadi and Essi, 2006). It is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment. In spite of many, and frequently changing, fiscal, monetary and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development (Ogbole, 2010). These policies span through two broad periods, which can be classified as “regulation” and “deregulation”. Our main focus is the differential in fiscal policy failed to achieve a satisfactory level of welfare for the society by providing an equitable or fair distribution of income and wealth, or all of these (Ogiji, 2004). The 1930s Great Depression was a confirmation of the reality of the failure of the market economy which led to the evolution of Keynesian economics. Keynes submitted that the lingering unemployment and economic depression were a result of failure on the part of the government to control the economy through appropriate economic policies (Iyoha and Fischer (1990). Consequently, Keynes proposed the concept of government intervention in the economy through the use of macroeconomic policies such as fiscal and monetary policies. Fiscal policy deals with government deliberate actions in spending money and levying taxes with a view to influencing macro-economic variables in a desired direction. This includes sustainable economic growth, high employment creation and low inflation (Microsoft Corporation, 2004). Thus, fiscal policy aims at stabilizing the economy. Increases in government spending or a reduction in taxes tend to pull the economy out of a recession; while reduced spending or increased taxes slow down a boom (Dornbusch and Fischer, 1990). Government interventions in economic activities are basically in the form of controls of selected areas/sectors of the economy. These controls differ, and depend on the specific needs or purpose the government desires to achieve. Samuelson and Nordhaus(1998), distinguished between two forms of regulation, namely:

1. Economic regulation (involving control of prices, entry and exit conditions, regulation of public utilities, such as transportation and media organizations, regulation of the financial sector operations.

1. Social regulation (aimed at protecting the health and safety of workers at work place, the environment, and protection of consumer rights. our focus is on economic regulation. Aregbeyen (2007), Ekpo (1994), Amin (1998), Devarajan and Ekpo (1994). (Fuente (1997), Kneller and Galor (2005). Bose, Tanzi, and Zee (1996), established positive relationship between fiscal policy (public spending) and economic growth. Bose et al. (2003) in Aregbeyen (2007) found that the share of government capital expenditures in the gross domestic product is positively and significantly correlated with economic growth, while the growth effect of current expenditure is insignificant. Aregbeyen (2007) believed that although government expenditures were necessary for economic growth, yet the impact of such expenditures on the economy is of primary importance. He concluded that the key to rapid economic growth constituted capital and public investment expenditure and that increased government budget deficits do not automatically guarantee rapid economic growth.It is interesting to know that the available evidence shows that over the years, under review (1981- 2015), Nigeria’s fiscal operations have resulted in persistent overall deficit. Nigeria has recorded over thirty years of deficits. Deficits are meant to accelerate economic activities through investments and induced aggregate demand. But this has become a serious problem to know that despite the fact that Nigeria has been operating deficits over these periods and found itself in a situation of less than full employment, her economy has been in distress, the opposite view of the essence of deficits occur. There is obvious fall in the standard of living of the citizens, decline in the growth of the economy, persistent unfavorable balance of payment, increased public debt; local and foreign, continued depletion of the foreign reserve, little or no savings, decline in exports, increased inflationary pressure, continuous dependence on external economies etc. Finally, it is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment. In spite of many, and frequently changing, fiscal, and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development (Ogbole, 2010).  Thus the aim of this research is to empirically investigate the impact of fiscal policy on the economy by examining the case of Nigeria. According to Adeoye (2006), “The debate on the effectiveness of fiscal policy as a tool for promoting growth and development remains.

 1.3 Research Questions

Therefore, this study aims to empirically investigate the aforementioned problems so as to bridge the gap in knowledge and contribute to existing literature. Thus, this study shall examine and address the following research questions:

1. What is the impact of government revenue (Tax) on economic growth in Nigeria?

2. What is the impact of government expenditure on economic growth in Nigeria?

3. What is the impact of domestic debt on economic growth in Nigeria?

4. What is the direction of causality between the fiscal policy components and economic growth in Nigeria?

 1.4Objectives of the Study

 The broad objective of this study is to empirically investigate/assess the impact of fiscal policy on Nigeria economic growth from 1981 to 2015.More specifically, this study intends to achieve the following:

1. To evaluate the impact of government expenditure on economic growth in Nigeria.

1. To determine the impact of government revenue (Tax) on economic growth in Nigeria.

1. To evaluate the impact of domestic debt on economic growth in Nigeria.

1. To ascertain the direction of causality between the fiscal policy components and economic growth in Nigeria?

   1.5 Statement of Hypothesis

In carrying out this study, the following hypotheses would be tested and either accepted or rejected, based on the research findings.

1. H01: Government expenditure has no significant impact on economic growth in Nigeria.

2. H02: Government revenuehas no significant impact on economic growth in Nigeria.

 3.  H03: Domestic debt has no impact on economic growth in Nigeria

 4.  H04: Fiscal policy variables have no causal relationship with economic growth in Nigeria.

1.6. Significance of the Study

The findings of this study will be beneficial to individuals, cooperate bodies, researchers and the government and its agencies at large. At the level of the corporate bodies or the individual level, it will help them understand the way the government conducts its revenue and expenditure programs and to know how to respond to such programs and policies. It will also aid the government to predict with accuracy the impact that its revenue and expenditure program will have on the economy at large. This research work will also serve as a reference point for other researchers and the academic. Above all, it will add to existing stock of knowledge thereby filling up the knowledge gap.

1.7 The Scopes and Limitation of the Study

This work is set to do a thorough assessment of the impact of fiscal policy on Nigeria economic growth. The scope of this study will cover the period 1981-2015. Government expenditure, revenue and budget deficit financing will be used as fiscal policy instruments. The data to be used for analysis will be secondary data sourced from the 2010 and the golden jubilee edition of Central Bank of Nigeria statistical bulletin.