THE IMPACT OF FISCAL POLICY ON THE NIGERIA ECONOMY

CHAPTER ONE

1.0INTRODUCTION

This investigates the three elements of fiscal policy (1) government spending, taxation and the other source of revenue which finance public spending and the resulting budget deficit or surplus which occurs wherever government expenditure does not exactly equal revenue.

With an introducing survey of this public finance aggregate before examining their role in the government, “fiscal poly”.

This is an instrument which is distorted to the study of the role of money in a monetary economy. The nature and function both of money and of the banking system in a modern economy, and we examined in some details the supply of money and the demand for money. It ultimate objective is to control inflation.

The fundamental change in monetary policy which have occurred in the U.K during the last thirty years, as Keynesian monetary policy has given way to monetarism. This include with a brief survey of alternative strategies which a monetarism. Government might adopt to control the money supply, together with an assessment of its success. Fiscal policies are complementary policies that the various government of the world use.

1.1            Background of the Study

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, corruption and ineffective economic policies, lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policies as well as inappropriate and ineffective policies. Imprudent public spending and weak sectorial linkages and other socioeconomic maladies constitute the bane of rapid economic growth and development (Amadi, 2006). It is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment.

Fiscal Policy is the budgetary policy of the government relating to taxes, public expenditure, public borrowing and deficit financing (Sanni, 2012). Thus, fiscal policy aims at stabilizing the economy. As noted by Anyanwu (1993), the objective of fiscal policy is to promote economic conditions conducive to business growth while ensuring that any such government actions are consistent with economic stability.

Economic Growth on the other hand is an increase in real output or real per capita output of an economy (Udabah, 1999). Similarly, Kuznets (1973) also defined economic growth as a long term rise in capacity to sustain increasingly, diverse economic goods and services to its population, growing capacity based on advancing technology, institutional and ideological adjustments that it demands. The interpretation of economic growth emphasizes a sustained rise in the output level which is the only manifestation of economic growth.

The relationship between fiscal policy and economic growth has continued to generate series of debate among scholars. Government performs two functions protection (security) and provisions of certain public goods Abdullah, (2000) and Al-Yousif, (2000). Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks of criminality, protect life and property, and the nation from external aggression. Under the provisions of public goods are defense, roads, education, health, and power, to mention a few. Some scholars argue that increase in government expenditure on socio-economic and physical infrastructures encourages economic growth. For example, government expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power, reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth. Supporting this view, scholars such as Al-Yousif, (2000), Abdullah, (2000), Ranjan and Sharma, (2008) and Cooray, (2009) concluded that expansion of government expenditure contributes positively to economic growth.

Researchers on fiscal policy and related topics have been many and varied and so are the theories. For instance Ram (1986) found that a stronger positive relationship exists between fiscal policy and economic growth in lower income countries than in higher income countries. In contrast, Landan (1983, 1985 and 1986) concluded that the data he examined support the view that government spending is associated with a reduction in a country’s capacity to grow. Easterly (1992) seems to support Landan’s results as he implied that government consumption spending is negatively associated with economic growth and GDP per capita. Ezirim and Muoghalu (2006) investigated the extent to which factors like population growth, urbanization effects and taxation affect the size of public expenditure in less developed countries like Nigeria; and concluded that inflation constituted the most important factor that accounted for changes in government financial management. Offurum (2005) in an extensive study investigated the impact of public expenditure on economic growth.

However, some scholars did not support the claim that increasing fiscal policy promotes economic growth, instead they assert that higher government expenditure may slowdown overall performance of the economy. For instance, in an attempt to finance rising expenditure, government may increase taxes and/or borrowing. Higher income tax discourages individual from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms. Moreover, if government increases borrowing (especially from the banks) in order to finance its expenditure, it will compete (crowds-out) away the private sector, thus reducing private investment.

Diamond (1990) notes that in Nigeria, less attention has been given to examining the productiveness of the various components of public spending. Longe (1984) examines the growth and structure of fiscal policy in Nigeria with a view to ascertaining if the pattern fits with the result of other countries. Thus, his study revealed that government expenditure has shown many considerable structural shifts over the review period and that the ratio of government expenditure to GNP has been rising and corresponds with the rising share hypothesis. For instance, government capital expenditure on economic services, social and community services, and transfers increased from N15.5 million N1.4 million and N100.7 million respectively in 1970 to N809120.5 million, N120049.2 million and N211758.1 million respectively in 2009, recurrent expenditure on same services increased from N25.95 million, N43.55 million and N511.42 million respectively in 1970 to N340193.77 million, N346071.95 million and N622171.10 million respectively in 2009. About 60 percent of the population lives on less than US$1 per day. This is inspite of astronomical increases in various fiscal policies over the years. It is on this background that this study would investigate the impact of fiscal policy on the economic growth of Nigeria.

1.2            Statement of the Problem

There exists a consensus in the literature that an adequate and effective macroeconomic policy is critical to any successful development process aimed at achieving high employment, sustainable economic growth, price stability, long-viability of the balance of payments and external equilibrium.

Despite the lofty place of fiscal policy in the management of the economy, the Nigerian economy is yet to come on the path of sound growth and development. Studies by Agiobenebo (2003), Gbosi (2002) and Okona (1997) indicate that the economy is still married by chronic unemployment, rising rate of inflation, dependence on foreign technology, monoculture foreign exchange earnings from crude oil, and more. Furthermore, stagnating revenue mobilisation in particular and some upward movements in expenditures led to a reversal of the fiscal stabilisation process since the second half of the Nineties. An improved fiscal performance during 2003-04 engendered by containment of the non-planned expenditures and supported by high revenue mobilisation on the back of buoyant real activity paved the way for renewed commitment towards fiscal consolidation in Nigeria.

The poor growth performance of the Nigerian economy since 1986 has generated interest in issue of growth and development. From 1970 to 1985 there was financial repression. However, financial liberalisation was introduced in 1986 to realise necessary finance to promote growth. This has made it necessary to study and understand the relationship between finance and growth. Nigeria is endowed with enormous potential for growth and development with her vast oil and gas resources, rich and expensive agricultural land, solid minerals and abundant human resources. Despite these factors, since 1960 when she got her independence from Britain, the successive governments have not done enough to put the nation’s resources to effective productive use as to chart the path of growth and development. The net result is that the Nigerian economy is now performing below her potential as the crown prince of the Gulf of Guinea.

Prior to 1975, there was lots of uncontrolled spending in the economy. The monetary control was minimal in the domestic science, ports were congested, the civil service was overloaded and largely corrupt and the economy lacked positive thrust. Data available indicate that by 1985, government expenditure was N13040.9 million, by 1990, it increased to N60268.2 million and N254038 million in 1995. In 1998, the total expenditure of the federal government recurrent and capital was N443,563.3 billion, increased by N87,3010 billion or 2.45% above N356,262.3 billion for the period of 1997. The expenditure also exceeded the 1998 budget estimate of N370, 000 billion by N73,563.3 billion or 19.9% also between the year 2005 and 2009, the general government expenditure has also been increasing rapidly. In 2005, it was N3986.2 billion representing 28.67% of the gross domestic product (GDP). It increased to N4290.7 billion in 2006 which constitute 23.23% of GDP, in 2007, it moved up to N5394.4 billion making up about 28.7% of the GDP, in the same manner, it increased to N7644.6 billion in 2008 which represented about 28.2% of the GDP and N7258.0 billion in 2009 which represent about 30.3% of GDP. At N7,258.0 billion, the aggregate expenditure of the federal government fell by 5.1% from the level in 2008.

The question then is what form of fiscal policy rules will perform better in reducing debt accumulation and promote the necessary medium term budget deficit stability. Can fiscal policy curb the problem of economic growth and development in Nigeria? What tier of government should influence the level of economic growth in Nigeria? The answers to these questions are the concern of this study for proper economic management in Nigeria.

Fiscal policies are fundamental tools used by various government of the world to stimulate the level of economic activity some of the problem to dividing the Nigeria economic include:

a.     High rate of unemployment

b.     Poor investment climate in the economy

c.      High rate of inflation

1.4            Purpose of the Study

The purpose of this study is to develop concepts to describe, conceptualize and analyze the emerging software component market from the point of view of the industrial buyer. In this study, existing concepts and theoretical model describing markets are explored and brought into the specific context of industrial purchasing in emerging software components. The research includes preliminary theory building. The theory building in this study is about using the existing conceptualizations and theoretical models and on the basis of these, compiling a conceptualization that is applicable in the specific industry setting. The building of the theoretical conceptualization of the market from the buyer’s perspective is conducted through applying the existing literature, due to the fact that there exist a lot of knowledge on the phenomenon of market in the literature. This knowledge, however, is scattered across various streams of research and thus it needs to be gathered and elaborated in such a form that it can be applied in analyzing the research phenomenon under study in this research. The existing knowledge needs to be brought into the industrial purchasing perspective in the software component market setting.

In order to accomplish this aim, the study focuses on solving the following research problem. How to manage industrial purchasing in the emerging software component market.

a.     To identify the fiscal policies employed between 199-2009.

b.     To find out bow the policies have impacted on employment and unemployment in Nigeria.

c.      To find out the extent to which the policies have helped to improve investment climate in Nigeria.

d.     To ascertain the extent to which the policies have reduce inflation in the country.

e.     To recommend measures for overcoming the negative effects of monetary and fiscal policies on the Nigeria economy.

The solution to the described research problem is generated through finding answers to the following, more focused research questions.

1.5            RESEARCH QUESTIONS

The following questions were formulated as a good to the researcher.

a.     Which fiscal policies did the monetary authority employed in Nigeria between 1994 - 2009?

b.     How have the fiscal policies employed in Nigeria between 1994 - 2009 imported on employment and unemployment?

c.      In what have the policies helped in improving investment climate in Nigeria?

d.     What impact have the policies created in inflation in Nigeria?

1.6            SIGNIFICANCE OF THE STUDY

The study is to enable the researcher himself, as one of the condition necessary for the partial fulfillment for the award of the National Diploma in the financial studies in the school of Business and Management studies. These policies of fiscal are instrument employed fiscal are instrument employed by government as a measure to stabilize the pricing system. Furthermore, this same researcher work will be of immense, benefit to students, of various school on the campus particularly, financial students, practicing accountants, economic on profession as well as financial manager, to keep them embrace of fiscal  policies.

1.7            SCOPE OF THE STUDY

Research work is confine, because it involves some necessary material to be used. To discuss this topic “the impact of fiscal policies in Nigeria economy” present, a long and broad view which unequivocally present herculean task to the researcher to write upon.

Therefore, the researcher will present a task to Boki local government area to discuss underproduction economy within the state, the researcher also divide the local government into two Buje zones, which the researcher can discuss under the topic “The impact of fiscal policy in Nigeria.

1.8            DEFINITION OF TERMS

Fiscal policy: This policy focuses on altering the level and composition of government receipt and expenditure to influence the level of economic activity. It is also for adjustment of tax rates and or government spending in order to affect aggregate demand and economy as a whole. Fiscal policy is, therefore, concerned with the raising of government revenue, through taxes. Other means and its expenditure.

Monetary policy: This is a policy that relates to monetary and non-monetary measured which are geared toward the sole purpose of influencing the value, volume and stability of money. The end result and effect such policy measure will culminant in achieving social economic and policies objective are the management of the expansion and contraction of the volume of money in circulation for specific purpose of achieving circulation for specific purpose of achieving predetermined national objective. It is also adopted by Central Bank of Nigeria (CBN)

Fiscal  policies: These policies and complementary, there are instrument employed by various government all over the world to bring about stabilization in the pricing of economic factors such as materials and labour as well as sustain economic growth and improvement on the National product.