The growth and development of the Nigerian economy has not been stable over the years as a result, the country’s economy has witnesses so many shocks and disturbances both internally and externally over the decades. The study examined the impact of fiscal policy measures on economic stabilization in Nigeria. Using the Ordinary Least Square (OLS) method, the study finds that of the four proxies of fiscal policy adopted by the study; only one (government oil revenue) is statistically significant. We therefore recommend diversifying the economy and creating conducive environment for small and medium scale businesses to thrive. This will not only increase our export earnings but also widen the tax net of the government.
1.1 Background of the Study
The growth and development of the Nigerian economy has not been stable over the years as a result, the country’s economy has witnesses so many shocks and disturbances both internally and externally over the decades. Internally, the unstable investment and consumption patterns as well as the improper implementation of public policies, changes in future expectations and the accelerator are some of the factors responsible for it. Similarly, the external factors identified are wars, revolutions, population growth rates and migration, technological transfer and changes as well as the openness of the country’s economy are some of the factors responsible for the disturbances in the Nigerian economy (Audu, 2012).
The cyclical fluctuations in the country’s economic activities has led to the periodical increase in the country’s unemployment and inflation rates as well as the external sector disequilibria (Gbosi, 2001). Fiscal policy is a major economic stabilization weapon that involves measure taken to regulate and control the volume, cost and availability as well as direction of money in an economy to achieve some specified macroeconomic policy objective and to counteract undesirable trends in the Nigerian economy (Gbosi, 1998).
Over the last decade, the growth impact of fiscal policy has generated large volume of both theoretical and empirical literature. However, most of these studies paid more attention to developed economies and the inclusion of developing countries in case of cross-country studies were mainly to generate enough degrees of freedom in the course of statistical analysis (Aregbeyen, 2007). There is a popular assertion in the empirical literature that public spending is negatively correlated with economic growth due to inefficiency of the public sector especially in the developing countries where large proportion of public spending is attributed to non-development expenditure like defense and interest payments on debt (Husnain et al., 2011) and Nigeria is not an exception. However, current trends in fiscal administration has introduced various ways in view to reducing such expenditure that contributes little to the development goals of national economy. Alongside this thought is the adoption of Medium Term Expenditure Framework (MTEF) as part of broad package of budget reforms to encourage cooperation across various government arms in planning and strategy for reducing wasteful expenditure (Babalola and Aminu, 2011).
The Nigerian government had consistently embarked on diverse macroeconomic policy options to tinker the economy on the path of growth and development. Amongst the policy options readily employed is that of fiscal policy (Iyeli and Azubuike, 2013). Fiscal policy entails government’s management of the economy through the manipulation of its income and spending power to achieve certain desired macroeconomic objectives amongst which is economic growth Gbosi (2008).Fiscal policy was not generally recognized as important until the birth of Keynesian Economics in the mid-nineteen thirties which enhanced its significance as a policy tool to overcome the economic depression of Western Europe and North America. The threat of inflation in the immediate post-war years and the desire to maintain continuous full employment following World War II has also meant the continued use of fiscal policy in these same economies. In more recent years, however, the general disentrancement over the limited success in the achievement of the above objectives has brought into sharp focus the question of the effectiveness of fiscal policy in relation to other policies especially monetary policy and the consideration as to whether or not the continued heavy reliance on fiscal policy as an economic stabilization tool is desirable (Samuelson 1970 as cited in Babalola, 2015).
While in the developing economies, the economic policy objectives of fiscal policy have been pursued to a greater or lesser degree, the one and overriding objective, the furtherance of which has relied greatly on fiscal policy, is economic development, defined not only as a continuous and sustained growth in total output as well as in output per head, but also as the structural transformation from the basically underdeveloped agricultural economies to fully industrialized ones. The reliance on fiscal policy in developing economies for the achievement of the economic development objectives in particular and other objectives in general, has been particularly great in relation to the use of other policies such as monetary policy (Olaloku, 1987).
The Nigerian government has over the years increased its spending For instance, government total recurrent expenditure increased from N3 .819 billion in 1977 to N4.805 billion in 1980 and further to N36.2196 billion in 1990. Recurrent expenditure was N461 billion and N1.5893trillion in 2000 and 2007, respectively. It further increased to N3.10944 trillion in 2010 and N3.6898trillion in 2013 but however declined to N2.5303trillion in 2014 (CBN, 2015). In the same manner, composition of government recurrent expenditure shows that expenditure on defense, internal security, education, health, agriculture, construction, and transport and communication increased during the period under review. Moreover, government capital expenditure rose from N5, 004.60 million in 1977 to N10, 163.40 million in 1980 and further to N24, 048.60 million in 1990. The value of capital expenditure stood at N239, 450.90 million and N759, 323.00 million in 2000 and 2007, respectively. Furthermore, the various components of capital expenditure (that is, defense, agriculture, transport and communication, education and health) also show a rising trend between 1977 and 2015 (CBN, 2015). This increase is nursed with the aim of increasing infrastructure, social services and poverty reductions however the economic growth records of the country has been relatively unstable. The growth rate does not reflect the increased spending, [decayed infrastructure] and poverty still soar high (Abu and Abdullahi, 2010).
Thus the aim of this paper, therefore, on a general term, is to assess the short and long run impact of fiscal policy on economic growth in the Nigeria economy between 1981 and 2015fiscal years.
1.2 Statement of the Problem
Fiscal policy as in many texts and literatures could mean the government actions affecting its receipts (revenue) and expenditure which is taken as ordinarily a measure by the government’s net receipts, its surplus or deficit. The use of fiscal policy is very paramount in every society most especially in the less developed countries (LDCs) as a major tool for stabilization and for development to be sporadic, when the government uses government revenue and expenditure policies to regulate and stabilize the economy toward development, the action is fiscal policy. It thus serves as an economy’s “shock- absorber” in specific areas of development (Babalola, 2015).
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 socio- economic maladies constitute the bane of rapid economic growth and development (Amadi et al., 2006). Also according to Ogbole, et al (2011) it is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment.
During 1981-1999 total capital expenditure amounted to N1694.04billion with an average of 5.33% of total GDP while from 2000-2014 it was averaged at 3.68% with and all time high of 11% in the year 2014 lowest of 1.23% in the year 2012 CBN (2014).
In the year 1993, government expenditure more than doubled and grew by 106% whereas GDP grew at 2%. Interestingly, in the year 2000 government expenditure dropped by 26% whereas GDP grew by 5%. However by 2013 government expenditure grew by 13% which was accompanied by a growth in GDP by 7%. Over the years (1981-2015) the trend pattern between economic growth and GDP has been somewhat fluctuating and has remained on an increase since 2000 (CBN, 2015).
There have been several fluctuations in the revenue of government. During 1982 government revenue dropped by 13.97% which was followed by a decline of the GDP by 1.72% however in the year 1995 government revenue increased by 127.82% but despite this sharp rise the economic growth rate at same date was averaged at 2.25% also similarly in 2009 government revenue dropped by 38.42% as a result of world financial crisis of 2009 but interestingly economic growth recorded a growth rate of 6.96% (CBN, 2015).
From the above it can be deduced that irrespective of the fact that there is a sharp increase in government expenditure the resulting effect does not trick down to economic growth as growth rate in the GDP has been slow, compared to the government expenditure, this situation is in contrast to the Wagner’s theory of increasing state activity and the fiscal policy objective of the Nigerian government. As such this study intends to investigate the effect of fiscal policy on economic growth in Nigeria.
1.3 Research Questions
The above statement does give rise to the following research questions
- What is the impact of fiscal policy on economic growth in Nigeria?
- Does government expenditure have any significant impact on economic growth in Nigeria?
- Does government revenue have any significant impact on economic growth in Nigeria?
1.4 Objective of the Study
The broad objective of the study is to examine the impact of fiscal policy measures on economic stabilization in Nigeria. However in achieving this objective the specific objective is thus stated as follows;
- To empirically examine the effect of fiscal policy on economic growth in Nigeria.
- To determine the impact of government expenditure on economic growth in Nigeria.
- To determine the impact of government revenue on economic growth in Nigeria.
1.5 Research Hypotheses
The hypothesis to be tested in this study includes
- H0: fiscal policy does not have a significant impact on economic growth in Nigeria
- H0: government expenditure does not have significant impact on economic growth in Nigeria.
- H0: government revenue does not have any significant impact on economic growth in Nigeria.
1.6 Scope of Study
This study is based on an empirically analysis of the impact of fiscal policy on economic growth in Nigeria and will cover the period of 35 years (1981-2015) and data will be sourced from CBN statistical bulletin, and also the relationship between fiscal policy and economic growth would be estimated using Eviews9.
1.8 Significance of the Study
The study when completed will be of relevance to government agencies and policy analyst such as the ministry of finance, Budgets and other government institutions for effective decision making on prescribing and formulation fiscal policy and measures. It will also be of immense help to business men and women to keep track of government fiscal policy particularly as it relates to government spending (which indicates government’s interest and target for a given fiscal year) and tax rate.
This study will also be of relevance to the general public as its enable them keep track of how government spends their common wealth and how such spending has affected their life and standard of living. Finally, the study will add to the basket of already existing literature and serve as a point of reference for students and researchers alike and as well serve as bedrock for further research.
1.7 Limitation of the Study
One limitation of this study is with the issue of time, as the researcher is also a student who needs to allocate time to other course work. And the issue of unavailability of finance to carry out a more comprehensive research and funds for travelling to necessary institutions to obtain relevant materials limited the researcher’s work.
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