EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH IN NIGERIA (A CASE STUDY OF CENTRAL BANK OF NIGERIA, ABUJA)

CHAPTER ONE

1.0 INTRODUCTION

1.1. BACKGROUND OF THE STUDY

The current dwindling concern is that large and growing governments have deleterious effect on the long-run growth of their economies. The usual policy prescription calls for a scaling back of government activity and budgets, constraining public spending from growing faster than output. In countries facing fiscal imbalances and high debt burdens, this has prompted wide-ranging fiscal consolidation programs to reduce government spending (IMF, 2013).

However, parallel to this thrust has been a call for fiscal space in which governments argue for room in their budgets to allow for the provision of productive public goods that will foster economic growth (Heller, 2011). The realization of this growth undoubtedly is not automatic but requires policy guidance, which are Fiscal and Monetary policy instruments which are the main instruments of achieving the macroeconomic targets.

The basic fiscal policy instruments are Government Expenditure and Tax revenue. To most economist all over the world, fiscal policy has been an important growth determinant of any country, this deep seeded belief that increase in taxation, public investment, Maintaining Surplus Budget, wage control, inflation and other aspect of fiscal policy instrument contribute more to the growth determinant of any country both developed and developing countries.

Fiscal policy is undoubtedly one of highly valued tools or policies used by the government to trace and achieve ‘macroeconomic stability of the economy of most developing countries (Siyan and Debayo, 2011). Monetary policy is synonymous with fiscal policy as it the tool which the central bank uses to monitor and influence money supply in economy.

Fiscal policy implementation in essence is done through the government’s budget, where the budget is an instrument of fiscal policy. Fiscal policy as a major instrument deals with government deliberate actions in money expenditures and levying of taxes with the main objective of influencing sustainable economic growth, high employment creation and low rate of inflation (Micosoft Encarta Encyclopedia, 2015).

Furthermore, the objective of fiscal policy is also inclusive of promoting an economic condition conducive for business growth while ensuring that any such government actions are consistent with economic stability (Anyanwu, 2015). More so, fiscal dominance is manifested when fiscal policy is set exogenously to monetary policy in a level or situation where there is a limit to the amount of government debt that can be held by the public.

More broadly, in some emerging economies with unsteady financial systems as Nigeria, monetary policy is directly opposite of fiscal policy and plays only an accommodative role. In a situation like this with such shallow financial system, the government institutions are underdeveloped.

The security markets do not function properly; the central banks have no sufficient amount of tangible securities and adequate instruments of monetary control. Situation like this is an inducing factor to fiscal dominance. Economic growth is considered is a key macroeconomic objective of a country and that increase in government spending on socio-economic and infrastructural development encourages economic growth (Barro, 2012).

Infrastructural development such as road, power, communication, railway, etc, reduces cost of production, raises formal private sector investment and production profitability of firms thus enhancing economic growth.

Furthermore, in an attempt to cater for increasing spending, government tends to increase taxation and/or borrowing which might affect her spending behaviour. High taxation de-motivates individuals or firms from investment sphere, which in turn reduces income and aggregate demand (Maku, 2015). Similarly, high taxation increase cost of production and reduces investment expenditure and profitability of firms especially the infant firms.

Government borrowings, especially domestically, in order to finance expenditure; it will crowd out the private sector, thus hampers private investment. The argument on the efficacy of fiscal policy as an instrument for stimulating growth and development remains biased given conflicting results of past studies.

Oshinowo (2015) observed dual sides of the review concerning the role of fiscal policy in stimulating growth. The first view is that government’s support for knowledge, research and development, productive investment, maintenance of law and order and provision of public services can stimulate growth in short-run and long-run.

Conversely, the second view is that governments, especially in developed economies, are bureaucratic and less efficient and as a result they tend to impede growth if they get involved in the productive sectors of the economy. Fiscal policy is perceived to destabilize economic growth by distorting the effect of tax and inefficient government spending.

As indicated by some of our literatures, that in a situation where fiscal policy dominance applies, the economy’s economic policy will be as good as its fiscal policy and institutionalized central bank independence may not necessarily bring about an independent monetary policy (Oyejide, 2013).

The management of fiscal policy and its implementation affects economic growth in particular and in general stabilizes the overall macroeconomic variables in every economy especially a frontier economy like Nigeria.

In essence therefore, this research is of the view that further investigation on this area in this moment of structural reform in Nigeria will help the government with useful information based on the fiscal policy formulation measures. To this end, the study contributed to the argument by examining the effect on fiscal policy on economic growth in Nigeria.

1.2 STATEMENT OF THE PROBLEM

Over the years, Nigeria’s potential for sustainable economic growth and development has remained unattained. This is quite disheartening that despite the enormous mineral and human resources the country owns coupled with increasing trend of public spending year in-year out, the economy has been performing below expectation.

Policy analysts, economists and other professionals hinged weakening of the Nigerian economy to corruption, bureaucracy, political instability, lack of accountability and transparency, poor control and lack of vision that will direct the economy to the path of growth.

Asaju, Adagba and Kajang (2014) added that the lack of congruence between monetary and fiscal policies and the hitches in the adoptions of non-market tools instituted set back to achieving fiscal objectives in Nigeria.

The public has continued inept in terms of service delivery, decay in infrastructure, corruption and lack of accountability and probity in the management of public policies and resources shows the depth of the ineptitude of the public sector in Nigeria that is supposed to lead the economy through fiscal policies.

These have resulted to high rate of unemployment, rising inflation, declined in growth, decreasing real incomes and increasing poverty level. It can be unequivocally stated that fiscal policy has not been effectual in the accomplishment of macroeconomic objectives of price stability, full employment, balance of payment equilibrium, efficient resource allocation, uneven redistribution of income and wealth, exchange rate stability and economic growth.

Moreover, there has been serious contention in literature as to which policy is more appropriate for the quest of macroeconomic equilibrium in developing economies. Supporters of the monetarist school of thought reported that monetary policy exerts greater influence on economic performance and it should be embraced by developing economies.

On the other hand, the Keynesians school of thought posited that fiscal policy has greater influence on economic performance and should be adopted by developing economies. However, fiscal policies have not been appropriately used to spur improved growth of the Nigerian economy (Ugwanta, 2014).

1.3 OBJECTIVES OF THE STUDY

The major aim of the study is to examine the effect of fiscal policy on economic growth in Nigeria. Other specific objectives of the study include;

1. To examine the fiscal policy variables that had a significant impact on economy growth in Nigeria.
2. To examine if government expenditure, government revenue and government borrowing predicts economic growth (GDP) in Nigeria.
3. To examine the impact of fiscal policy on economic growth in Nigeria.
4. To examine the impact of public external debt on the Nigerian economic growth.
5. To examine the relationship between fiscal policy and economic growth in Nigeria.
6. To recommends ways to improve the effectiveness of fiscal policy instruments in Nigeria.

1.4 RESEARCH QUESTIONS

1. What are the fiscal policy variables that had significant impact on economy growth in Nigeria?
2. Does government expenditure, government revenue and government borrowing predicts economic growth (GDP) in Nigeria?
3. What is the impact of fiscal policy on economic growth in Nigeria?
4. What is the impact of public external debt on the Nigerian economic growth?
5. What is the relationship between fiscal policy and economic growth in Nigeria?
6. What are the recommended ways to improve the effectiveness of fiscal policy instruments in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

1. : There is no significant impact of fiscal policy on economic growth in Nigeria.
2. : There is a significant impact of fiscal policy on economic growth in Nigeria.

Hypothesis 2

1. : There is no significant relationship between fiscal policy and economic growth in Nigeria.
2. : There is a significant relationship between fiscal policy and economic growth in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study would be of immense benefit towards the development of financial policy in Nigeria by properly assessing government expenditure, taxation and the importance to the country at large. The findings of this study will be useful for the Economic Planners who are responsible for allocating budgetary for the growth and development of the country. The study would also be of immense benefit to students, researchers and scholars who are interested in developing further studies on the subject matter.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the effect of fiscal policy on economic growth in Nigeria, a case study of Central Bank of Nigeria (CBN), Abuja.

1. LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. DEFINITION OF TERMS

Fiscal Policy: Is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply.

Government Spending: It refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer

Economic Growth: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

1. ORGANIZATION OF THE STUDY

The study would be structured into five chapters, with the first chapter being introductory;

Chapter two reviews the theoretical review, literature and brief overview on fiscal policy and economic growth as well as its policy implications for the Nigerian economy;

The third chapter devolves on the methodological issues and models used in the analyses;

The fourth chapter specifies the results coming from the analyses were discussed in the chapter; and

The fifth chapter concludes the study with the summary of findings, policy recommendations and suggestion for further research.