IMPACT OF FISCAL POLICY ON ECONOMIC PERFORMANCE IN NIGERIA (1981-2016).
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IMPACT OF FISCAL POLICY ON ECONOMIC PERFORMANCE IN NIGERIA (1981-2016).
Chapter one
INTRODUCTION
1.1 Background for the Study
Fiscal policy has traditionally been defined as the employment of taxes and public spending to influence a country’s economic activities. The government’s budget serves as the foundation for the implementation of fiscal policies. The most important component of a public budget is its ability to govern an economy (Omitogun & Ayinla, 2007).
Fiscal policy is a purposeful action of the government that uses government spending, taxation, and borrowing to influence the pattern of economic activity, level of output growth, employment, inflation, and employment (Ugwanta, 2014).
Over the last decade, the growth impact of fiscal policy has generated a considerable body of theoretical and empirical study. Economic growth is regarded as a key macroeconomic goal of a country, and increases in government spending on socioeconomic and physical infrastructure, as well as expenditure on health and education, stimulate the rate of growth of national output (Barro, 1990).
Investing in infrastructure such as roads, power, communication, and railways reduces production costs while increasing private sector investment and company profitability, hence boosting economic growth.
Barro (1990) supported the claim that more government spending promotes economic growth. Another school of thought held that more government spending stifles economic progress. According to this school of thought, increased government spending tends to impair an economy’s overall performance.
Furthermore, in order to support increased expenditure, the government typically raises taxes and/or borrows, which may influence her spending habits. Higher income taxes discourage people from working long hours or looking for work, lowering income and aggregate demand (Maku, 2015).
Similarly, greater profit taxes tend to raise production costs while lowering enterprises’ investment spending and profitability. If the government expands borrowing, particularly from banks, to fund spending, it will crowd out the private sector, limiting private investment.
Given the contradictory findings of previous studies, the argument over the usefulness of fiscal policy as a tool for encouraging growth and development continues. Oshinowo (2015) highlighted that there are two opposing viewpoints in the literature on the function of fiscal policy in fostering economic growth.
The first viewpoint holds that government support for knowledge, research and development, productive investment, law enforcement, and the provision of public services can encourage both short- and long-term growth.
The second viewpoint is that governments, particularly in developed economies, are bureaucratic and inefficient, and as a result, they tend to stifle growth if they become involved in productive sectors of the economy.
Fiscal policy is thought to undermine economic growth by distorting the impact of taxes and wasteful government spending. Furthermore, propositions exist regarding the impact of fiscal policy on economic performance results.
According to Khosravi and Karami (2010), proponents of the classical school of thought believed that the influence of government spending was only ephemeral and ineffective, especially in the long run when prices adjusted and output was at its peak.
In a similar line, endogenous theorists claimed that government spending and taxation have both temporary and lasting effects on economic growth. To that purpose, the study contributes to the debate by investigating the impact of fiscal policy on economic performance in Nigeria.
1.2 Statement of Problem
Nigeria’s potential for long-term economic growth and development has yet to be realised. It is depressing that, despite the country’s vast natural and human resources, and an increasing tendency of public spending year after year, the economy has performed below expectations.
Policy analysts, economists, and other professionals have attributed Nigeria’s poor economic performance to corruption, bureaucracy, political instability, a lack of accountability and transparency, poor governance, and a lack of visionary leaders who can steer the economy towards growth. Asaju
Adagba, and Kajang (2014) stated that the misapplication of monetary and fiscal policies, as well as complexities in the deployment of non-market friendly tools, posed significant challenges to Nigeria’s fiscal objectives.
The public has remained inefficient in terms of service delivery, infrastructural decay, a high rate of corruption, and a lack of accountability and probity in the management of public policies and resources, demonstrating the depth of Nigeria’s public sector’s ineptitude in leading the economy through fiscal policies.
These have resulted in a high rate of unemployment, rising inflation, slowing growth, declining real incomes, and a high rate of poverty.
Fiscal policy has not been effective in achieving macroeconomic objectives such as full employment, price stability, balance of payment equilibrium, efficient resource allocation, uneven redistribution of income and wealth, exchange rate stability, and economic growth.
Furthermore, there has been much debate in the literature on which policy is most suited to achieving macroeconomic stability in emerging countries.
Supporters of the monetarist school of thought claimed that monetary policy has a bigger impact on economic performance and should be adopted by developing economies.
The Keynesians, on the other hand, believed that fiscal policy has a bigger impact on economic performance and should be used in developing economies. However, neither monetary nor fiscal policies have been used effectively to improve Nigeria’s economic performance (Ugwanta, 2014).
1.3 Research Questions.
The central questions for this investigation are:
To what extent has government total expenditure influenced Nigeria’s economic performance?
What impact does the government’s overall revenue have on Nigeria’s economy?
To what extent have direct taxes influenced Nigeria’s economic performance?
1.4 Objectives of the Study
The study’s overall goal is to investigate the impact of fiscal policy on Nigeria’s economic performance. The precise aims include:
Determine the extent to which government total expenditure has contributed to Nigeria’s economic performance.
To investigate the extent to which the government’s overall revenue has influenced Nigerian economic performance.
on measure the contribution of direct taxes on Nigeria’s economic performance.
1.5 Significance of the Study
Several studies have been done to investigate the impact of fiscal policy on economic performance (growth) in Nigeria. Previous empirical data indicate that fiscal policy has a positive impact on Nigerian economic growth.
However, the magnitude of the influence has been debated. According to scholars such as Audu (2012) and Agu, Idike, and Okuwo (2014), fiscal policy has a significant impact on Nigeria’s economy. On the contrary, researchers such as Onwe (2014) and Abdulrauf (2015) argue that fiscal policy has a small impact on Nigeria’s economy.
This, however, has resulted in a void in literature. The study investigates the scale of the impact of fiscal policy on economic growth in Nigeria by broadening the scope of previous studies in recent years, as the years 2014, 2015, and 2016 have not been addressed in the literature.
1.6 Scope of the Study
The study looks at the impact of fiscal policy on Nigeria’s economic performance between 1981 and 2016. Fiscal policy instruments considered include government total expenditure, government total revenue, and direct taxes. Similarly, economic performance is linked to economic growth (a proxy for real GDP).
1.7 Definition of Key Terms.
Fiscal Policy
This refers to the government’s discretionary authority to control and regulate the economy through spending and taxation.
Economic Performance
This refers to the extent to which an economy has met its macroeconomic goals. Price stability, full employment, economic growth, and a strong foreign exchange position are indicators of economic performance. However, the study relied on economic growth as an indicator of economic performance.
Government Total Expenditure
This refers to the overall amount spent by the government over a given period of time. Government total expenditure is the sum of recurring and capital expenditures across time.
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