ABSTRACT
The effectiveness of fiscal policy on the growth of Nigeria economy has been a thing of debate over the years. The objective of the research is to provide evidence for the effectiveness of fiscal policy on economic growth. The research covers a period of 1981 to 2015 and data was collected from CBN’s statistical bulletin. The result findings shows that fiscal policy instrument such as capital and recurrent expenditure cannot significantly explain economic growth. Also, recurrent expenditure shows an inverse relationship with growth meaning increase in recurrent expenditure will lead to a decrease in growth. Total Federal Collected Revenue (Taxes) significantly explained economic growth in Nigeria. In conclusion, the research work reveals that fiscal policy which has to do with manipulation of government revenue and taxes is not effective to the growth of Nigerian economy.
CHAPTER 1
INTRODUCTION
1.1 Background of the Study
Fiscal policy is the use of government revenues and expenditure policies to regulate and stabilize the economy toward development. The government uses this policy in other to achieve its objectives in stabilizing the economy. This includes the macroeconomic objectives (price stability, economic growth, reduction in poverty, balance of payment equilibrium etc.) and microeconomic influence on efficiency of resources use. The question is “how precisely do these channels work in developing economies? What kind of revenue and expenditure policies should developing countries adopt to help realize this objectives?
Fiscal policy also is essentially concerned with manipulating the financial operations of government with a view of furthering certain economic policy objective. In the other words, it consists of government decisions to vary certain fiscal aggregate such as total government spending and tax revenues as opposed to some other aspects of public finance which are primarily concerned with the effect of specific government expenditure and taxes (Stein 1968). Fiscal policy is majorly used in terms of government expenditure, tax revenue, government investment, budgeting and debts (Babalola, 2015).
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 (Samuelson, 1970). ‘The threat of inflation in the immediate post-war years and the desire to maintain continuous full employment following World War II has created the need for a continuous use of fiscal policy in some economics’ (Samuelson, 1970). 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 “effectiveness of fiscal policies” in relation to other polices 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, 1951).
While in developing economies, the economic policy objectives of fiscal policy such as reduction in unemployment, inflation, poverty reduction, economic growth, price stability have been pursued to a greater or lesser degree, the furtherance of which has relied greatly on fiscal policy. Economic development is 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 economics to full industrialized ones. The reliance on fiscal policy in developing economies for the achievement of the economic growth 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).
1.2 Statement of the Problem
Nigeria is endowed with diverse and huge resources both human and material resources. However, years of negligence and adverse policies (fiscal and monitory policies) have led to the under-utilization of these resources (Economic Watch, 2010) and this has contributed to increasing unemployment rate in Nigeria (Babalola, 2015). In 2000, the unemployment rate was 13.1% and 21.10% in 2010. On the average, there has been an upward trend of the unemployment rate in Nigeria (CBN, 2005, 2006, 2009; Nigerian Bureau of Statistics, 2010).
Poverty reduction has been a major goal of various governments. This is evidenced by the fact that the various governments have introduced different programs to reduce poverty levels. Examples are the Nigerian Directorate of Employment (NDE) introduced in 1989 and the National Poverty Eradication Program (NAPEP) introduced in 2001.Per-capital income in Nigeria has been increasing steadily from 2000 when it was N39,657 to year 2010 when it reached N71,131 (IMF, 2011). This increase in per capital income has not led to an increase in the standard of living of the citizens because of the increase in the cost of goods and services and poor fiscal policy implementation strategy.
According to Okunroumu, (1993), the management of the Nigerian economy in order to achieve macroeconomic stability has been unproductive and negative hence one cannot say the Nigeria economy is performing. A review of macroeconomic indices shows that inflation accelerated double-digit levels in 2000 and 2001. It increased from 6.94 to 18.87 respectively. The double-digit inflation continued up to 2005, and decreased to single digit in 2006 and 2007. In 2008, the inflation rate reverted to double digit (11.58) and continued to increase and in 2010, it was 13.72% (International Monetary Fund (IMF), 2011). This can be attributed to the poor performance of the fiscal policy strategies in the country.
The rising profile of Nigeria’s indebtedness is a sour point in the public finance management and speaks volumes of the fiscal discipline of political actor’s attitude to the sovereignty of Nigeria. According to Nwankwo (2010), Nigeria debt profile was $32.5 billion by September 2010, that is, N5, 241,667 million. In year 2000, the total outstanding debt of Nigeria was N3, 995,638 million. These continued to be an upward trend until in 2006 it declined to N3, 177,409 million because of debt cancelation agreement between Nigeria and Paris Club (Okwo, 2010). Thereafter, it started rising again and reached N5, 241,667million.
However, the fiscal policy implementation in Nigeria has made a good contribution in order to achieve the objectives of macroeconomics and economic stability. The Federal Government has introduced measures to curtail imbalances in Nigerian Economy, reasons for low tax compliance, high rate of inflation etc. The fiscal policies of the government introduced measure like tax compliance scheme, fiscal consolidation for high rate of indebtedness from 2011-2013 etc. These strategies should help lead the Nigerian economic system to a standard height but to no avail. The rate of corruption and bribery in the country has rendered these policies null and void. Political barriers, cultural barriers, religions barriers among others limit the implementation of these policies.
The government should be able to time their discretionary fiscal policies to avoid errors to the minimum and hence use in-built stabilizers to maintain fluctuations in business cycles. More effort should be made in fighting corruption in Nigeria as it clears way for effective fiscal policy implementation.
1.3 Research Questions
This research question will guide the study;
- Are the tools of fiscal policy employed in Nigeria effective to the growth of its economy?
1.4 Objective of the Study
The main objective of the study is to examine the effectiveness of fiscal policy as a tool to drive the Nigerian Economy. The Research generally aims to:
- To determine effective instruments of fiscal policy in Nigeria
- To determine whether fiscal policy has contributed positively or negatively to the Nigerian economy.
1.5 Research Hypothesis
Following the above research question, our hypothesis is stated as follows:
Ho: Fiscal policy is not significantly effective to the growth of the Nigerian Economy
H1: Fiscal policy is significantly effective to the growth of the Nigerian Economy
1.6 Significance of the Study
The result and outcome of this research work will be of great benefit to the government of Nigeria. By identifying the strengths and weakness of the government in using fiscal policy measures: Tax and expenditure management, effective policy formation can be made from the research result. More importantly these individuals or group will benefit from the research work. They are; the government fiscal policy formulation board, the private and foreign investors and exporters, local firms etc. This research will go a long way by improving the economic development of the nation as it affects mostly the industrial and manufacturing sector of the country.
The study would be valuable to assist the researcher to widen his knowledge in the research work. Finally, future researchers would find this study indispensable.
1.7 Scope of the Study
The research covers a period of 1981-2015. The study is basically limited to the Nigerian Economy. It’s based on the time and resources given that the study was carried out. The research is something possible to estimate. The study is organized in five chapters.
1.8 Limitation of the Study
The study is only limited to the Nigerian Economy. It is equally limited to time and sources of data. The data used is secondary data which was hard to get.
The study should enable me to visit government board of fiscal planning but due to finance and other limitations I cannot have access to such.
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