ABSTRACT
The study analyzed the effect of fiscal policy on economic growth in Nigeria using time series data from 1990 to 2016. The data was sourced from Central Bank of Nigeria Statistical Bulletin, vol. 27, 2016. Fiscal policy was decomposed into government capital expenditure, recurrent expenditure, tax revenue and non-tax revenue, while economic growth was measured by real gross domestic product. The analysis of data was done using multiple regression analysis. Based on the outcome of the regression analysis, it was found that capital expenditure had a negative and significant effect on economic growth, while recurrent expenditure exerted a positive and significant effect on economic growth in Nigeria. The effect of tax revenue was found to be positive and insignificant, while non-tax revenue had a negative and insignificant effect on economic growth in Nigeria. Based on the findings, it was recommended among other things that Government of Nigeria should enhance investment in productive expenditure including expenditure on education as well as ensure that funds meant for development on these sectors are properly utilized.
TABLE
OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background
to the Study . . . . . . . 1
1.2 Statement
of the Problem . . . . . . . 3
1.3 Objective
of the Study . . . . . . . 4
1.5 Research
Hypotheses . . . . . . . . 4
1.6 Scope
of the Study . . . . . . . 5
1.7 Significance
of the Study . . . . . . . 5
1.8 Limitation
of the Study . . . . . . . 6
CHAPTER
TWO: LITERATURE REVIEW
2.1 Conceptual Framework . . . . . . . 7
2.1.1 Fiscal policy . . . . . . . 7
2.1.2 Objectives
of fiscal policy . . . . . . . 8
2.1.3 Nature
and techniques of fiscal policy . . . . . 11
2.1.4 Meaning
of Gross Domestic Product (GDP) and Economic Growth . . 11
2.1.5 Fiscal
policy in Nigeria . . . . . . . 12
2.1.6 Fiscal policy and economic growth in Nigeria . . . . 18
2.2 Theoretical Framework . . . . . . . 22
2.2.1 Endogenous
economic growth theory . . . . . . 22
2.2.2 The
traditional Keynesian theory . . . . . 23
2.2.3 Rational expectations view . . . . . . . 23
2.3 Empirical
Review . . . . . . . 23
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Research
Design . . . . . . . 35
3.2 Nature
and Sources of Data . . . . . . . 35
3.3 Method
of Data Analysis . . . . . . . 35
3.4 Model Specification . . . . . . . 36
3.5 Description of
Research Variables . . . . . . 36
3.6 Data Analysis Techniques . . . . . . . 37
CHAPTER FOUR:
PRESENTATION OF DATA, ANALYSIS AND DISCUSSION
4.1 Presentation
of Data . . . . . . . 39
4.2 Descriptive
Analysis . . . . . . . 40
4.3 Regression Analysis . . . . . . . 45
CHAPTER FIVE: SUMMARY OF FINDINGS,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary
of Findings . . . . . . . 48
5.2 Conclusion . . . . . . . 48
5.3 Recommendations . . . . . . . 49
REFERENCES
APPENDIX
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Nigeria
had relatively favourable growth prospects and income levels at the time of independence.
However, overtime, economic growth in the country has been dependent on oil
revenue and debt due to mismanagement of fiscal policies (Okoh, Oyekwelu &
Iyidiobi, 2016). When compared with emerging economies of Southeast Asian
countries, it is obvious and glaring that economic growth and development in
Nigeria has been lagging behind. The Nigerian economy has been plagued with
several challenges over the years. Notable among the challenges is the
management and mismanagement of fiscal policies (Ogbole, Amadi & Essi,
2011). In spite of many, and frequent changing of fiscal and other
macro-economic policies, Nigeria is yet to tap her economic potentials for
rapid economic development and growth. Fiscal policies are extremely linked in
macro-economic management; growth in one sector of the economy directly affects
growth in the other. Notably, fiscal policy is central to the health of any
economy, as government’s has power to raise revenue and expend such revenue to
meet national needs. These actions affect the disposable income of citizens and
corporations which in turn affects the general economy as well (Khalifa, 2016;
Omran, 2017).
Fiscal
policy has conventionally been associated with the use of taxation revenue and
public expenditure to influence the level of economic activities (Abdon,
Estrada, Lee & Park, 2014). The implementation of fiscal policy is
essentially routed through government’s budget. Consequently, the most
important aspect of a public budget is its use as a tool in the management of a
nation’s economy (Jeong, 2014). Fiscal policy as a deliberate action of
government involves the use of government spending, taxation and borrowing to
influence the pattern of economic activities and also the level and growth of
aggregate demand, output and employment. This includes sustainable economic
growth, high employment creation and low inflation which is aimed at
stabilizing the economy. Increases in government spending or a reduction in
taxes tend to pull the economy out of a recession; while reduced spending or
increased taxes slow down a boom (Omran, 2017). Fiscal policy entails
government's management of the economy through the manipulation of its revenue
and expenditure to achieve certain desired macroeconomic objectives amongst
which is economic growth (Mohanty, 2012). 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.
Scholars
argue that increase in government expenditure on socio-economic and physical
infrastructures encourage economic growth likewise expenditure in health and
education raise the productivity of labour and increase the growth of national
output (Janku & Kappel, 2014). Similarly, expenditure on infrastructure
such as roads, communications, power, etc. reduces production costs, increases
private sector investment and profitability of firms, thus fostering economic
growth. Supporting this view, scholars concluded that expansion of government
expenditure contributes positively to economic growth (Samanta & Cerf,
2009). Furthermore, in an attempt to finance rising expenditure, government may
increase taxes and/or borrowing which might affect her spending behavior
(Checherita & Rother, 2010). Thus, higher income tax discourages individual
from working for long hours or even searching for jobs and this reduces income
and aggregate demand. In the same vein, higher profit tax tends to increase
production costs and reduces investment expenditure as well as profitability of
firms (Oseni & Onakoya, 2012). Moreover, if government increases borrowing
(especially from the banks) in order to finance its expenditure; it will
compete away the private sector, thus reducing private investment (Njuru, 2012).
In
the light of the above, this study will contribute to the debate by
investigating the effect of fiscal policy on Gross Domestic Product of
Nigeria.
1.2 Statement of the Problem
A
major strand in literature regarding the role fiscal policy play in fostering
economic growth is that government’s support for knowledge accumulation,
research & development, productive investment, the maintenance of law and
order and the provision of other public goods and services can stimulate growth
in both the short-run and the long run (Okoh, Onyekwelu & Iyidiobi, 2016;
Osuala & Ebieri, 2014; Ogbole, Amadi & Essi, 2011). This
notwithstanding, the extent to which fiscal policy engender economic growth has
continued to attract empirical debate especially in developing countries.
Fundamental
to this problem statement is the representation of fiscal policy. Theoretically,
three standard fiscal policy measures; spending/expenditure, taxation and deficits
exist. Out of these three variables, literature does not single out any as the
most representative of fiscal policy. While scholars such as (Okorie, Sylvester
& Simon-Peter, 2017; Rafiq, 2013; Engen & Skiner, 1996) have made use of
tax rates as a proxy for fiscal policy others such as Adame & Okoi (2015);
Umaru & Gattawa (2014); Maji & Achegbulu (2012) have used deficits to
account for fiscal policy in their estimations. Yet, scholars including Ogbole,
Amadi & Essi (2011); Osuala & Ebieri (2014) used expenditure to account
for fiscal policy stance. When expenditure is considered as a fiscal policy
measure certain studies have considered aggregate government expenditure as a
single variable while others are of the view that the variable ought to be
decomposed into several categories like recurrent and capital expenditure
(Rafiq, 2013).
However,
a significant problem with most of Nigerian studies is the inability of the
studies to apply both government revenue and expenditure as a measure of fiscal
policy in a single model. This implies testing the effects of fiscal policy on Gross
Domestic Product (GDP) taking into account the structure of fiscal policy i.e. both
sides of revenue and expenditure. In other words, past studies on Nigeria
focused on the effect of government deliberate spending on economic growth
while ignoring, at least partially, the other side (revenue) of fiscal policy. This
study will deal with the above problems in the context of multiple regressions
by showing the complete specification of the government fiscal constraint and
careful attention to fiscal classifications to produce dramatically different
results for the GDP effects of fiscal policy.
1.3 Objective of the Study
The main objective of this study is
to investigate the effect of fiscal policy on gross domestic product in
Nigeria. The specific objectives are as follows:
1)
To determine if
government capital expenditure significantly affect gross domestic product in
Nigeria.
2)
To ascertain if
government recurrent expenditure significantly affect gross domestic product in
Nigeria.
3)
To assess if government
tax revenue significantly affect gross domestic product in Nigeria.
4)
To find out if government
non-tax revenue significantly affect gross domestic product in Nigeria.
1.4 Research Questions
The study will seek to answer the
following questions:
1)
To what extent does
government capital expenditure affect gross domestic product in Nigeria?
2)
How does government
recurrent expenditure affect gross domestic product in Nigeria?
3)
What effect does
government tax revenue affect gross domestic product in Nigeria?
4)
In what way does
government non-tax revenue affect gross domestic product in Nigeria?
1.5 Research Hypotheses
The
following hypotheses will be tested:
Ho1:
Government capital expenditure does not have a significant effect on gross
domestic product in Nigeria.
Ho2:
Government recurrent expenditure does not have a significant effect on gross
domestic product in Nigeria.
Ho3:
Government tax revenue does not have a significant effect on gross domestic
product in Nigeria.
Ho4:
Government non-tax revenue does not have a significant effect on gross domestic
product in Nigeria.
1.6 Scope of the Study
The
study was limited to the period 1990 to 2016 for two reasons. First, the period
was long enough to capture the effect of fiscal policy on GDP. Secondly, time
series data was available for this period of time. Fiscal policy will be
captured by government expenditure (capital and recurrent expenditure) and
government revenue (tax and non-tax revenue) over the chosen period. Data for
these proxies will be sourced from Central Bank of Nigeria Statistical Bulletin
and Federal Internal Revenue Service.
1.7 Significance of the Study
The empirical findings of this research
will be particularly significant to the following groups:
1)
Government
of Nigeria: This study will assist the Government
of Nigeria in the effective and efficient management of fiscal policies to
achieve greater incentives for people to work and pay taxes, as well as for
private sector’s investment in input goods for the country. This will certainly
grow national productivity in the country.
2)
Investors:
Outcomes of this study will assist policy
makers in fashioning out policies that will crowd-in investment in the various
sectors of the economy which will result in more economic growth for Nigeria.
3)
Academic:
Imperatively, this study will contribute
significantly to the volume of literature available in the area of effect of
fiscal policies on economic growth. In
academics, debates are unending and studies will continue to support or
disprove theories. Therefore, the outcome of this study will contribute
immensely in determining effects of fiscal policy variables on economic growth
from a structural perspective.
1.8 Limitation of the Study
The
study is limited to the effect of fiscal policy on GDP of Nigeria from 1990 to
2016. However, every work has its limitations and so this work is not an
exception. Though the study did not encounter much challenges, it has its
limitations in that it focused entirely on fiscal policy effectiveness on Gross
Domestic Product without taking into consideration the effect of monetary
policy, as both fiscal and monetary policy normally work simultaneously.
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