Table of Contents
Chapter One:
Introduction
1.1 Background
of the Study 1
1.2 Statement
of problem 6
1.3 Research
Question 11
1.4 Research
Objectives 11
1.5 Research
Hypothesis 11
1.6 Significance
of the study 12
1.7 Scope
of the Study 12
Chapter Two:
Review of
Related Literature
2.1 Conceptual Framework 13
2.1.1 Operation of Fiscal
Policy and Economic Growth 13
2.1.2 Progression of
Manufacturing Sector 14
2.1.3 Factors that Contribute
to Poor Performance of the Manufacturing sector in Nigeria 18
2.1.4 Nigeria Interest Rate
Policy 19
2.1.5 Government Expenditure 20
2.1.6 Gross Capital Formation 20
2.2 Theoretical Literature
Review 19
2.2.1 Keynesian Theory 21
2.3 Empirical Literature
Review 22
2.4 Summary of Empirical
Literature Reviewed 30
Chapter Three:
Research
Methodology
3.1 Research Design 46
3.2 Methodology
Framework 46
3.3 Description
of Variables 47
3.4 MODEL SPECIFICATION 48
3.5 3.5 SOURCES OF DATA 49
3.6.1 PRE-ESTIMATION TEST 50
3.6.1.1 Stepwise Regression Analysis 50
3.6.1.2
Normality Test 50
3.6.1.3 Unit Root Test 51
3.6.1.4.1 Autoregressive Distributed Lag
Model (ARDL) Approach to Co-integration Testing or Bound Co-integration Testing
Approach 51
3.6.1.4.2. Requirements for the Application of Autoregressive
Distributed Lag Model (ARDL) Approach to Co-integration Testing 52
3.6.2 POST-ESTIMATION
TEST 53
3.6.2.1. Error
Correction Mechanism (ECM) 53
3.6.2.2 Toda and Yamamoto for Granger
Causality Test 53
3.6.2.3. Breusch–Godfrey Test for
Autocorrelation 53
3.6.4 Breusch–Pagan test for
Heteroscadasticity 54
3.6.5 Stability Test 55
3.6.5.1 Cumulative Sum and Cumulative Sum of
Squares 55
3.6.5.2 Ramsey Regression Equation
Specification Error Test 55
Chapter Four
4.1 PRE-ESTIMATION TEST RESULT 56
4.1.1 Descriptive
statistics 56
4.1.2 Unit
Root Test 56
4.1.3 Vector Autoregressive Lag Length
Criteria 58
4.1.4 Autoregressive distributed lag bounds
test for co-integration 58
4.2 Dynamic
ARDL Short Run Error Correction Model and Discussion for the analysis of fiscal
policy and manufacturing sector performance in Nigeria. 61
4.2.2 ARDL long run estimate for the analysis
of fiscal policy and manufacturing sector in Nigeria 61
4.3 Diagnostic Test/Post Estimation Test 62
4.3.1 Test for autocorrelation 62
4.3.2 HeteroscedasticityTest 62
4.3.4 Toda and
Yamamoto Granger Causality Test 64
Chapter Five
5.1 Summary of findings 69
5.2 Conclusion 69
5.3 Policy
Recommendation 70
Reference 71
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
The performance of any economy is determined
to a large extent by the level of activities especially in the real sector of
the economy (Industrial sector). The all-important role of fiscal policies in
relation to the sustenance of vibrant and stable economy through real sector
cannot be jettisoned.
The achievement of macroeconomic goals,
namely full employment, price stability, sustainabile economic growth and
external balance via real sector economy, has always attracted priority
attention of the government. Almost all economies of the world, irrespective of
the state of the economy (developing or developed), the government intervenes
in undertaking fundamental roles of allocation, stabilization, distribution,
and regulation especially when the market proves inefficient. The government
particularly pursues key macroeconomic objectives such as economic growth and
development, full employment, price stability, and poverty reduction by
applying several policies to rejuvenate the real sector of the economy. (Richard,
Nwite, Ndubuisi, Onwe, Okereke Ogiji, 2019).
Fiscal
policy is vital to every economy even to the less developed countries (LDCs) as
a main tool for steadying the development of the economy. Fiscal policy in
other words could be said to be governments' actions affecting its receipts
(revenue) and expenditure which is taken as ordinarily a measure by the
government's net receipts, its surplus or deficit. To offset unwanted
variations in private consumption and investment government adopts anti-cyclical
disparity of public expenditure and tax revenue.
The government
as the case maybe, may offset undesirable variations in private consumption and
investment by anti-cyclical variation of public expenditure and tax revenue.
Furthermore, when the government uses inflow and outflow policies to regulate
and stabilize the economy toward development, such action is referred as fiscal
policy. Therefore fiscal policy serves as an economy’s shockabsorber in
specific areas of development. Therefore
fiscal policy serves as an economy's shock absorber in specific areas of
development.
Peter
and Simeon (2011), opine that the two key instruments of fiscal policy are
government taxation and government expenditure. It can also be seen as government spending policies
that impact macroeconomic conditions. These policies affect tax rates, interest
rates and government spending, in an effort to control the economy. Government
over the years has carried out various macroeconomic policy options to nurture
the economy in terms of growth and development and the policy option employed
is that of fiscal policy.
Oke
(2013), observed that the intentions of fiscal policy is to rouse economic and
social development by pursuing a policy stance that ensures a sense of balance
between taxation, spending and borrowing that is consistent with sustainable
growth. Macroeconomic policies (fiscal and monetary) are vital tools that can
be used to lessen short-run vacillations in output and employment.
Arikpo, Ogar,
Cornelius (2017), 'suggests that the need to achieve improved balance of
payments position, balanced industrial development, high employment level,
increased productivity, equitable income distribution, high revenue sources,
price stability and economic growth has necessitated the development of various
macroeconomic policies'.
'Fiscal policy
over time has proven to be compelling apparatus in the hands of policy makers
for handling macroeconomic issues like high unemployment, insufficient national
savings, excessive budget deficit, and large public debt burden
The
application of fiscal policy is essentially routed through government's budget.
Budget as a fiscal policy tool could be considered as a structure that balances
the changes in government revenue against expenditure over a period of time. It
is a all-inclusive financial plan, setting forth the expected route for
achieving the financial and operational goals of a country' (Meigs &
Meigs,2004).
The importance
of financial policy on the productivity and capacity utilization of the
manufacturing sector cannot be overemphasized. Fiscal policy drives the market
for the manufacturing sector through the purposeful manipulation of government
revenue and expenditure. When government pursues an expansionary policy, the
policy implication is that it reduces taxation and increases expenditure and
the purchasing power of the economic units which in turns expands the market
for manufactured products. This sends a signal to the manufacturers to increase
their productive capacity to take opportunity of the increase market demand.
The reverse holds when a contractionary policy is being pursued.
In
the works of Libanio (2006) through the use of Kaldor’s first law, defined
manufacturing sector as the engine of growth of the economy. To Adebayo 2010,
the manufacturing sector are those industries which are involved in the
manufacturing and processing of items and indulge or give free rein in either
the creation of new commodities or in value addition.
The
final products of the manufacturing industries are usually categorized as
finished goods which are presented to the public for sale or intermediate
products used in other forms productions processes. The manufacturing sector is the key variable in an economy and
motivates conversion of raw material into finished goods.
Adofu and Tijani (2017) viewed manufacturing
as the production of goods for sale or use through application of tools,
machine, labour, chemical and biological formulation. It comprises both
handiwork of human activities and high tech by changing of unfinished goods to
finished goods. In modern economy today, the growth of industries is widely built
on
technological development of productive strategies.
The
importance of manufacturing sector, according to Charles (2012), involves the
creation of employment which helps to boost agriculture and diversify the
economy on the process of helping the nation to increase its foreign exchange
earnings. The need to attainb etter
balance of payments position, balanced industrial development, high level of
employment, increased productivity, equitable income distribution, high revenue
sources, price stability and economic growth has necessitated the development
of various macroeconomic policies.
Furthermore,
the manufacturing sector provides avenue for production of goods and services,
assist in jobs creation, and also earn the economic agents’ handsome rewards.
Afolabi
and Laseinde (2019), outlines that manufacturing sector is the fastest channel
by which rapid sustainable growth and development is achieved in any economy.
Therefore,
the level of responsiveness given to the manufacturing sector is negligible and
might not have produced much output as expected considering its economic level
of significance.
Charles
(2012) noted that the ‘importance of manufacturing sector involves the creation
of employment which helps to boost agriculture and expand the economy on the
process of helping the nation to increase the size of its foreign exchange
earnings’. In order to attain improved balance of payments position, balanced
industrial development, high employment level, increased productivity, unbiased
income distribution, high revenue sources, price stability and economic growth
has given rise the need for the development of various macroeconomic policies.
Additionally,
the manufacturing sector provides channels to produce goods and services,
facilitate good jobs, and also earn the economic agents’ handsome rewards.
Afolabi
and Laseinde (2019), states that manufacturing sector is the fastest channel by
which speedymaintainable growth and development are accomplished in any
economy.
Holis
and Bacheney (1999) suggest that the manufacturing is the key expectation of
most countries trying to upsurge their level of income. Manufacturing in
Nigeria has the idea of transformingthe idle workers of Nigeria into full time
or part time industrial workers and on the other hand, it will alter the
structure of the Nigerian economy. The standard of living of the people in the
economy will be improved and economic growth would be stimulated.
Despite
the emphasis placed on fiscal policy in the management of the economy, the
manufacturing sector inclusive, Nigerian economy is yet to come on the path of
sound growth and development because of low output in the manufacturing sector
to the economy
The
performance of the Nigerian manufacturing sector since independence has been
unimpressive. The scenario has been a mixture of initial mild growth and
subsequent retrogression.
The economy suffered series of problems
ranging from excessive dependence on imports for consumption and input
materials, socio-economic infrastructure decay, and capacity under-utilization
in the industrial sector, poor management strategies and institutional
framework, and agricultural sector neglect that used to be the economic base of
the Nigerian economy.
As observed by
Tomola, Adebisi and Olawale (2012), some manufacturing industries in Nigeria
have been attributed by falling productivity rate, by extension employment
generation, which is caused largely by insufficient electricity supply,
bringing in secretly of foreign products into the country, trade
liberalization, globalization, high exchange rate, and low-slung government
expenditure. Therefore, the sluggish performance of manufacturing sector in
Nigeria is primarily due to enormous importation of finished goods,
insufficient financial funding including other exogenous variables which has
resulted in the drastic reduction in capacity operation and productivity of the
manufacturing sector of the economy.
1.2 Statement of the Problem
From
independence till date, the industrial sector manufacturing sector has lived
below its expectation. The departure of certain production companies proved
that the Nigeria policies (that is from the Structural Adjustment Program (SAP)
to the indigenous policies) have not favored the manufacturing sector. The
location of crude oil which has become the primary export commodity and foreign
exchange earner has to a large extent worsened the situation of the manufacturing
sector leading to the neglect of the sector.
The
low level of performance of the production companies in Nigeria will be majorly
attributed to the poor performance of the Nigeria national budgets and its
implementation as well as the poor implementation of the government
expenditure. The manufacturing sector often tagged as engine of any economy has
not received the required attention and commitment by the federal government
despite its sensitivity hence staging the economy as an import based economy.
Figure 1: Trend
Movement of Manufacturing sector performance percentage contribution to GDP
Source:
Researcher’s compilation
It
has been argued that industrial capacity, technological innovation, and
business development, rather than enormous human resources and a high level of
endowed material resources, are the quickest ways for any economy to achieve
rapid, sustainable growth and development (Olamide, Oyebisi and Olabode, 2014).
According
to Afolabi and Laseinde (2019) modern manufacturing processes lead to the
implementation of management and business skills, as well as high-tech
developments that often result in increased productivity and better living
conditions on a large scale. But in Nigeria, instead of the manufacturing
sector productivity to be increasing and translating to positive shocks to
economic growth, it declines consequent upon dependence in oil sector and
negligence of the sector. Despite the country's abundant natural resources, the
World Bank reports that a larger proportion of Nigerians live in abject
poverty, earning less than $2 per day as Nigeria isranked 161th out of 186
countries in the Human Development Index, among the poorest economy. The
nation's economy is plagued by the nature of its economic system, which is
based on a monoculture economy and gross underutilization of natural resources.
The economy has been plagued by a slew of issues, including excessive reliance
on imports for consumption and input materials, deterioration of socioeconomic
infrastructure, capacity underutilization in the industrial sector, weak
managerial strategies and institutional background, and neglect of the
agricultural sector, which was once the mainstay of the Nigerian economy.
As
observed from the graph in fig 1, from 1981 to 1994, there was a steady
intercept movement of the percentageimpact of the industrial sector to economic
growthgoing by the 20.26 percent to 20.92 percent which showed a significant
contribution to GDP where this steady growth was met with a sharp intercept
downtrend movement from 1995 to dateshowing evidence of the poor performance of
the manufacturing sector contribution to GDP of Nigeria.
In
Nigeria, tax is adopted as one of the reliable instruments or tools to ensure
economic growth and development owing to its reliability and
predictability. Tax is been the primary
source of government revenue besides oil has posed a lot of problem of the
development of the industrial sector. As the government taxes earnings from
investment, it becomes a problem for the firm to raise adequate resources in
the capital market. When retained profits are taxed, firms fail to depend on
their internal resources for expansion, but resort to borrowing if they can
obtain such loans. Thus, the total capacity to invest is likely to decrease.
Thus,
the total capacity to invest is likely to decrease. In pursuit of the
achievement of economic goal set, government introduces a number of incentives
in the annual budget such as the investment in certain preferred sector of the
economy to attract foreign exchange earnings in order to compliment domestic
production to enhance speedy economic growth and development. Through tax holidays and concessions,
government encourages these.
Figure 2: Trend Movement of Tax Revenue in Nigeria
Source: Researcher’s Compilation 2021
Figure 3: Trend Movement of Company Income
Tax in Nigeria
Source: Researcher’s Compilation 2021
Taxation
as the key tool of financial policy is a big player and determinants for the
growth and performance of the industrial sector due to increased company income
tax that can be generated from Small and Medium Scale Enterprises (SMES) which
can boost the performance of the sector or induce decline in their productive
capacities. Taxation as a the main source of government income forms the part
of government expenditure on public goods such as adequate infrastructure such
as construction of roads, steady power supply,
public parks, hospitals and good telecommunication together with other
basic social amenities which in turn creates a good investment atmosphere for
the manufacturing sector.
Increased
taxes implies increase tax revenue, whereby when the tax payers pays their
taxes, government revenue increases which in turn ceteris paribus should
translates to increase in government spending in strategic pillar of the
economy which brings about economic prosperity. Take for instance, figures 2
and 3 above, it is unfortunate that the increase in Company Income Tax (CIT)
which bring about 30% increase in total revenue over the years, has not
translated into any meaningful progress in the manufacturing which can be
attributed to mismanagement and corruption. For instance from 1994 to present,
CIT and Tax Revenue has been on steady increase whereby the SMES contributed as
much as 46.2 billion naira in 1999, 68.1 billion naira in 2001, 1229.02 billion
in 2015 and rising to its peak in 2019 with an absolute value of 1517.51
billion naira whereby this increase reflected in the Tax Revenue values for
instance also, in 1999, tax revenue averaged around 949.19 billion naira,
2,231.60 billion in 2001, 6,915.50 billion in 2015 and 10.262.30 billion in
2019, all values in Nigerian naira respectively. As a result, the possibly
negative economic implications of high taxes on SMEs, as well as gradual
instability in the country's economic activities, would lead to periodic
increases in unemployment and inflation rates, as well as global economic
instabilities; and these factors are highly asserted as being able to take a
strong stance against any developing economy (Ogu, 2020). Consequent upon the
identified problems, it is essential to examine investigation on the effect of fiscal
policy on manufacturing firms output in Nigeria.
1.3 Research Questions
This
study will be answering the following research questions:
1.
What is the effect of government expenditure on manufacturing sector
performance in Nigeria?
2. What is the effect of tax revenue on
manufacturing sector performance in Nigeria?
1.4 Objectives of the Study
The broad objective of the study is to
empirically examine the effect of fiscal policy on the manufacturing sector
productivity in Nigeria. The specifically objectives are:
1.
To ascertain the effect of government expenditures on the manufacturing
performance in Nigeria
2.
To evaluate the effect of tax revenue on the manufacturing
sectorperformance in Nigeria.
1.5 Research Hypotheses
The
hypotheses are in null form as shown below: Fiscal policy has no significant
effect on the Manufacturing sector performance.
The specific null hypotheses for the study
are stated as follows;
Ho1:Government expenditure has no significant effect on manufacturing sector
performance in Nigeria.
Ho2:Tax revenue has no significant effect on manufacturing sector
performance in Nigeria.
1.6 Significance of the study
The
purpose of this study is targeted at the government, policy maker, economic
planners, researchers and the academia which is posed to provide insight to the
government on how to be judicious in its spending of public funds on the
manufacturing sector, reduction of tax especially on growing industries as well
as keep the general public informed on the operations and impart of fiscal
policy. This study will further assist the nation’s economic planners in their
policy planning. Specifically, the outcome of this study would provide a basic
understanding of the dynamics of operation of monetary policy and the key
macroeconomic variables in the development of the manufacturing sector.
1.7 Scope of the Study
The study will cover the period 1981to 2019
as its time frame. Data used for the study focuses on the Performance and
impact of the production sector. The study also focuses only on some fiscal
policy instruments which aid the entire economy’s manufacturing development
process.
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