IMPACT OF FISCAL POLICY ON THE MANUFACTURING SECTOR OUTPUT IN NIGERIAN

ABSTRACT

The study examined the impact of fiscal policy on the manufacturing sector output in Nigeria. The data used was secondary data, sourced from Central Bank of Nigeria statistical bulletin. Multiple regression of ordinary least square (OLS) technique of analysis was used. The result from the study revealed that government expenditure had negative and insignificant impact on the manufacturing sector output in Nigeria while, government tax revenue had positive and significant impact on the manufacturing sector output in Nigeria. Based on the findings, the study concluded that fiscal policy had significant impact on the manufacturing sector output in Nigeria. The study therefore recommended the following; That government should refocus and redirect government expenditure towards the manufacturing sector for production of goods that will enhance economic growth and government should increase its budgetary allocation on the capital expenditures that will accelerate or enhance economic growth in Nigeria through manufacturing sector output, that government should create more awareness on the importance of tax payment which is one of the major sources of government revenue, the process of tax collection should be convenient to the tax payers and the revenue accrued from tax payment should be judiciously utilized such as in construction of good roads that will enhance economic activities geared towards achieving economic growth in Nigeria through manufacturing sector output.

TABLE OF CONTENTS

Title page        -           -           -           -           -           -           -           -            -           -           i

Declaration     -           -           -           -           -           -           -           -            -           -           ii

Certification   -           -           -           -           -           -           -           -            -           -           iii

Dedication      -           -           -           -           -           -           -           -            -           -           iv

Acknowledgement      -           -           -           -           -           -           -            -           -           v

Table of Contents       -           -           -           -           -           -           -            -           -           vi

List of Tables              -           -           -           -           -           -           -            -           -           vii

Abstract          -           -           -           -           -           -           -           -            -           -           viii

CHAPTER ONE: INTRODUCTION

1.1       Background to the Study        -           -           -           -           -            -           -           1

1.2       Statement of the Problem       -           -           -           -           -            -           -           4

1.3       Objective of the Study            -           -           -           -           -            -           -           5

1.4       Research Question      -           -           -           -           -           -            -           -           5

1.5       Research Hypotheses              -           -           -           -           -            -           -           6

1.6       Scope of the Study      -           -           -           -           -           -            -           -           6

1.7       Significance of the Study       -           -           -           -           -            -           -           6

1.8       Limitation of the Study           -           -           -           -           -            -           -           7

1.9       Definition of Terms    -           -           -           -           -           -            -           -           7

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1       Conceptual Framework          -           -           -           -           -            -           -           9

2.1.1    Types of Fiscal Policy            -           -           -           -           -            -           -           12

2.1.2    Tools of Fiscal Policy             -           -           -           -           -            -           -           13

2.1.2.1 Government Spending as a Fiscal Policy Tool         -           -            -           -           13

2.1.2.2   Government Tax Revenue as a Fiscal Policy Tool              -            -           -           14

2.1.3    Functions of Fiscal Policy      -           -           -           -           -         -  -           14

2.1.4    Objectives of Fiscal policy     -           -           -           -           -            -           -           16

2.1.5    Limitation of Fiscal Policy Implementation              -           -         -  -           17

2.1.6    Fiscal Deficit in Nigeria and How to Solve it            -           -         -  -           17

2.1.6.1 Significance of Sources Covering Government Debts           -            -           -           19

2.1.6.2 Deficit Reduction Techniques            -           -           -           -            -           -           20

2.2       Theoretical Framework          -           -           -           -           -         -  -           21

2.2.1    Classical school of thought     -           -           -           -           -            -           -           22

2.2.2    Keynesian School of Thought            -           -           -           -            -           -           22

2.2.3    Neoclassical school of thought           -           -           -           -            -           -           22

2.2.3.1 Managerial Theory of the Firm          -           -           -           -            -           -           23

2.2.3.2 The Savers-Spenders Theory             -           -           -           -            -           -           23

2.3       Empirical Review       -           -           -           -           -           -            -           -           24

CHAPTER THREE: RESEARCH METHODOLOGY

3.1       Research Design         -           -           -           -           -           -            -           -           31

3.2       Sources of Data          -           -           -           -           -           -            -           -           31

3.3       Area of Study              -           -           -           -           -           -            -           -           31

3.4       Model Specification   -           -           -           -           -           -            -           -           32

3.5       Techniques of Analysis          -           -           -           -           -            -           -           33

3.6       Decision Rule             -           -           -           -           -           -            -           -           33

3.7       Description of Variables         -           -           -           -           -            -           -           33

3.7.1    Dependent variable     -           -           -           -           -           -            -           -           33

3.7.1.1 Manufacturing Sector Output (MSO)             -           -           -            -           -           33

3.7.2    Independent Variables            -           -           -           -           -            -           -           34

3.7.2.1 Government Expenditure (GEXP)     -           -           -           -            -           -           34

3.7.2.2 Government Tax Revenue (GTR)      -           -           -           -            -           -           34

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION

                             OF FINDINGS

4.1       Data presentation        -           -           -           -           -           -            -           -           35

4.2       Regression Analysis and interpretation of Result      -           -            -           -           36

4.3       Test of Hypotheses     -           -           -           -           -           -            -           -           36

4.4       Discussion of findings            -           -           -           -           -            -           -           37

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND     RECOMMENDATIONS

5.1       Summary of Findings -           -           -           -           -           -            -           -           39

5.2       Conclusion      -           -           -           -           -           -           -           -            -           39

5.3       Recommendations      -           -           -           -           -           -            -           -           40

REFERENCES

LIST OF TABLES

Table 4.1         Data used for the Regression analysis            -           -            -           -           31

Table 4.2         Regression Result       -           -           -           -           -            -           -           32

Table 4.3         Test of Hypothesis one           -           -           -           -            -           -           32

Table 4.4         Test of Hypothesis two           -           -           -           -            -           -           33

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Government over the years has employed various macroeconomic policies instruments for the attainment of the desired economic growth and development, and these policies option employed is that of fiscal policy and monetary policy.  The use of these macroeconomic tools in attaining economic growth according to the classical view reveled that harmonizing the fiscal and monetary policies would either increase the pace of economic growth or reduce it depending on the direction of the policies (Blanchard, 2006).

The term fiscal policy is defined as the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The fiscal policy main instruments are government taxation and government expenditure. Fiscal policy can also be seen as government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. The government as the manager of the entire economic activities of any nation determines the overall macroeconomic direction of that nation. Its functions transcend its activities as a regulator of specific industries. The government also manages the overall pace of the economic activities, seeking to maintain high levels of employment and stable prices. To achieve these objectives, it has two main tools: fiscal policy, through which it determines the appropriate level of taxes and government spending; and monetary policy, through which it manages the supply of money, interest rate and inflation (Bakare & Osobase, 2014).

The role of fiscal policy on the output and capacity utilization of manufacturing industry in Nigeria has been a growing concern, despite the fact that the government had embarked on several policies aimed at improving the growth of the Nigerian economy through the contribution of manufacturing industry to the economy and capacity utilization of the sector (Adebayo, 2010; Peter & Simeon, 2011 and Loto, 2012).

The manufacturing sectors are those industries that engage on the transformation or conversion of raw materials into finish products. They are one of the most important sectors of every economy which accounts for a significant portion of overall economic activity. Manufacturing sector is also the most important tradable sector of the economy, which in turn implies that they are often the most competitive sector. The significance of manufacturing also stems from the fact that it is the carrier of innovation, research and development activities that eventually spill over to other sectors and results in an increased productivity (Marina & Maruška, 2009).

According to Adebayo (2011), manufacturing sector refers to 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. Manufacturing sector accounts for a significant share of the industrial sector in developed countries. The final product can either serve as finished goods for sale to customers or as intermediate goods used in the production process (Dickson, 2010). Loto (2012) sees manufacturing sector as an avenue for increasing productivity in relation to import replacement and per-capita income which causes unrepeatable consumption pattern. As a result, manufacturing industries are the key variables in an economy and motivates conversion of raw materials into finished goods. Manufacturing industries according to Charles (2012) create employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings.

Manufacturing industries came into being with the occurrence of technological and socio-economic transformations in the western countries in the 18th-19th centuries (CBN, 2011). This period was widely known as industrial revolution. It all began in Britain and replaced the labour intensive textile production with mechanization and use of fuels (Olakunori, & Ejionueme, 1997)

Manufacturing sector are categorized into; Engineering sector, construction sector, electronics sector, Chemical sector, Energy sector, Textile sector, food and beverage sector, metal-working sector, plastic sector, transport and telecommunication sector (CBN, 2012).

In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate, by extension employment generation which is caused by inadequate electricity supply, smuggling of foreign products into the country, trade liberalization, globalization, high exchange rate and inadequate government investments in infrastructure. It has been argued that the persistent poor performance of the manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other variables which has resulted in the reduction in capital utilization and output of the manufacturing sector of the economy (Tomola, Adebisi & Olawale, 2012). Looking at the manufacturing sector share in the GDP in recent years (1996-2016), it has not been relatively stable. In 1996, it was about 4.92% while it increased to 5.50% in 2016. Also at the same period, the overall manufacturing capacity utilization grew from 40.3% in 1996 to 58. 92% in 2016 (CBN, 2011). This may be attributed to the increase in government capital expenditure in recent times.

Furthermore, in Nigeria, the level of growth in manufacturing sector has been affected negatively because of high lending rates, which invariably is responsible for high cost of production (Adibiyi, 2001 and Rasheed, 2010). Okafor (2012) further observed that the level of Nigerian manufacturing sector performance has continue to decline because of low implementation of government budget and difficulties in assessing raw materials.

Based on the forgoing relationship between fiscal policy and manufacturing sector, a study such as this becomes paramount. This study, therefore, is designed to examine the impact of government expenditure (spending) and government taxation (revenue collection) on the manufacturing sector output of Nigerian economy.

1.2       Statement of the Problem

There have been a lot of challenges facing the growth of Nigerian manufacturing industry notwithstanding several government policies employed to stabilize the economy via this sector. These challenges as reviewed by researchers include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policy (Onoh, 2007); gross mismanagement/misappropriations of public funds (Okemini & Uranta, 2008); and lack of economic potential for rapid economic growth and development (Ogbole, 2010). 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 (GDP).

The research problem is to inquire into these unfolding realities, by probing into the impact of the fiscal policy of the Nigerian government on the manufacturing sector output. While asking the question of whether or not, government spending and revenue collection policies have impact on manufacturing sector output in Nigeria?

Most studies on fiscal policy dwelt on its effect on the economic growth and development, its determinant, its impact on capital formation, its impact on capital stock, deficit and macroeconomics variables, while studies on manufacturing sector focuses on its productivity, bank lending, economic growth, global economic downturn, monetary policy, banking sector reform, and its performance.

However, in Nigeria, both variables have valuable significant effect on economic growth and stabilization, but study about their relationship has research gap, as there seems to be little or no attention on the impact of fiscal policy on manufacturing sector in Nigeria. This study seeks to fill this research gap.

1.3       Objective of the Study

The main objective of this study was to ascertain the impact of fiscal policy on the manufacturing sector output in Nigeria.

The specific objectives include the following:

1.              To examine the impact of government expenditure on the manufacturing sector output

in Nigeria.

2.              To determine the impact of government tax revenue on the manufacturing sector

            output in Nigeria.

1.4       Research Question

The research questions include the following:

1.       To what extent has government expenditure impact the manufacturing sector output in

        Nigeria?

2.       How does government tax revenue impact the manufacturing sector output in Nigeria?

1.5       Research Hypotheses

The following null hypotheses was formulated in line with the objectives of the study:

H₀₁: Government expenditure has no significant impact on the manufacturing sector output in

         Nigeria.

H₀₂: Government Tax revenue has no significant impact on the manufacturing sector output

        in Nigeria.

1.6       Scope of the Study

This study intends to examine and measure the overall impact of fiscal policy on the manufacturing sector output in Nigeria, therefore our analysis falls within the boundary of fiscal policy vis-à-vis the manufacturing sector. Data for the analysis covered the time period of 21 years (1996-2016). Secondary data generated from the Central Bank of Nigeria statistical bulletin and academic journals was used in carrying out the research work.

1.7       Significance of the Study

The study will enormously contribute in giving support to the government, policy makers, economic planners, researchers and the academia generally.

      i.         Government: This will go a long way in providing an insight and understanding to the government on how to spend public funds judiciously which will bring about economic stability as well as economic growth and development.

     ii.         General Public: The study will immensely help in providing an insight and knowledge to the general public on how the government influences the economy through its spending and revenue especially as it relates to the manufacturing sector.

   iii.         Policy Makers: This work will be of immense advantage to the policy makers and economic planners in terms of using its findings in formulating and implementing appropriate policy measures towards accelerating economic growth through the manufacturing sector.

   iv.         Manufacturing Sector Regulatory Authorities: It will provide the manufacturing sector regulatory authorities with the knowledge of the impact of fiscal policy on the manufacturing sector output in Nigeria.

     v.         The academia:  To the academia, the findings of the study will contribute to the available literature on the current scenario of manufacturing sector in Nigeria and its level of contribution to the GDP.

   vi.         Researchers: Based on our empirical findings and analysis, the result of the study will be of immense benefit to researchers who will rely on their contributions to existing knowledge for further research.

  vii.         Monetary Authorities: The findings of this research will assist monetary authorities in assessing the performance of the fiscal policy in Nigeria particularly in terms of their impact on the output of manufacturing sector.

1.8       Limitation of the Study

This work is limited to Nigeria because of the nature of the study which only aims at the Nigerian environment. In addition, time constraints and finance constituted a major limitation to the study which consequently, hampers the researcher’s ability to source enough research materials and periodicals needed for the study.

1.9       Definition of Terms

1.     Fiscal policy: Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. It is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. Fiscal policy is the sister strategy to monetary policy through which a central bank influences a nation's money supply.

2.     Manufacturing: The process of converting raw materials, components, or parts into finished goods that meet a customer's expectations or specifications. It is the production of merchandise for use or sale using labour and machines, tools, chemical and biological processing, or formulation. Manufacturing commonly employs a man-machine setup with division of labor in a large scale production.

3.     Manufacturing sector: Agglomeration of industries engaged in chemical, mechanical, or physical transformation of materials, substances, or components into consumer or industrial goods. Manufacturing and Industry sector known as secondary sector, or sometimes called the production sector, includes all branches of human activities that transform raw materials into products or goods.

4.  Output: An output is the amount of something (such as energy, work, goods, or services) produced by a machine, factory, company, or an individual in a given period. The manufacturing output is the total output of all the facilities producing goods within a country, is a sub-set of individual output.

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