TABLEOFCONTENT
TitlePage——————————————————i
Certification————————————————–ii
ApprovalPage———————————————-iii
Dedication——————————————————iv
Acknowledgement———————————————-v
ListofTables———————————————-vi
ListofFigures———————————————vii
Abstract——————————————————–viii
ChapterOne:Introduction
1.1BackgroundoftheStudy————————————1
1.2StatementoftheProblem———————————–4
1.3ResearchQuestions————————————–6
1.4ObjectivesoftheStudy————————————6
1.5StatementofHypothesis———————————–6
1.6SignificanceoftheStudy———————————–7
1.7ScopeoftheStudy—————————————-7
ChapterTwo:LITERATUREREVIEW
2.1ConceptualLiterature————————————–8
2.1.1ConceptofFiscalPolicy———————————–8
2.1.2ConceptofEconomicGrowth—————————–9
2.2TheoreticalLiterature————————————-10
2.2.1TheKeynesiantheoryofFiscalPolicy_________________10
2.2.2Savers-spenderstheoryoffiscalpolicy________________11
TheoriesofEconomicGrowth—————————–11
2.2.3Harrod-DomarGrowthModel______________________11
2.2.4TraditionalNeoclassicalGrowththeory________________12
2.2.5EndogenousGrowthTheory_______________________12
2.2.6MacroeconomicTheories———————————-13
2.3EmpiricalLiterature————————————–18
2.4SummaryandLimitationofpreviousStudies_____________23
CHAPTERTHREE
3.0 RESEARCH DESIGN AND METHODOLOGY – – -25
3.1 Theoretical Framework – – – – 25
3.2 Research Design – – – – – 26
3.3 Model specifications – – – 26
3.4 Method of Evaluation – – – – 27
3.4.1 Economic criteria on Test(Apriori Test) – – 28
3.4.2 Statistical test of significance – – – 29
3.4.2.1 Test for Goodness of Fit – – – 29
3.4.2.2 t-test of significance- – – – – -29
3.4.2.3 f-test of Significance- – – – 29
3.4.3EconometricTestofSignificance(SecondorderTest)- – 29
3.4 Data requires and sources- – – – – -31
CHAPTERFOUR
4.0PRESENTATIONANDANALYSISOFRESULT – – – 32
4.1 The Empirical Result – – – 32
4.2 ExaminationoftheAlgebraicSignsoftheParameterEstimate__35
4.3 Statistical Test of Significance – – – -36
4.4.1 Interpretation of R2 Result- – – 36
4.4.2 Interpretation of the t-test Result – – – 36
4.4.3 Interpretation off-Test result – – – 37
4.5 Result and Interpretation of Auto correlation Test – 38
4.6.Implicationoftheresult_______________________________42
CHAPTERFIVE
5.0 SUMMARYOFFINDINGS,CONCLUSIONANDRECOMMENDATIONS -43
5.1 Summary of Findings – – 43
5.2 Conclusion – – – – – – 43
5.3 Recommendations – – – 44
REFERENCES – – – – – 45
APPENDIX I – – – – – 49
APPENDIX II – – – 50
APPENDIX III – – – – – 51
APPENDIX IV – – – – – 52
APPENDIX V – – – – – – 53
APPENDIX VI – – – – – – 54
APPENDIX VII – – – – – —55
APPENDIX VIII – – – – – 56
APPENDIX IX – – – – – 57
APPENDIX X – – – – – – 58
APPENDIX XI – – – – – 65
CHAPTER
ONE
INTRODUCTION
- Background of the Study
Fiscal policy is seen as that part of
government policy concerned with the raising of government revenue through
taxation and other means and the decision on the level and pattern of
expenditure for the purpose of influencing economic activities or attaining
some desirable macroeconomic goals. Economic growth on the other hand may be
defined in terms of the total physical output, or real income, of an economy
(Udabah, 2002). Fiscal policy can foster growth and human development through a
number of channels such as increase in investment and productivity.
Macroeconomic instability is particularly damaging to the poor in a nation, as
their earnings are not indexed to inflation and they have limited opportunities
to invest in assets that provide a hedge against inflation. But macroeconomic
stability associated with prudent fiscal policy yields greater benefits,
including higher rates of investment and educational attainment, as expected
rates of return can better be achieved in an environment of low inflation. Prudent
fiscal policy can help enhance factor productivity, leading to higher growth
and consequently poverty reduction. The vast literature on endogenous growth
theory suggests that fiscal policy can either promote or retard economic growth
through its impact on decisions regarding investment in physical and human
capital. In particular,increased spending on education, health, infrastructure,
and research and development can boost long term growth. Higher growth, in
turn, generates greater fiscal resources to finance spending on human capital,
further bolstering the dynamism of the economy.
Effectively and efficiently implemented government spending on
infrastructure increases private sector productivity by providing complementary
public inputs (for example, through spending on roads and bridges that
facilitate trade in rural areas) Ineffective fiscal policy, on the other hand,
can harm the growth process of an economy. Dead-weight loss from taxes that
finance public spending, and the associated adverse factor-supply effects are
good examples that readily come to mind.
Unproductive public spending can take various forms, including:
expenditure on wages and salaries of unproductive employees. Such resources can
be deployed to more productive initiatives that would enhance increased
productivity in the economy. Rent-seeking incentives reduce growth by diverting
higher human capital away from productive activities with adverse impact on the
index of productivity.Macroeconomic dynamics in Nigeria has been dominated in
the past by fiscal instability. There have been a strong deficit and debt bias
stemming from government revenue volatility. With about 75 percent of revenue
from oil and gas, fiscal policy in Nigeria has been heavily influenced by oil
driven volatility impacting both revenue and expenditure. Since 1970, both
revenue and expenditure have been very volatile while increasing over time. In
periods with high oil prices, such as in1979-82, 1991-92 and more recently in
2000-02, revenue and expenditure have increased sharply. The implications of
such boom-bust fiscal policies include the transmission of oil volatility to
the rest of the economy as well as disruptions to the stable provisions of
government services (Thomas 2003).
Since
the late 1980s, fiscal (budget) policy has become a major tool/instrument in
Nigeria. The reasons for this are not inconsiderable. First is the dominant
role of the public sector in major (formal) economic activities in Nigeria.
This can be traced to several factors. Among them are the oil boom of the early
1970s, the need for reconstruction after the civil war, the industrialization
strategy adopted at the time (import substitution industrialization policy) and
the militarization of governance. The second reason for the increasing
dominance of fiscal policy in the management of the economy is the fall in the
international price of oil in the late 1980s. Furthermore, the persistent
fiscal deficit since the early 1970s (and given the decline in oil revenue)
required a new fiscal focus that saw the emergence of the public sector in
major economic activities (Obi,2007). Although the democratically elected
government in 1999 adopted policies to restore fiscal discipline, the rapid
monetization of foreign exchange earnings between 2000 and 2004, another era of
oil windfall, resulted in large increases in government spending. In 2005
alone, government spending increased to 19 percent of GDP from 14 percent in
20000(CBN bulletin 2015). Extra budgetary outlays not initially included in the
budget increased. Worst till, most of this spending were not directed towards
capital and socio-economic sectors. Corollary primary deficit worsened from an
average of 2.6 percent of GDP in 1980s to one of 6.2 percent in 1990s. In 2002
alone, primary deficit increases to 5 percent of GDP from 2 percent in 2000.
These increases in deficits result in a mounting stock of debt, ranging from 88
percent of GDP in 1980s to 96 percent of GDP in 1990s. In 2002 alone, the stock
of debt increased to 91 per cent of GDP from 45 per cent in 2000 (Cashin,
1995). However, considering the uncertain fiscal dynamics in Nigeria, the
recent fiscal adjustment witnessed in 2005 might still not be sustained.
Nigeria’s fiscal revenues are largely coincided with oil revenue accounting for
nearly 80 percent of government revenues, which implies that the economy is
highly exposed to price fluctuations in the world oil markets. Naturally, oil
revenue is very volatile due to world oscillation in oil prices and to
unpredictable changes in OPEC assigned oil quota of which Nigeria has been a
member since 1958 following the commercial discovery of oil in Oloibiri in
River State, Nigeria in 1956. Absence of suitable fiscal rules and a proper
finance management framework for oil related risks over the past two decades in
Nigeria have led to boom and-bust type fiscal policies that have generated
large and unpredictable movements in government finances. Consequently, this
has been a recurrent source of destabilizing effect of fiscal surprises on the
domestic prices and exchange rate as well as financial system. Issues connected
to budgetary (fiscal) policy have become major issues in our polity. The 2012
budget has attracted a lot of criticism. One of the major issues raised against
Nigeria’s 2012 budget is the high rate of recurrent expenditure, despite
government’s reduction from 74.4 per cent in 2011 to 72 per cent in 2012. Based
on the 2012 budget, government proposed spending most of its money on running
the administration rather than on badly needed infrastructure projects to
create jobs and boost growth in the continent’s second-largest economy. 2014
budget was incremental in nature, the figures shows sharp increases in
expenditure and that Nigeria has spent more than she has earned. Within the period,
total revenue has witnessed an average increase of 29%, while total expenditure
exceeded that by 15%. Between 2015 and 2016 average increase in expenditure was
lower than revenue. This may be partly due to the negative impact of
insurgency, recession etc. that significantly reduced government revenue. The
figure also shows that government expenditure responds to changes in total
revenue. Between 2014 and 2016 when government revenue dropped on the average
by 0.82% due to significant decline in oil prices, government expenditure also
shaded an average of 1.20% within the period. This suggests that Nigerian
economy follows pro cyclical fiscal policies to changes in government revenue.
Based on the above analysis, this investigation is primarily aimed at assessing
the impact of fiscal policy on the economy of Nigeria.
1.2 Statement of the Problem.
In Nigeria, despite the importance of existing policies to achieve economic objectives of viable economic growth, the use of fiscal policy for the realization of these growth objectives is still highly questionable. The Nigerian economy has been plagued with several challenges over the years. Researchers have identified some of these challenges as: gross mismanagement/ misappropriation of public funds, (Okemini and Uranta, 2008), corruption and ineffective economic policies (Gbosi, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policies (Onoh, 2007); inappropriate and ineffective policies (Anyanwu, 2007). Imprudent public spending and weak sectorial linkages and other socioeconomic maladies constitute the bane of rapid economic growth and development (Amadi and Essi, 2006). It is evident that one of Nigeria’s greatest problems today is the inability to efficiently manage her enormous human and material endowment. In spite of many, and frequently changing, fiscal, monetary and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development (Ogbole, 2010). These policies span through two broad periods, which can be classified as “regulation” and “deregulation”. Our main focus is the differential in fiscal policy failed to achieve a satisfactory level of welfare for the society by providing an equitable or fair distribution of income and wealth, or all of these (Ogiji, 2004). The 1930s Great Depression was a confirmation of the reality of the failure of the market economy which led to the evolution of Keynesian economics. Keynes submitted that the lingering unemployment and economic depression were a result of failure on the part of the government to control the economy through appropriate economic policies (Iyoha and Fischer (1990). Consequently, Keynes proposed the concept of government intervention in the economy through the use of macroeconomic policies such as fiscal and monetary policies. Fiscal policy deals with government deliberate actions in spending money and levying taxes with a view to influencing macro-economic variables in a desired direction. This includes sustainable economic growth, high employment creation and low inflation (Microsoft Corporation, 2004). Thus, fiscal policy aims 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 (Dornbusch and Fischer, 1990). Government interventions in economic activities are basically in the form of controls of selected areas/sectors of the economy. These controls differ, and depend on the specific needs or purpose the government desires to achieve. Samuelson and Nordhaus(1998), distinguished between two forms of regulation, namely:
IMPACT OF FISCAL POLICY ON ECONOMIC GROWTH IN NIGERIA
