FISCAL POLICY AND MACROECONOMIC EXPENDITURES BY PRIVATE SECTOR IN NIGERIA 1996-2018

FISCAL POLICY AND MACROECONOMIC EXPENDITURES BY PRIVATE SECTOR IN NIGERIA 1996-2018

CHAPTER ONE

                                                            INTRODUCTION

• Background to the Study

The importance of macroeconomic policies and its impact on growth has occupied a central position in the economics literature in recent years both developed and developing economies (Andabai, 2016). Fiscal policy and its impact on private sector growth in Nigeria have been identified as one of the areas in the economics literature that can quicken the pace of growth and development in an economy such as Nigeria. The empirical studies carried out by Omitogun and Ayinla (2007) reveals that increase in government expenditure would lead to growth and development of the private sector.

The implication is that more percentage of the total expenditure should be spent on capital projects which contributed to the growth and development of the private sector. Efficient and effective government fiscal policy serves as a catalyst for private sector growth and development in any modern economy (Nzotta, 2014). Some empirical studies conducted by (Okemini & Uranta, 2008; Andabai, 2014) on the impact of government fiscal policy on private sector growth in Nigeria.

Fiscal policy are government measures designed to influence the quantum and allocation of revenue and expenditure with the aim to achieving internal and external economic balance, as well as sustainable development. For optimum results, fiscal policy must have a handshake with monetary policy to achieve the primary goal of welfare maximization for the citizenry, which is facilitated by internal and external economic stability as well as sustainable development.

The current dwindling concern is that large and growing governments have deleterious effect on the long-run growth of their economies. The usual policy prescription calls for a scaling back of government activity and budgets, constraining public spending from growing faster than output. In countries facing fiscal imbalances and high debt burdens, this has prompted wide-ranging fiscal consolidation programs to reduce government spending (IMF, 2003). However, parallel to this thrust has been a call for fiscal space in which governments argue for room in their budgets to allow for the provision of productive public goods that will foster economic growth (Heller, 2005).

The realization of this growth undoubtedly is not automatic but requires policy guidance, which are fiscal and monetary policy instruments which are the main instruments of achieving the macroeconomic targets. The basic fiscal policy instruments are government expenditure and tax revenue. To most economist all over the world, fiscal policy has been an important growth determinant of any country, this deep seeded belief that increase in taxation, public investment, Maintaining Surplus Budget, wage control, inflation and other aspect of fiscal policy instrument contribute more to the growth determinant of any country both developed and developing countries.

Vast researches have been done on the nature of fiscal policy and the economic growth for years, example Tim Mahedy and Daniel J. Wilson(2018)  Fiscal Policy in Good Times and Bad, Taiwo and Agbatogun (2011) in their paper analyse the implications of government spending on the growth of Nigeria economy over the period 1980-2009, most of these studies considered fiscal policy impact on the development of economy in both the developed and developing countries. However, recent literatures have justified the need to jointly take into consideration fiscal policy and economic growth in an economic model and economic techniques for unbiased result. Marzie and Safdari (2011) asserted that there is a linkage between fiscal policies variables of gross domestic product growth rate, growth of exchange rate, growth of the price index of goods and services, and growth of government. This argument was in conformity with several studies that have been carried out worldwide to investigate the nature of relationship that exists between fiscal policy and economic growth, but not much have been done in Africa most especially in Nigeria. The current dwindling concern is that large and growing governments have deleterious effect on the long-run growth of their economies. The usual policy prescription calls for a scaling back of government activity and budgets, constraining public spending from growing faster than output. In countries facing fiscal imbalances and high debt burdens, this has prompted wide-ranging fiscal consolidation programs to reduce government spending (IMF, 2003). However, parallel to this thrust has been a call for fiscal space in which governments argue for room in their budgets to allow for the provision of productive public goods that will foster economic growth (Heller, 2005). The realization of this growth undoubtedly is not automatic but requires policy guidance, which are Fiscal and Monetary policy instruments which are the main instruments of achieving the macroeconomic targets. The basic fiscal policy instruments are Government Expenditure and Tax revenue. To most economist all over the world, fiscal policy has been an important growth determinant of any country, this deep seeded belief that increase in taxation, public investment, Maintaining Surplus Budget, wage control, inflation and other aspect of fiscal policy instrument contribute more to the growth determinant of any country both developed and developing countries. Studies carried out in Nigeria such as Medee and Nenbee (2011) study centred on an empirical investigation of the impact of fiscal policy variables on economic growth in Nigeria between 1970 and 2009, Oseni and Onakoya (2013), the focused in testing the argument that only three fiscal variables (productive expenditure, distortionary tax and fiscal deficit) which  have not been able to effectively resolve the issues on the problem of fiscal policy and economic growth ,some of them propose that there is no positive relationship between fiscal policy and economic growth while a few of them find the evidence to support the motion, as some of them make use of the Keynesian approach and while some focus on the effectiveness of this policy measure in stimulating economic growth in this country during regulation and deregulation periods. Fiscal policy plays a key role in the promotion of economic growth and macroeconomic stability (Ezeabasili et al, 2012). However, Siegal (1979), Tanzi and Blejer (1984) argue that the magnitude of government fiscal surplus or deficit is an important indicator of the impact of fiscal policy on the economy. During the first decade of independence, fiscal operations in Nigeria recorded a positive balance over the period 1961-1969, at an annual average of 8.12 per cent (CBN, 2014). The first deficit balance (8.62 per cent) was recorded in 1970. The fiscal surplus of the 1960s can be linked to a vibrant agricultural sector that ensured a steady stream of income for government operations as well as the nation’s conservative approach to industrialization. The intent of fiscal policy is essentially to stimulate economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, expenditure and borrowing that is consistent with sustainable growth. However, the extent to which fiscal policy engenders economic growth continues to attract theoretical and empirical debate in developing and advanced countries. During the global recession and financial crisis of 2008 and onward, most advanced countries implemented a variety of active fiscal policies as large stimulus packages to mitigate this recession. In particular, since monetary policy options are restricted by the very low interest rates, which were central features of this recession, most governments relied much more on fiscal policy. For example, the U.S. enacted unprecedented fiscal expansion including the American Recovery and Reinvestment Act (ARRA) of 2009 which was a combination of tax cuts, transfers to individuals and states, and government purchases equal to 5.5% of GDP Auerbach (2012). In 2008, the EU adopted the European Economic Recovery Plan (EERP) equivalent to 1.5% of the EU GDP Beetsma and Giuliodori (2011). These examples are just a subset of the stimulus packages by G20 governments. According to Gemmell (2011), much larger G20 stimulus packages worth $15 trillion over 2009-2010 were announced in 2009, expecting to stimulate GDP by 4% compared to the ‘no stimulus’ alternative.

However, these large-scale fiscal stimulus packages have triggered a lively debate about the effectiveness of fiscal policy regulations. Until the early 1980s, fiscal policy was widely regarded as a useful tool for economic stabilization. However, its failure to boost economic growth in the wake of the oil shocks of the 1970s, and the associated increase in budget deficit and public debts, have led a lot of economists to be skeptical about the effectiveness of fiscal policy to smoothen cyclical fluctuations (Beetsma & Giuliodori, 2011), and fiscal policy has received less attention (Afonso & Sousa, 2012). While policymakers continued to rely heavily on active fiscal policy as a policy instrument, as demonstrated during the current global recession, academic researchers have not reached a consensus about the effects of fiscal policy on macroeconomic variables, or about the magnitude of such effects. The role of the government in accelerating economic growth has come under intense controversy since the emergence of Keynes in the 1930s. On the one hand, opponents of fiscal policy argued that government spending may hinder economic growth, due to the impact of raising tax on individual and firm. Such increase in individual and firm tax reduces aggregate demand and reduces profitability as well as investment of firms. This therefore impact negatively on potential investment and long run growth (Blejer & Khan, 1984). Opponents of fiscal policy also argued that government spending may impact negatively on private investment, if government finances it spending through borrowings from banks. Such borrowings culminates in a raise in interest rates which consequently affects the cost of capital for the private sector from banks and thereby crowd out (compete away) private investment with adverse affect on economic growth. In contrast, proponents of fiscal policy advocated that government spending crowd-in private investment. For instance, given the low rate of national savings and gross shortage of essential facilities (such as education, electricity, roads, among other) especially in developing countries and which are prerequisite for investment climate and growth, there is the need for government to provide such investment-enhancing essentials that can spur economic growth. Relatedly, the role of government in the remarkable sustained growth achieved by the newly advanced countries (especially Japan and China) has also been cited as the importance of government in spurring economic growth. Furthermore, the rapid response of various governments especially in the form of bailout to the (2007/2008) financial crisis, have also portrayed the importance of government spending as a stimulus to enhancing private investment. Apart from the above controversy on the impact of aggregate government spending on private investment, there also exists an unresolved issue on the relationship between components of government spending and private investment. It is also argued in the literature that components of government spending may have differential impact on private investment. Some component may compliment (crowd in) private investment and so enhance economic growth while others may substitute (crowd out) private investment and thus adversely affect economic growth (Majeed & Khan, 2008). In this regard, Mamatzakis (2001) noted that public investment had a positive effect on private investment while government consumption had negative effect on private investment. In addition to Mamatzakis (2001), studies such as Laopodis (2001), Karagöl (2004), Ahmed and Miller (1999), and Levine and Renelt (1992) among others also examined the relationship between components of government spending and private investment. These studies have however produced divergent results. Although plethora of endogenous studies (see Paiko, 2012; Amassoma et al., 2011; Nurudeen & Usman, 2010; Ekpo, 1995 among others) exist on the relationship between government spending and private investment, these studies failed to take into account the relationship between government final consumption expenditure and private investment (domestic credit and foreign direct investment) in their analyses. It is against this backdrop that this study seeks to examine to what extent has the component of government spending (taken into account government final consumption expenditure) crowd-in or crowd out private investment in Nigeria from 1981 to 2010.

• Statement of the Problem

In recent years, the growth and performance of key macroeconomic indicators in many developing countries has decelerated. The current recession and tightening of global financial conditions in addition to financial market volatility may lead to a decrease or reversals of capital inflows. Since the risk to capital flows can limit monetary policy in these countries, the choice of fiscal policy as a counter cyclical tool becomes highly essential.

Fiscal policy as a tool of macroeconomic management is central to the health of any economy, as the tax and expenditure policy of the public sector affects the disposable income of individuals and business organizations. Hence, effective fiscal policy operations will ensure a sound balance of payment and price stability that will provide the atmosphere needed for sustainable economic growth and development; and encourage expenditures from macroeconomic agents. However, what is seen in the Nigeria economy is abysmal performance of the consumption, expenditure, investment expenditure and expenditures made by the external sector. Thus, this has necessitated some scholars to delve into studying the relationship between fiscal policy measure and the expenditures made by the three macroeconomic agents. The reports from the scholars have produced conflicting results in the body of literature; and at the same time create a knowledge gap, because the study to the best of our knowledge has been able to address the effects of fiscal policy on macroeconomics expenditures by the private sector of the Nigerian economy from 1996 to 2018.

It is against this backdrop that this study attempts ask some questions on what has been happening to expenditures incur by consumers, business unit and the external sector in the face of increase in the government fiscal policy implementation in Nigeria. Addressing this problem, is the motivated the study to examine the effect of fiscal policy and macroeconomic expenditures by private sector in Nigeria with literature ranging from 1996 – 2018.

• Aim and Objectives of the Study

The aim of this study is to examine the relationship between fiscal policy and macroeconomic expenditures by private sector in Nigeria 1996-2018. Specifically, the study would pursue the following objectives:

1. To determine the relationship between fiscal policy and consumption expenditure in Nigeria from 1996 to 2018.
2. To examine the relationship between fiscal policy and investment expenditure in Nigeria from 1996 to 2018.
3. To ascertain the relationship between fiscal policy and external sector expenditure in Nigeria from 1996 to 2018.

1.4.    Hypotheses

The following hypotheses would be formulated by the researcher to aid the completion of the study.

H₀₁:  There is no significant relationship between fiscal policy and consumption expenditure in Nigeria.

H₀₂:  There is no significant relationship between fiscal policy and investment expenditure in Nigeria.

H₀₃:  There is no significant relationship between fiscal policy and external sector expenditure in Nigeria.

1.5.   Significance of the Study

It is believed that at the completion of the study, the findings would be of great importance to the Ministry of Finance and Federal Inland Revenue Service as the study seeks to explore the relationship of fiscal policy and macroeconomic expenditure by private sector in Nigeria. The study would also be of great importance to researchers who intend to embark on a study in a similar topic as the study would serve as a guide to further research.

The study would also be of great importance to the private sector of the economy as it gives the key players an insight on how fiscal policy of a government affects the private sector. Finally the study would be of importance to researchers, academia’s students, teachers and the general public as the study will contribute significantly to the pool of existing literature on the subject matter and also add to knowledge.

1.6.    Scope of the Study

The scope of the study covers fiscal policy and macroeconomic expenditures by private sector from 1996 – 2018. The researcher aims at showing the impact of Fiscal Policy and Macroeconomic Expenditures by Private Sector in Nigeria 1996-2018. Also, the study also review theories that deals with fiscal policy and macroeconomic expenditure by private sector. The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals.

1.7.   Definition of Terms

Fiscal Policy: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply.

Fiscal Policy Measures:

Fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. … In taxes and expenditures, fiscal policy has for its field of action matters that are within government’s immediate control

Macroeconomics: Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment

Expenditures: Expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense.

Government Expenditure:

Government expenditure refers to the funds and resources allocated by the government to social goods and services, such as health care, education and infrastructure.

Tax:

A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.

Taxation:

Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax. The term “taxation” applies to all types of involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue is usually called “taxes.”

Private Sector Expenditure: The private sector is the part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the State.

Consumption Expenditures:

Consumption expenditures is a measure of national consumer spending. It tells you how much money Americans spend on goods and services

Investment Expenditures:

Expenditures made by the business sector on final goods and services, or gross domestic product, especially the purchase of productive capital goods.

External Sector Expenditures:

The external sector is the portion of a country’s economy that interacts with the economies of other countries. In the goods market, the external sector involves exports and imports. In the financial market it involves capital flows. Economic features related to the external sector include: External debt

1.8.   Organization of the Study

Chapter one gives us an overview of the background of the fiscal policy and macroeconomic expenditures by private sector in Nigeria 1996 – 2018, the statement of the problem, aim and objectives of the study, hypothesis, significance of the study as well as the scope of the study, definitions of terms and organization of the study. Chapter two is divided into four sections. In the first section, we discussed the theoretical framework; the second section covers the conceptual framework, the third section deals with empirical literature and the last sums up literature review.

Chapter three of the study considers the methodological issues treated under the sub headings of research design, nature and sources of data required, model specification and estimation, method of study and analytical framework. Chapter four presents data used for the analysis, the results of the analysis and discussion of results, chapter five summarizes, concludes and recommendations for policy actions in the study.

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