Fiscal Deposit and Economic Development of Nigeria
Chapter One
Abstract
This study focuses on fiscal deposit and economic development in Nigeria. To achieve the objective of this study diagnostic check and unit root test using Phillips perron was employed to investigate time series data and to test the stationarity of the time series of the variables. Johansen co-integration analysis and Error Correction Model (ECM) are employed to test for a relationship between or among variables. The paper concludes that the driving variables of economic development in Nigeria were Public external debt-PEXD, total federal collection revenue-TFCR, and interest rate-INTR. The public deficit financing was determined based on the study by the variables of Government expenditure (GOVE), real GDP, exchange rate-EXCR. The best model of ECM to determine the impact of fiscal deficit in Nigeria is the interaction with economic development performance measures in Nigeria. The findings confirm that one standard deviation of shocks of fiscal deficit has a significant influence on economic development, hence confirming the long-run relationship. The search recommended that Government should set its priority rights, be more committed to the budget implementation, and pay more attention to capital expenditure geared towards economic development.
Chapter one
Introduction
Background of the study
Fiscal deposit or fiscal deficit refers to the difference between the government’s total receipts and total outlays. It serves as a gauge for the total amount of borrowings the government will require. “A budget deficit is the excess of government outlays over collections received through taxes, fees, and charges levied by government authorities,” states the public finance literature (Hyman, 1996). The sustainability of fiscal policies is evaluated using the budget deficit measurement. An expansionary approach is suggested by a budget deficit. The budget deficit as a percentage of GDP is a measure of how the government sector affects the economy through time.
In general, the definition of a fiscal deficit includes the financing of loans and the use of cash reserves. Therefore, it refers to the discrepancy between budget receipts and budget expenditures paid for using cash reserves and governmental borrowing (Nwaogwugwu, 2005).
“The phrase fiscal deficit can be defined as the difference between revenue and budget expenditure,” write Faith and Yunus in 1990. Tax revenue, tax-exempt revenue, and private revenue make up the three major components of budget revenue. Tax revenue is the most significant part of the budget’s revenue. However, budget spending includes four crucial components. These are: current expenditure, investment expenditure, real expenditure and transfer payments. Current expenditure is a kind of expenditure which is related to non-durable goods. It is usually used for short term expenses. Investment expenditure is stated as expenses related investment and efficient use of resources. Transfer payment is an unrequited payment that has an indirect effect on GDP. Real expenditure consists of production factors and production expenditure. If budget deficit shows the disharmony and imbalance between revenue and expenditure, both the revenue and expenditure side of budget should be analyzed in detail”.
According to Onwioduokit (1994), “Fiscal deficits occur when public spending increases while income stays the same, when tax revenue decreases while public spending increases, or when tax revenue fails while public spending maintains the same. In the majority of emerging nations, it is a well-known pattern that the public sector predominately initiates and finances economic growth. Public income from taxes and other sources are intended to pay the ensuing increase in public spending, but as revenues are never enough to keep up with the amount of spending, big deficits are the main concern. The growth in public revenue in developing countries are restricted by many factors such as: low per capita income, limiting the base on which direct taxes can be imposed, income tax exemptions in the form of tax holidays, accelerated depreciation rates and tax credits usually provided to the manufacturing sector, and deficiencies in tax administration. On the other hand, public spending continues to grow due mainly to mismanagement; increased public participation in production and control of economic variables; and inability to control spending.
However, despite the fact that Nigerian Government had had various deficit budgets to stimulate Economic Growth yet less is achieved in the respect. One of the primary objectives of budgetary is to achieve a sustainable Economic growth.
It is no exaggeration to claim that Nigeria’s huge debt burden was one of the hard knots of the Structural Adjustment Programme (SAP) introduced in 1986 by the Babagida administration. The high level of debt service payment prevented the country from embarking on large volume of domestic investment, which would have enhanced growth and development. With the debt forgiveness granted to Nigeria, one would expect the economic process of the country to be increased. However, with the number of years of independent and the substantial debt she has incurred, coupled with the existing situations, one can claim that the entire spectrum of the economy has not been sufficiently active, deficit sustain these negative consequences with their rippled cost over a long period of time beyond the point even the deficits stopped. Ongoing fiscal deficits substantially reduce national savings, consequently domestic investment. The effect is increased foreign borrowing, beyond their sustained budget deficit can also erode confidence on the economy both locally and internationally.
Statement of the problem
Industrialization is necessary for an economy to grow quickly, and for a nation to become industrialized, there must be a sufficient amount of investment to support output. Because of this, the industrialized countries seem to be the most advanced in the world. However, there must be an increase in the level of investment and production in order to reap the benefits of economic expansion. Therefore, a considerable infusion of capital, which can likely be obtained through taxes and borrowing, is required for a nation to promote productive activities. Keynesian believed that government borrowing was rational and asserts that it has no negative effects on economic performance on this basis.
The goal of government borrowing, one of the tools used to finance the deficit, is to promote growth and development. Over time, this borrowing has consistently exceeded the income produced. Discussions about the impact of budget deficits on economic performance have been reignited by the constant rise in government budget deficits in recent years. Many of the recent worries about government borrowing have focused on the potential interest rate effect that could cascade to other macroeconomic indicators, despite the fact that the effects of budget deficit on the economy can operate through a number of different channels, including exchange rate, interest rate, national savings, and gross capital formation among others. Higher interest rates caused by expanding government debt may reduce investment, inhibit interest-sensitive durable consumption expenditure, and decrease the value of assets held by households, thus indirectly dampening consumption expenditure through a wealth effect (Glenn, 2012).
In addition, rise in government borrowing may cause problem of rise in bond yields and inflation if governments fund deficits by printing money. If the government sells more bonds, it is likely to cause interest rates to increase. This is because the authority may need to increase interest rates in order to attract investors to buy the extra debt. Therefore, increased government borrowing may cause a decrease in the size of the private sector which may crowd out investment. Also, the likelihood of higher taxes and spending cuts may reduce the incentives to work. In extreme circumstances government may increase the money supply to pay the debt. But if government decides to sells short term gilts to the banking sector then there will be an increase in the money supply. This is because banks see gilts as near money, therefore they can maintain their lending to customers. Thus, rapid rise in government borrowing may lead to not just a rise in real debt but a rise in debt to GDP. This means debt burdens are a bigger percentage of aggregate output.
In spite of the above measures fiscal deficit has become a recurring decimal in Nigeria. Large fiscal deficit may have a lot of consequences on the country’s economic growth. For instance, Ikpama (2010) has argued that a higher fiscal deficit may lead to increased government borrowing and high debt servicing which may force the government to cut back in spending on relevant sectors of the economy such as health, education, infrastructure, human and physical capital development. He claims that it also causes exchange rate fluctuation and the crowding out of private investment as discussed earlier. For instance, Ezeabasili et al (2012) have noted that the major causes of inflation in Nigeria are the widening fiscal imbalances and the sources of deficit financing. According to them, a feature of the Nigerian economy has become a transition to high rates of inflation. They note that in the 1970s the overall inflation averaged 15.3%, while in the 1980s it increased to an average of 22.9% and in the 1990s the average inflation rate soared to 30.6%. They claim that the transition to high inflation rate over these periods must have resulted in substantial real cost and big losses in income and a low performance of the economy as a whole as a result of the widening fiscal deficits. However, Ranjan (2013) is of the view that if productive public investments increase and if public and private investments are complementary the negative impact of high borrowings on economic growth may be offset. Therefore, on this note, it is pertinent to investigate further the influence of government budget deficit on economic performance in Nigeria. Various studies have been conducted, with different approaches and diverse results. Some adopted Keynesian theory of Aggregate Demand and argue that government budget deficit may be necessary especially when the economy is in a recession or depression. However, some economists argue that government budget deficit is detrimental to the economy while others postulated that it promotes economic growth. For example, Anyanwu and Oaikhenan (1995); Omoke and Oruta (2010) are of the view that government budget deficit promotes economic growth (GDP), while Dalyop (2010), Onwiodukit (1999); Egwuaikhide, Cheta and Falokun (1994) argued that government budget deficit harm economic growth. However, this argument xv shows that there is no consensus on the effects of budget deficit on economic performances which is rooted in Keynesian, Neoclassical and Ricardian theories on budget deficits. Thus, Keynesian economists postulate that deficit spending grows the economy through its effect on some macro variable, while neoclassical economists are of the opinion that the effect is counterproductive, contrary to Ricardian theory which asserts that budget deficit has no positive or negative impact on the economy. Hence, the existence of these differences has been source of inspiration to this study, which is based on the fact that there are conflicting inferences due to varying results from previous studies in Nigeria.
Objective of the study
The following research objectives are to be ascertained;
- To determine the effect of government expenditure on econonomic development in Nigeria.
- To determine the effect of total federal government collection of revenue on economic development
- To examine the effect of public external debt on economic development
- To examine the effect of exchange rate on economic development in Nigeria.
Research Question
The following research questions are formulated;
- What is effect of government expenditure on econonomic development in Nigeria?
- What is the effect of total federal government collection of revenue on economic development?
- What is the effect of public external debt on economic development?
- What is the effect of exchange rate on economic development in Nigeria?
Research Hypotheses
The following research hypotheses are formulated;
H01: There is no effect of government expenditure on econonomic development in Nigeria.
H02: There is no effect of total federal government collection of revenue on economic development.
H03: There is no effect of public external debt on economic development.
H04: There is no effect of public external debt on economic development.
Significance of the study
By analyzing fiscal deficit and economic development, this study shall improve the understanding of the policymakers on the nature, extent and effect of budget deficit on economic development which is proxied with real gross domestic product in Nigeria. And examination of the nature of the role of budget deficit and some macroeconomic indicators economic performance in the country shall guide the fiscal policymakers in their choice for a specific target in the future. Also, the outcome of this study shall help the government and monetary authority to discover some areas of weakness in the choice and use of specific policy instruments and how to improve on them for effective performance of the Nigerian economy. Furthermore, the study shall add to the existing literature on fiscal deficit and economic development, especially in developing nations, like Nigeria, where government has been playing a prominent role while the financial system is at best rudimentary. In conclusion, this research work shall lend a voice to the ongoing advocacy for a mutual, cordial relationship between the fiscal (government) and the monetary (CBN) authorities especially in the area of policy management and macroeconomic performance in Nigeria.
Scope of the study
This research work is a country-specific study concentrating on the Nigeria economy. The study will cover the period of 1992 to 2022. The choice is based on data availability for all the variables. Moreover, the study will focus on the effects of overall government fiscal deficits and some key macroeconomic variables of interest such as interest rate, government expenditure, real money supply, net export, unemployment, RGDP, budget deficit ratio and as well inflation rate. This is for a straight and concise purpose of the study.
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