Background to the Study
Fiscal policy is the means by which a government adjusts its level of spending to monitor and influence a nation’s economy. It is used along with the monetary policy, which the central bank uses to influence money supply in a nation. These two policies are used to achieve macroeconomic goals in a nation. These goals include price stability, full employment, reduction of poverty levels, high and sustainable economic growth, favorable balance of payment, and reduction in a nation’s debt. Nigeria’s potential for growth and poverty reduction is yet to be realized. A key constraint has been the recent conduct of macroeconomics, particularly fiscal and monetary policies. This has led to rising inflation and decline in real incomes. National economic management became a Herculean task as the economy has to contend with volatility of revenue and expenditure. The widespread lack of fiscal discipline was further exacerbated by poor co-ordination of fiscal policy among the three tiers of government. Also, there is a weak revenue base arising from high-marginal tax rate with very narrow tax base, resulting in low tax compliance. As a result of these and other factors, serious macroeconomic imbalances have emerged in Nigeria. A review of these macroeconomic indices shows that inflation has accelerated to double-digit levels in 2000 and 2001. It increased from 6.94 to 18.87, respectively. This double-digit inflation continued up to 2005, and decreased to single digit in 2006 and 2007. In 2008, the inflation rate reverted to double digit (11.58) and continued to increase, and in 2010, it was 13.72% (International Monetary Fund [IMF], 2011). Unemployment is a major political and economic issue in most countries. In Nigeria, the years of corruption, civil war, military rule, and mismanagement have hindered economic growth of the country. Nigeria is endowed with diverse and huge resources both human and material. However, years of negligence and adverse policies have led to the under-utilization of these resources (Economic Watch, 2010), and this has contributed to the increasing unemployment rate in Nigeria. In 2000, the unemployment rate was 13.1%, and 21.10% in 2010. On the average, there has been an upward trend (CBN, 2005, 2006, 2009; Nigerian Bureau of Statistics, 2010).The use of government revenues and expenditures to influence macroeconomic variables developed as a result of the Great Depression when the previous laissez-faire approach to economic management became discredited. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics indicated that government changes in the levels of taxation and government spending influences aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country’s government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target the inflation (which is considered “healthy” at the level in the range of 2%–3%) and to increase employment. Additionally, it is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%.This implies that fiscal policy is used to stabilize the economy over the course of the business cycle.
Fiscal Policy as a tool of macroeconomic management used by the government to control the economy via its revenue and expenditure portfolios is an important concept in economics. The revenue portfolio consists of components like tax revenue, trade surplus, and foreign aid, while the expenditure portfolio consists of recurrent and capital expenditure. In other words, fiscal policy is the government’s deliberate actions towards spending money and for levying taxes aimed at influencing macro-economic variables so as to achieve desired macroeconomic objectives. The relationship between fiscal policy and economic growth has been discussed extensively in the literature using empirical analysis. According to Tanzi and Zee (2017), there are three cardinal indicators of fiscal policy—government expenditure, taxes, and deficits. There have been macroeconomic imbalances of varying degrees in Nigeria. Inappropriate public expenditure and revenue policies, a large deficit in the public sector have been identified by experts as responsible for the macroeconomic disequilibrium (Ajisafe and Folorunso, 2015). Evidence reveals that there was a substantial increase in government spending, primary deficit, and debt in Nigeria between 1991 and 2005 (CBN Statistical Bulletin, 2012). This was a result of the oil windfall between 1991 and 1992 which was followed by rapid growth in government spending with an average of about 21 percent of GDP during that period. However, as the oil market weakened in subsequent years, oil receipts were not adequate to meet increasing levels of demands and expenditures as being reinforced by political pressures. Although the democratically-elected government in 1999 adopted policies to restore fiscal discipline, the rapid monetization of foreign exchange earnings between 2000 and 2004 and another era of oil windfall resulted in large increases in government spending. In 2005 alone, the government spending alone increased to 19 percent of GDP from 14 percent in 2000, extra-ordinary budgetary outlays not initially included in the budget increased (CBN Statistical Bulletin, 2012). The growth and development of the Nigerian economy have not been stable over the years. As a result, the country’s economy has witnessed so many shocks and disturbances both internally and externally over the decades. Internally, the unstable investment and consumption patterns, as well as the improper implementation of public policies, changes in future expectations, and the accelerator, are some of the factors responsible for it. Similarly, the external factors identified are wars, revolutions, population growth rates andmigration, technological transfer and changes, as well as the openness of the country’s economy are some of the factors responsible. Fiscal policy is a major economic stabilization weapon that involves measures taken to regulate and control the volume, cost, and availability, as well as direction of money in an economy to achieve some specified macroeconomic policy objective and to counteract undesirable trends in the Nigerian economy (Gbosi, 2016). Therefore, economic stabilization cannot be left to the market forces of demand and supply and as well, other instruments of stabilization such as monetary and exchange rate policies among others, are used to counteract the problems identified (Ndiyo and Udah, 2013). This may include either an increase or a decrease in taxes, government expenditures, as well as public debt which constitute the bedrock of fiscal policy but in reality, government policy requires a mixture of both fiscal and monetary policy instruments to stabilize an economy because none of these single instruments can cure all the problems in an economy (Ndiyo and Udah, 2013). Advocates of government intervention in economic activity maintain that such intervention can spur long term growth. They cite the government’s role in ensuring efficiency in resource allocation, regulation of markets, stabilization of the economy, and harmonization of social conflicts as some of the ways in which government could facilitate economic growth. In the context of endogenous growth, government role in promoting accumulation of knowledge, research, and development, productive public investment, human capital development, law, and order can generate growth both in the short- and long-run [Osuala& Jones, (2014), Success, Success &Ifurueze, (2012), Okafor, (2012), Rena, R. (2011)]. Opponents hold the view that government operations are inherently bureaucratic and inefficient and therefore stifle rather than promote growth. It seems then that as to whether the government’s fiscal policy stimulates or stifles growth remains an empirical question. Even so, the existing empirical findings are mixed, with some researchers finding the relationship between fiscal policy and growth either positive, negative, or indeterminate. Nations the world over device comprehensive strategies directed towards the attainment of distinctive national goals.The transformation agenda of the present government is one such step.Nigeria has always witnessed well-articulated economic and social reforms intended to launch the nation on the path of meaningful development, (Abdul-Rahamoh, Taiwo&. Adejare, 2013). The problem with past governments in Nigeria has always been non-achieving of the required results. However, results can only be achieved when the vision is clear to all, the goals are broken down into simple manageable success milestones and responsibility delegated on the basis of competence and result periodically reviewed and laced with the implementable fiscal policy framework, (Babalola&Aminu, 2011). The transformation Agenda is achievable only if we can break from the past and chart a new course in the implementation process more especially as it concerns fiscal policy management. We must realize that the primary goal of governance is to ensure that the services of a state are properly harnessed towards achieving an optimal quality of life for the people derived from the most feasible outcome of real gross domestic products’ measurement in Nigeria otherwise called good economy.
Higher government expenditure finance with borrowing may or may not contribute positively to the overall performance of the economy. For instance, if the government increases borrowing in order to finance its expenditure, it will compete (crowds-out) away from the private sector, thus reducing private investment or it may spend the substantive amount on servicing its existing liabilities that can otherwise be used for investment. Furthermore, in a bid to score cheap popularity and ensure that they continue to remain in power, politicians and government officials sometimes increase expenditure and investment in unproductive projects or in goods that the private sector can produce more efficiently. Thus, government activity sometimes produces misallocation of resources and impedes the growth of national output. In such cases, unfortunately, rising public debt for ever-mounting public expenditure will not be translated into meaningful growth and development.
Statement of the problem
Over the years, there has been expansion in deficit financing and unstable fiscal policy, driven largely by oil prices between 1991 and 1992, and 2000 and 2002; revenueand expenditure have increased sharply. This, as typically seen, followed the reductionof expenditures as oil prices substantially decline, though at times with an interval afterthe decline in oil prices. The implications of such boom-burst fiscal policies includetransmission of oil-price volatility to the stable provision of government services. Thishas added to the failure over the years of public spending and stagnancy in economicgrowth. The Nigerian economy started experiencing recession from early 1980s that ledto a depression in the mid-1980s. This depression continued until early 1990s withoutrecovering from it. As such, the government continually initiated policy measures thatwould tackle and overcome the dwindling economy. Drawing from the experience ofthe great depression, government policy measure to curb the depression was in the formof increased government spending (Nagayasu, 2003). According to Okunroumu (1993),the management of the Nigerian economy in order to achieve macroeconomic stabilityhas been unproductive and negative, hence one cannot say the Nigerian economy isperforming. This is evident in the adverse inflationary trend, government fiscal policies,rippling foreign exchange rates, the fall and rise of gross domestic product,unfavourable balance of payments as well as increasing unemployment rates which are all symptoms of growing macroeconomic instability. As such, the Nigerian economy is unable to function well in an environment where there is low capacity utilization attributed to shortage in foreign exchange as well as the volatile and unpredictable government policies in Nigeria (Isaksson, 2001). Studies have been conducted on the impact of fiscal policy on economic growth of Nigeria as seen in the literature review and it has been discovered that emphasis is laid on the relative effectiveness of the fiscal policy components. Therefore, this research study will contribute to the stock of knowledge by considering the impact of fiscal policy on economic growth from 1986 to 2012 and the relative effectiveness of the fiscal policy instruments.
Therefore, the following questions will be examined in this study:
- What is the trend and pattern of government expenditureon economic growth of Nigeria?
- What are the effects of revenue on the economic growth of Nigeria?
- What extent does public debt affect the growth of the Nigerian economy?
Objective of the Study
The broad objective of this study is to examine the effect of fiscal policy on economic growth in Nigeria from 1994 to 2018
- To determine the trend and pattern government expenditureon economic growth in Nigeria.
- To evaluate the effects of Public debts on economic growth in Nigeria
- To ascertain how revenue affect the growth of the Nigerian economy.
- To what extent does public debt affect the growth of the Nigerian economy?
- What are the determinants of government expenditures on economic growth in Nigeria?
- To what extent does revenue affect economic growth in Nigeria?
Statement of Hypothesis
The following research hypotheses have been formulated for testing this study:
Ho1: There is no significant relationship between public debt and Nigerian economicgrowth.
Ho2: government expenditure does not have any significant positive impact on Nigeria economic growth.
Ho3: There is no significant relationship between revenue and the growth of the Nigerian economic.
Scope of the Study
This study focuses exclusively on fiscal policy and its relationship with gross domestic product (GDP) in Nigeria. The study appraises the impact of fiscal policy actions of the government for the period 1994 to 2018. This period of time is chosen due to the availability of data on the subject matter and the change in the economic structure of Nigeria in the year 1994. The study would make use of key variables such as tax, government debt, and government expenditure.
Significance of the Study
The research will be of immense benefit to the following:
- Government and her agencies (CBN): The various findings of this study would enable the government and financial authorizes to devices, modify and adopt a better fiscal policy on the economy that is policy makers of the central bank of Nigeria who issue guideline governing international trade practices.
- Banks especially the commercial banks: importantly, this study would help banks to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits their activities. This will definitely enhance growth and development of the economy of commercial banks in Nigeria.
- Students of financial and banking: who might take a cue from the work done have to further research into the field of exchange rate fluctuations and international trade. Hence, the study will also serve as a guide to future researchers on this subject
- The general public: who have a right to contribute and informed to the activities of our banking institutions. It is hoped that the, findings and recommendations of this study will be of great importance to the above mentioned group.
Limitation of the Study
The study is structured to evaluate the fiscal policy as the pilot of economy growth and development. The study is therefore limited to the core economic growth in Nigeria and not the socio-political factors of the foreign exchange rate. Although there are many economic variables that operate within the Nigeria economy, this study was also faced with certain constraints such as limited time frame with which to collect all necessary data.
- Policy Lags:
During the recent times, there is not much argument about the desirability or otherwise of a discretionary fiscal policy. The burning question in this context is related with the timing of the fiscal measures. Unless the variations in taxes and public expenditure are neatly timed, the desired counter-cyclical effects cannot be realized.
There is generally some interval between the time when a particular action is needed and the time when a fiscal measure has its impact felt. The duration of this interval determines the extent to which a specific fiscal measure can be effective. This time interval comprises of three types of lags-recognition lag, administrative lag and operational lag.
Another most serious limitation of fiscal policy is the practical difficulty of observing the coming events of economic instability. Unless they are correctly observed the amount of revenue to be raised, the amount of expenditure to be incurred or the nature and extent of budget balance to be framed cannot be suitably planned. In fact, success of fiscal measures depends on the accurate predictions of various economic activities. In its absence, it proves to be a little bit erratic.
- Correct Size and Nature of Fiscal Policy:
The most important necessity on which the success of fiscal policy will depend is the ability of public authority to frame the correct size and nature of fiscal policy on the one hand and to foresee the correct timing of its application on the other. It is, however, too much to expect that the government would be able to correctly determine the size, nature of composition and appropriate execution-time of fiscal policy.
- Fiscal Selectivity:
When monetary policy is general in nature and impersonal in impact, the fiscal policy, in contrast, is selective. The former permits the market mechanism to operate smoothly. The latter, on the contrary, encroaches directly upon the market mechanism and gives rise to an allocation of resources which may be construed as good or bad depending upon one’s value judgements. A particular set of fiscal measures may have an excessively harsh impact upon certain sectors, while leaving others almost unaffected.
- Inadequacy of Fiscal Measures:
In anti-depression fiscal policy, the expansion of public spending and reduction on taxes are always important elements. The question arises naturally, whether a specific variation in public spending or taxes will bear the desired results or not. In case the injections or withdrawals from the circular flow are more or less than what are required, the system will fail to move in the desired direction. This results in exaggeration of instability in the econom
CHAPTER TWO/REVIEW OF RELATED LITERATURE
2.1 Conceptual Review/Framework
The term fiscal policy has conventionally been associated with the use of taxation and public expenditure to influence the level of economic activities. Fiscal policy deals with government deliberate actions in spending money and levying taxes with a view to influencing macroeconomic 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& Fischer, 1990). Fiscal policy involves the use of government spending, taxation and borrowing to influence the pattern of economic activities and also the level and growth of aggregate demand, output and employment. Fiscal policy entails government’s management of the economy through the manipulation of its income and spending power to achieve certain desired macroeconomic objectives (goals) amongst which is economic growth (Medee&Nembee, 2011). Peter and Simeon (2011) define fiscal policy as the process of government management of the economy through the manipulation of its income and expenditure and to achieve certain desired macroeconomic objectives. Central Bank of Nigeria (2011) defined fiscal policy as the use of government expenditure and revenue collection through tax and amount of government spending to influence the economy. In finance, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure. Geoff (2012) contended that fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs creation. It is the government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation‟s economy. From all these definition, it was deduced that one of the regulatory policies used by government in achieving its objectives to bring about economic growth is fiscal policy. Fiscal policy is an outgrowth of Keynesian economics; its logical analysis suggests that it offers a sure-fire means of stabilizing the economy. The goal of modern fiscal policy is to achieve economic efficiency and stability. In a modern economy, no sphere of economic life is untouched by the government. Two major instruments or tools are used by government to influence private economic activity; taxes and expenditure but not limited to these two, it may include public debt, public work among others.
Fiscal policy is undoubtedly one of the most important tolls used by government to achieve macroeconomic stability of the economy of most developing countries (Ihendinihu, Jones &Ibanichuka, 2014)). Therefore, the attempt to empirically test the efficacy of monetary and fiscal policy in an economy dates back to the pioneering studies of Friedman and Easterly and Rebelo, (1993) empirically investigated the responsiveness of general price level on economic activity represented by aggregate consumption to change in money supply and autonomous government expenditure using ordinary simple linear regression model to estimate the US data from 1897-1957. In their conclusion, they found out that a stable and predictable causal relationship existed between demand and money supply while no such significant relationship was observed for government expenditure (Abdul-Rahamoh, Taiwo&. Adejare, 2013). Hence, there was a stable aggregate and money supply for the period. According to Ogbonna&Appah (2012), in his article unit root of variables tests confirm that the model assumed the irrelevance of anticipated monetary policy for short-run deviations of domestic output from its natural level. Therefore, only the unanticipated components of external price changes in the level of external economic activity leads to the deviation of domestic output from natural and observed that monetary tightening once anticipated in an economy would have no effect on real domestic output in the short-run. Also, Okafor, (2012) in his study “Tax Revenue Generation and Nigeria Economic Development” analyzed the monetary and fiscal policy implication Nigeria’s full employment level. However, on the other hand, all the fiscal variables significantly reduced unemployment in Nigeria. This except one was highly significant in reducing the level of unemployment generation in Nigeria than monetary policy measure. Also, Ajisafefolorunso (2001) in their study found out that monetary policy rather than fiscal policy exerts a great influence on economic activity in Nigeria. They therefore observed that the emphasis of government fiscal actions on the economy has led to a greater distortion of the Nigerian economy. Appah, (2010) in his study, ‘The Relationship between fiscal policy and Economic growth in Nigeria (1991–2005)’ also confirms that thegrowth of financial aggregates in real terms have positive impact on economic growth of development countries, irrespective of the level of economic development attained.
2.1.1 Concept of Economic growth
Growth Economic growth has long been considered an important goal of economic policy with a substantial body of research dedicated to explaining how this goal can be achieved (Fadare, 2010). Economic growth has received much attention among scholars. According to Khorravi and Karimi (2010), classical studies estimate that economic growth is largely linked to labour and capital as factors of production. The emergence of the endogenous growth theory has encouraged specialists to question the role of other factors in explaining the economic growth phenomenon (Bogdanov, 2010).
Economic growth represents the expansion of a country‟s potential GDP or output. For instance, if the social rate of return on investment exceeds the private return, then tax policies that encourage can raise the growth rate and levels of utility. Growth models that incorporate public services, the optimal tax policy lingers on the characteristic of services (Olopade&Olopade, 2010). Economic growth has provided insight into why state growth at different rates over time; and this influence government in her choice of tax rates and expenditure levels that will influence the growth rates.
2.2 Review of Related Theories
2.2.1 The Savers-Spenders Theory of Fiscal Policy
Savers-Spenders theory of fiscal policy was developed by Mankiw (2000) and used by Matsen, Sveen and Torvik (2008). This theory was developed because of the inconsistency of Barro-Ramsey (1974) theory of infinitely-lived families and DiamondSamuelson (1965) theory of overlapping generation respectively. Savers-Spenders theory is the new theory developed to explain the behaviour of fiscal policy in the economy. The theory is based on some propositions (Mankiw, 2000). The first proposition is on temporary tax changes having large effects on the demand for goods and services. This proposition states that the higher take-home pay that spenders received will be offset by higher tax payments, or by lower tax refunds. The implication is that consumers should realize that their lifetime resources were unchanged and therefore, should save the extra take-home pay to meet the upward tax liability.
The second proposition is on government debt in relation to crowd out capital in the long-run. This proposition states that extra consumption of spenders as aresult of a tax cut financed by debt reduces investment, which in turn raises marginal product of capital and thus the interest rate. The higher interest rate therefore induces savers to save more, their higher savings continues until the marginal product of capital is driven back to their rate of time preference, thus, temporary decrease in the level of economic growth. It is to be noted that this proposition holds when tax is lump sum. The third proposition states that government debt increases steady-state inequality. This means that a higher level of debt means a higher level of taxation to pay the interest on debt. The tax will fall on both the savers and the spenders but the interest payment will go entirely to the savers. The implication of this is that a higher level of debt raises the income and consumption of the savers and lowers the income and consumption of the spenders. Thus, a higher level of debt raises the steady-state inequality in income and consumption.
2.2.2 The Classical Theory of Economic Growth
When Adam Smith wrote his famous 1776 treatise called “An Inquiry into Nature and Causes of the Wealth of Nations”. Some academics pointed out that he was involved predominantly with economic growth. Smith hypothesized a supply-side-determined model ofgrowth. According to him, population growth was endogenous—it depends on the accessibility to life sustaining needs and it has the capacity for the increasing workforce; Investment was also endogenous—established by the rate of savings (mostly by capitalists); land growth was reliant on invasion of new lands (e.g. Colonisation) or technological enhancement of fertility of old lands. Technological advancements could also add to overall growth. Smith’s renowned thesis that the division of labour (specialisation) enhances growth was an essential argument. Smith also saw developments in machinery and international trade as engine of growth as they aided further specialization. He also assumed that “division of labouris restricted by the size of the market”, thus speculating an economies of scale dispute. Therefore, he argued that growth was self-fortifying as it demonstrates increasing returns to scale. Lastly, because savings of capitalists is what generates investment and hence growth, he saw the allocation of income as being one of the most significant determinants of how fast (or slow) a nation would grow. Smith’s model of growth remained the main model of Classical Growth. David Ricardo (1817) adjusted it by incorporating diminishing returns to land. Output growth demands growth of factor inputs, but, unlike labour, land is “variable in quality and fixed in supply”. This means that as growth continues, more land must be taken into development, but land cannot be “produced”. This has two consequences for growth: firstly, raising land owner’s rents over time (due to the limited supply of land) cut into the proceeds of capitalists from above;
Secondly, earnings from goods (from agriculture) will be rising in price over time and this then cuts into profits from below as workers require higher wages. This, then, brings in a quicker limit to growth than Smith allowed, but Ricardo also asserted that this fall off can be freely curbed by technological advancements in machinery (although, also with diminishing productivity) and the specialization brought by trade, although he also had static states. Ricardo’s description is somewhat more pessimistic than Smith’s. The decisive depressing picture, however, was painted by T.R. Malthus (1796) with his famous assertion that if population growth was not curbed, it would rapidly surpass growth and cause rising depression all around.
2.2.3 The Keynesian Theory of Economic Growth
The Keynesians are the twentieth century economists who embraced and also broadened John Maynard Keynes’ principle in the existence of incessant unemployment equilibrium, dissimilar to the classical economists idea on Say’s law of market arguing that market economy are self-adjusting therefore there is no need for the government involvement in the economy. They believe that fiscal policy and not monetary policy is the most powerful policy measure to make the economy stable and move it forward. They are sometimes referred to as Demand-side
Economists. Keynes accepts that the forces of demand and supply could not attain full employment condition. Keynesians therefore insisted that only government interference (public sector) through the use of unrestricted policy measures would take the free enterprise economy out of depression and ensure steady growth. Variations in savings and investments are responsible for modifications in business activities and employment in an economy.
2.2.4 The Neo-Classical Theory of Economic Growth
It is not far wrong to say that the father of a modern neo-classical growth theory is Robert Solow. Solow’s (1956) idea was to clarify economic growth by taking into account technological advancement, i.e., permitting it to decide growth outside the previous so-called post-Keynesian theory, where the interference taken by public sector is seen as the main engine for economic growth. Beginning from the classical economists, it has been under examination for a long time to scrutinize why growth rates differ in various countries and what are the fundamental issues in constructing economic development. The essential postulation is that the step up of factors of production is the simplest way to attain better economic growth. Traditional factors of production are: natural resources, physical capital, and labour. In neo-classical growth theory models, the postulation is that in the long run, with diminishing returns to capital, a nation’s per capita growth rate tends to be inversely related to its initial level of income per person (Barro, 1990). In other words, this would mean that countries should come together over time and thus, inequality between countries should reduce. However, empirical data does not support this assumption. According to Barro (1990), after the post-war period, per capita growth rates in 100 countries are uncorrelated with the starting level of per capita product. In neoclassical growth theories, the major dilemma is the linear ways of reasoning about how the world is being formed. If input is about to multiply, it has a direct influence on output and the impact is also positive. The fundamental rule is more resources, more outcomes. However, it is not as easy as that. There are excess literature asserting that the production procedure cannot be moved from one place to another with total ease and flexibility. This is also the explanation for why the meeting between countries, as neoclassical theories would propose, does not happen. In every case, the observable fact is associated to its environment, such as people, infrastructure, political atmosphere etc. Neo-classical growth theories also emphasized the position of technological change as an exogenous factor. Especially in Solow’s expression, technological change is an act of economic growth, but it is an exogenous factor and hence it is called a “public good”. Besides the exogenous nature of technological alteration, Solow and neo-classicalists have many postulations, such as perfect markets, perfect knowledge in the markets, utility maximization, no spillovers, and positive and reducing marginal revenue (Solow, 1956). One could simply argue in opposition to a number of these assumptions, for example, perfect markets and perfect knowledge in the markets, but such assumptions are basic to this model of study. Solow’s neo-classical growth theory has beenable to practically give details on two-thirds of countries economic growth. Nonetheless, more recently, the center on studying economic development and growth, both on a national and regional level has been more on knowledge, spillovers, and innovations.
2.2.5 The Endogenous Growth Theory
Due to the fact that Solow’s theory could not give details on all models of economic growth, new theories were developed. One of these is the new theory of growth, also known as endogenous growth theory, developed by Paul Romer. Romer’skey line of reasoning is that technological alteration is not “a manna from heaven” and its trends and degree can be directed. If this is the case, technology can then be made endogenous to growth, rather than being an exogenous factor as in Solow’s model. In addition to this, human capital and investments in innovations can then be perceived to be vital in the process. The new growth theory views knowledge as a public good (Romer, 1990). In general, the new growth theory exists in complete difference to the law of diminishing returns, due to the fact that the law of diminishing returns implies that output reduces if we increase the inputs. However, over the last 100 years, output in developed countries has increased and the new growth theory attributes this to an overflow of knowledge and innovations.
2.3 Empirical Review
Researchers have attempted to examine the effect of fiscal policy on economic growth in different countries and periods, using different techniques. Amongst many others are the following:
Khosravi and Karimi (2010) studied the relationship between monetary policy, fiscal policy, and economic growth in Iran for the period 1960 to 2006 using Autoregressive Distributed Lag (ARDL) cointegration approach and they found out that the impact of exchange rate and inflation on growth was negative, but government expenditure was found to have a significant positive impact on growth. Olawunmi and Tajudeen (2007) used solow growth model and ordinary least squares method in analyzing the impact of fiscal policy on the Nigerian economic growth between 1981 and 2004, they found out that there is no significant impact of fiscal policy variables on economic growth in Nigeria Onyemaechi (2014) studied the impact of fiscal policy components on economic growth in Nigeria using Augmented Dickey-Fuller (ADF) test model and cointegration test and he found out that government expenditure on economic services and transfer payments have not yielded positive results as regards economic growth in Nigeria though statistically insignificant, expenditures on administration as well as social and community services yielded positive results in improving economic growth in Nigeria. Ozougwo (2012) assessed the impact of fiscal policy on the economic growth of Nigerian for the period 1978 to 2011 using the Augmented Dickey-Fuller (ADF) test of stationarity and granger causality test. The result showed that taxation has an insignificant negative influence on economic growth although it granger-causes economic growth. On the other hand, deficit financing revealed an insignificant positive effect and a bi-directional causality on economic growth while government expenditure has an indisputable, significant, and positive effect (but lacks causality) on economic growth in Nigeria.
2.4 Summary of Empirical Review
|1.||Khosravi and Karimi (2010||1960 to 2006||Iran||Relationship between monetary policy,
fiscal policy, and economic growth in Iran
|Autoregressive Distributed Lag (ARDL)||monetary policy,
|the impact of exchange rate and inflation on growth was negative|
|2.||Olawunmi and Tajudeen (2007)||1981 and 2004||Nigerian
|the impact of fiscal policy on the Nigerian economic
|solow growth model and ordinary least
|fiscal policy||they found out that there is no significant impact of
fiscal policy variables on economic growth in Nigeria
|3.||Onyemaechi (2014)||1999 to 2012||Nigeria||impact of fiscal policy components on
economic growth in Nigeria
|Augmented Dickey-Fuller (ADF) test model and
|government capital expenditure, government recurrent expenditure, public external debt and public domestic debt||he found out that government expenditure on economic services
and transfer payments have not yielded positive results as regards economic growth in
Nigeria though statistically insignificant, expenditures on administration as well as
social and community services yielded positive results in improving economic growth
|4.||Ozougwo (2012)||1978 to 2011||Nigerian||the impact of fiscal policy on the economic growth
|Secondary data the Augmented Dickey-Fuller (ADF) test
of stationary and granger causality test
|government capital expenditure, government recurrent expenditure, public external debt and public domestic debt||The result showed that taxation has an
insignificant negative influence on economic growth although it granger-causes
|5.||Vladimirov and Neicheva (2008)||1999 to 2014||Bulgaria.||the stabilizing role of fiscal policy
in Bulgaria during the period of European Union (EU) accession.
|regression analysis approach||real gross domestic product||the found out that a negative relationship exists
Between the discretionary expenditure interventions and the short-run output growth.
|6.||Iyeli and Azubuike (2013||1970 and 2011||Nigeria||the impact of fiscal policy variables on
Error Correction Mechanism (ECM) techniques
|real gross domestic product||The result revealed that there exists a
long-run equilibrium relationship between economic growth and fiscal policy variables.
|7.||Akanni and Osinowo (2013) examined||1970 to 2010||Nigeria||effect of fiscal instability on
economic growth in Nigeria
|The cyclical effect of fiscal
spending components were measured using the HodrickPrescot (HP) where fiscal
spending components and output were filtered with the correlation technique
|real gross domestic product and real total
indicated that between 1970 and 1985, both real gross domestic product and real total
fiscal spending were highly volatile. However, total fiscal spending appears to be
counter-cyclical from 1970 to 1986. But from 1987 to 2010, the variation in total fiscal
spending was relatively unstable.
|8.||Ogbole et al (2011)||1970 to 2006||Nigeria||fiscal policy and economic growth in Nigeria||the Augmented Dickey-Fuller (ADF) test and Johansen’s
|. real gross domestic product (dependent variable) and government capital expenditure, government recurrent expenditure, public external debt and public domestic debt (independent variable)||The result of the analysis showed the
existence of causal relationship between the variables with a unidirectional causality
running from government expenditure to GDP.
|9.||Munongo (2012)||1980 and 2010||Zimbabwe||the effectiveness of fiscal policy in spurring
economic growth in Zimbabwe
|the Augmented Dickey-Fuller (ADF) technique after which the co
integration test was conducted using the Johansen Approach and Error Correction
Models were estimated to take care of short-run dynamics.
|real gross domestic product (dependent variable) and government capital expenditure, government recurrent expenditure, public external debt and public domestic debt (independent variable)||The results indicated that
government consumption expenditure and income tax positively impacted economic
growth during the period of coverage but capital expenditure by the government has a
negative effect and a long-run relationship exists between them as confirmed by the co
|11.||Appah (2010)||1991 to 2005||Nigeria||the effects of fiscal policy on the economic growth of
|he utilized multiple regression for
the analysis of the data
|real gross domestic product (dependent variable) and government capital expenditure, government recurrent expenditure, public external debt and public domestic debt (independent variable)||the result indicated that a significant relationship exists
between the explanatory variables taken together and the gross domestic product, and
no significant relationship between the specific explanatory variables contributing to
the gross domestic product except government recurrent and capital expenditures.
|12.||Imoisi (2013||1970 to 2009||Nigeria||the problems surrounding the procedures of fiscal
policy and their influence on economic growth in Nigeria
Ordinary Least squares (OLS) technique of multiple regression models
|real gross domestic product
and government expenditure and taxes
|The regression result also showed that tax was not properly significant and this could
largely be credited to poor tax administration in Nigeria and over-dependence of the
government earnings from crude oil in funding her projects.
|13.||Okoro (2013)||1980 to 2011||Nigerian||the impact of government spending on the Nigerian economic growth.||the Ordinary least Squares (OLS) multiple regression analysis||real gross domestic product
and government expenditure and taxes
|the result showed that there exists a long
run equilibrium relationship between government spending and economic growth in
Nigeria. The short-run dynamics adjusted to the long-run equilibrium at the rate of 60
percent per annum.
|14.||Egbetunde (2012)||1970 and 2010||Nigeria||causal nexus between public debt and
economic growth in Nigeria
|Augmented Dickey-Fuller (ADF) and Philip Perron (PP) tests||external debt value, domestic debt
value, total debt value, and budget deficit figure.
|the result showed
that the variables are stationary at first differencing. Co-integration test was performed
and the result revealed the presence of co-integration between public debt and economic
growth, it showed that public debt and economic growth have long-run relationship.
The findings of the VAR model revealed that there is a bi-directional causality between
public debt and economic growth in Nigeria
|15.||Amassoma et al (2011)||1970 to 2010.||Nigeria||the linkage between the components of
government spending and economic growth in Nigeria
|the Error Correction Modelling approach||external debt value, domestic debt
value, total debt value, and budget deficit figure.
|the result of the study showed that
expenditure on agriculture had a significant influence on economic growth while
expenditure on education, health, and transport and communication sectors had
Insignificant influence on the economic growth of the nation.
|16.||Egbetunde and Fasanya (2013)||1970 to 2010||Nigeria||the long run and short run
relationships between public expenditure and economic growth in Nigeria
|Auto-Regressive Distributed Lag approach||external debt value, domestic debt
value, total debt value, and budget deficit figure.
|The findings indicate the impact of total public spending on growth
to be negative. Recurrent expenditure however was found to have little significant
positive impact on growth.
|17.||Ajibola and Nwakahma (2013)||1981 to 2011||Nigeria||investigated the long run relationship between
government expenditures and a set of macroeconomic variables (GDP, Consumer Price
Index, and Unemployment)
|using Johansen multivariate
co-integration for the estimation procedure
|government expenditures and a set of macroeconomic variables (GDP, Consumer Price
Index, and Unemployment)
|They discover that there is a long run
relationship between government expenditure and the specified macroeconomic
variables. They also discover that an increase in capital expenditure improves economic
growth, while an increase in recurrent expenditure is detrimental to growth.
|18.||Umaru and Gatawa (2014)||1970 to
|Nigeria||examined the impact of fiscal deficit and a
disaggregated government expenditure on economic growth in Nigerian
|using Auto-Regressive Distributed Lagged approach||government capital expenditure ,fiscal deficit||The ARDL estimation revealed that the national output changes at a rate of
0.1005 in response to a unit change in fiscal deficit while it changes at a rate of 0.06221
in response to a unit change in government capital expenditure.
|19.||Benos (2009)||2002 to 2016||Belgium, Denmark,
Germany, Ireland, Greece, Italy, Luxembourg, Netherlands, Austria, Portugal, Finland,
Sweden, and the United Kingdom.
|examined fiscal policy and economic growth in European Union
|Ordinary Least Squares method of multivariate
|public expenditure, government expenditures||He found that public expenditure on infrastructure, that is, economic affairs and general
public services exerted a positive impact on economic growth. He found that
government outlays on property rights protection, e.g., defence, public order or security
have a positive effect on per capita growth and the distortionary taxation depresses
economic growth. He also found that government expenditures on human capital
enhancing activities (such as education, health, housing, community amenities,
environmental protection, and recreation-culture-religion) and social protection do not
have significant effect on per capital growth.
|20.||Medee and Nenbee (2011)||1970 and 2009||Nigeria||investigated the impact of fiscal policy variables on
Nigeria’s economic growth
|method of Vector
Autoregression (VAR) and Error Correction Mechanism (ECM) technique.
|government recurrent and capital expenditures||The result
revealed that there exists a long-run equilibrium relationship between economic growth
and fiscal policy variables in Nigeria.
|21.||Nathan (2012)||1970 and 2010||Nigeria||evaluated the causal relationship between money supply, fiscal
deficits and exports as a means of analysing the impact of policy on the growth of the
Error Correction Mechanism (ECM)
|government recurrent and capital expenditures||The study reveals that there is a significant causal relationship between GDP
and the variables used in the research
|22.||Fasoranti (2013)||1970 to 2009||Nigeria||examined the productivity of tax revenue and its relationship
with the growth of the economy
|the OLS regression method||government expenditure, tax revenue||The result showed that tax productivity was generally low as reflected in the elasticity
indexes of the tax revenue showing that they are not responsive to the growth of the
|23.||Ayuba (2014)||1993 to 2012||Nigeria||analysed the impact of non-oil tax revenue on economic growth||OLS regression analysis method and the Error
|capital and recurrent
expenditures of government
|The result showed that there exists a positive impact of non-oil
tax revenue on economic growth in Nigeria. Also, the error correction term showed that
the series is non-explosive and that long run run equilibrium is indeed attainable.
2.5 Gap in Literature
Several research works have been carried out to investigate the relationship between fiscal policy and economic growth in Nigeria. These studies however do not lay emphasis on the relative effectiveness of the fiscal policy components. Having found this gap, this study would therefore fill such gap by examining the effect of fiscal policy on the economic growth of Nigeria from 2004 to 2018 and the relative effectiveness of the fiscal policy instruments.