Full Project – The impact of fiscal policy instruments on investment in Nigeria

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CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Fiscal policy is the use of government revenues and expenditure policies to regulate and stabilize the economy toward development. The government uses this policy in other to achieve its objectives in stabilizing the economy. This includes the macroeconomic objectives (price stability, economic growth, reduction in poverty, balance of payment equilibrium etc.) and microeconomic influence on efficiency of resources use.

The use of fiscal policy is very paramount in every society most especially in the less developed countries (LDCs) as a major tool for stabilization and for development to be sporadic. Fiscal policy as in many texts and literatures could mean the government actions affecting its receipts (revenue) and expenditure which is taken as ordinarily a measure by the government’s net receipts, its surplus or deficit. The government may offset undesirable variations in private consumption and investment by anti-cyclical variation of public expenditure and tax revenue. Simply put, when the government uses government revenue and expenditure policies to regulate and stabilize the economy toward development, the action is fiscal policy. It thus serves as an economy’s “shock absorber” in specific areas of development (Amanja 2015)

Taxation in fiscal policy as a major tool is used by the government authority as a compulsory contribution imposed on goods, individuals income, cooperate bodies etc., irrespective of the tax payer in return, and not imposed as a penalty for any legal offence (Anyaele J., 2003). Expenditure in fiscal policy is the total expenses incurred by public authorities at the Federal, state and local governments (Anyaele J., 2003). With the influence of government authorities on taxation and expenditure they can be able to manipulate the economy to a desired direction.

Fiscal policy also is essentially concerned with manipulating the financial operations of government with a view of furthering certain economic policy objective. In the other words, it consists of government decisions to vary certain fiscal aggregate such as total government spending and tax revenues as opposed to some other aspects of public finance which are primarily concerned with the effect of specific government expenditure and taxes (Stein 1968). Fiscal policy is majorly used in terms of government expenditure, tax revenue, government investment, budgeting and debts (Babalola, 2015).

1.2       Statement of the Problem

Upon several government policies on the stability of Nigerian economy, there have been a lot of challenges facing the growth and investment as identified by researchers. These challenges include: corruption and ineffective economic policies (Gbosi, 2013); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policy (Onoh, 2007); gross mismanagement/misappropriations of public funds (Okemini and Uranta, 2008); and lack of economic potential for rapid economic growth and development (Ogbole, 2010). Despite the emphasis placed on fiscal policy in the management of the economy, investment in Nigerian economy is yet to come on the path of sound growth and development because of low output in the gross fixed capital formation to the economy (GDP).

This study is specifically interested in examining the level of significant fiscal policy has on investment output in Nigeria due to its low contribution to the growth of the economy. Most studies on fiscal policy dwelt on the determinants, its impact on economic growth, its impact on capital formation, its impact on capital stock, deficit and macroeconomics variables, while studies on investment output focuses on its productivity, bank lending, economic growth, global economic downturn, monetary policy, banking sector reform, and its performance. However, in Nigeria, both variables have valuable significant effect on economic growth and stabilization, but study about their relationship has research gap, as there seems to be little or no attention on the impact of fiscal policy instruments on investment in Nigeria. This study seeks to fill this research gap.    

1.3       Research Questions

These research questions will guide the study;

1. What is the effect of fiscal policy tools on investment in Nigerian economy?
2. Is there any long run relationship between fiscal policy tools and investment in Nigeria?

 1.4      Objective of the Study

The main objective of the study is to examine the effectiveness of fiscal policy tools on investment in Nigerian Economy. Then the specific objectives are as follows:

1. To determine effective instruments of fiscal policy on the growth of investment in Nigeria
2. To determine if there is a long run relationship between fiscal policy tools and investment in Nigeria.

1.5       Statement of Hypothesis

Following the above research question, our hypothesis is stated as follows:

H_o1: Fiscal policy tools is not significantly effective to the growth of investment in the Nigerian Economy

H₀₂: There is no long run relationship between fiscal policy tools and investment in the Nigerian Economy

1.6       Significance of the Study

The result and outcome of this research work will be of great benefit to the government of Nigeria. By identifying the strengths and weakness of the government in using fiscal policy measures: Tax and expenditure management, effective policy formation can be made from the research result. More importantly these individuals or group will benefit from the research work. They are; the government fiscal policy formulation board, the private and foreign investors and exporters, local firms etc. This research will go a long way by improving the economic development of the nation as it affects mostly the industrial and manufacturing sector of the country.

The study would be valuable to assist the researcher to widen his knowledge in the research work. Finally, future researchers would find this study indispensable.

1.7       Scope of the Study

The research covers a period of 1981-2017. The study is basically limited to the Nigerian Economy. It’s based on the time and resources given that the study was carried out. The research is something possible to estimate. The study is organized in five chapters.

1.8       Limitation of the Study

The study is only limited to the Nigerian Economy. It is equally limited to time and sources of data. The data used is secondary data which was hard to get.

The study should enable me to visit government board of fiscal planning but due to finance and other limitations I cannot have access to such.

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Full Project – The impact of fiscal policy instruments on investment in Nigeria