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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Fiscal policy refers to that part of government policy concerning the raising of revenue through taxation and other means and deciding on the level and pattern of expenditure for the purpose of influencing economic activities. This means that fiscal policy deals with taxation, public borrowing, public expenditure and other revenues aimed at influencing economic activities for the achievement of certain desirable macro-economic goals (Anyanwu, 1997). Fiscal policy also aims at the use of government budget to influence economic activities which could be deficit, surplus or balanced. It is deficit when government expenditure outweighs its revenue. Governments often engage in massive investment activities (fiscal deficit) which is believed will not only enhance the development of the domestic economy but also situate the economy on the path of sustainable growth.

Fiscal Deficit operations involves the pursuit of fiscal deficit policy which is intended to stimulate the economy through the injection of ‘more money’ from the central bank of Nigeria or borrowing from financial institutions or from the non banking public or external borrowing. This has the effect of increasing aggregate spending or demand for goods and services by the public and private sector of the economy. By extension employment and output are leveraged in the short, medium and long run.

In premchard (1984) budget deficit implies an increase in the supply of government bonds. In order to improve the attractiveness of these bonds the government offers them at a lower price, which leads to higher interest rates. The increase in interest rates discourages the issue of private bonds, private investment and private spending. In turn, this contributes to the financial crowding out of the private sector.

Miller (2007) argued that government deficit spending is a primary cause of inflation. These studies have supported the proposition that the Central Bank will be obliged to monetize the deficit either now or in later periods. Such monetization results in an increase in the money supply and the rate of inflation.

Aschauer (1989) argued that higher investment may raise the marginal productivity of private capital and thereby crowd-in private investment. He further noted that public capital, infrastructure capital such as highways, water systems and airports are likely to bear a complimentary relationship with private capital. It is also argued that an increase in the budget deficit would induce upward pressure on interest rate causing capital inflows and an appreciation of the exchange rate that will increase the current account deficit.

This research work is meant to find out if the Nigerian economy agrees with any of these schools of thought, given the methodology implored and the data. The debate continues.

Statement of the Problem

Available evidence shows that over the years under review (1980-2015), Nigeria’s fiscal operations have resulted in persistent overall deficit. It recorded thirty five years of deficits.

Despite the fact that Nigeria has been operating deficits for these periods and also found itself in a situation of less than full employment, her economy has been in distress, the opposite view of the essence of deficits occur. There were obvious fall in the standard of living of the citizens, decline in the growth of the economy, persistent unfavorable balance of payment, increased public debt; local and foreign, continued depletion of the foreign reserve, little or no savings, decline in exports, increased inflationary pressure, continuous dependence on external economies etc.

It is important to note that budget deficits have many implications on economic growth. Large and persistent fiscal deficits usually contribute to macro economic instability. It will adversely affect output growth and raise inflationary pressures in the economy.

Also, deficits bring about a reduction of loan-able funds that are available to the private sector. Specifically, it will crowd out private investment in the real sector, private savings, result to low growth and intensive inflationary pressures, current account deficits, real exchange rate appreciation and external debt crisis if the debt is unsustainable.

However, in a situation of less than full employment, budget deficits could contribute to growth as a result of the idle capacities that are being employed in the economy. Therefore, deficits could lead to the achievement of macroeconomic stability and growth. This condition holds if the size of the overall deficit is about 3 percent of the Gross Domestic Product GDP. Gbosi, (2004).

All these are indicators of negative growth, its impact on these macroeconomic variables has been unfavorable, and one then asks if budget deficits no longer stimulate economic growth?

Secondly what are the policies that will enhance budget deficit in the Nigeria economy?

1.3 Objectives of Study

The need for adequate public expenditure programming and management has, therefore, become paramount, particularly at this period when various arms of government and even the private sector are experiencing severe financial constraints. Consequently, the objectives of this paper are to:

To investigate the impact of deficits budgeting on economic growth in Nigeria.
To determine the causal relationship between budget deficit on economic growth.
Derive some policy suggestions according to the findings.

1.4 Research Hypothesis

H₀: Budget deficits have no significant impact on Economic growth in Nigerian economy.

H₁: Budget deficits exert significant impact on economic growth in Nigeria.

H₀: There exist no causal relationship between Budget deficits and economic growth in Nigeria.

H₁:There exist a causal relationship between Budget deficits and economic growth in Nigeria.

The rejection of the null hypothesis means the acceptance of the alternative hypothesis. Where: Ho = Null Hypothesis

1.5 Significance of the Study

The results of this study will provide information and understanding as well as direct fiscal management of the Nigerian economy. Also it will give direction on government policies on budget deficit management in Nigeria economy.

1.6 Scope of the Study

This study covers budget deficits as it relates to Gross Domestic Product (GDP) in Nigeria. The study covers the period 1980-2015.

In this study, only deficit of the federal government will be given close attention while the financial profile (revenue and expenditure) of the other two tiers of government, that is, local and state governments will not be considered. Also, we shall consider in this study, the range of years the federal government have experience budget deficit.

1.7 Limitations of the Study

In carrying out the study there are so many challenges that was encountered some of which are: time constraint, easy access to statistical data for better analysis and other materials for effective research, health challenge and financial constraint.

1.8 Definition of terms

Deficit: Deficit is the amount by which a sum of money falls short of the required amount.

Budgeting: A budget is a plan for the near future detailing saving and spending expenditures. It consists of a list of all planned expenses and revenues.

Fiscal budgeting: Term fiscal budget Definition is a statement of the financial position of government during its fiscal year based on estimates of anticipated tax revenues and expenditures.

Gross Domestic Product (GDP):the total value of the goods and services produced by the people of a nation during a year not including the value of income earned in foreign countries.

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Full Project – Impact of deficit budgeting on economic growth in Nigeria

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Full Project – Impact of deficit budgeting on economic growth in Nigeria

Full Project – Impact of deficit budgeting on economic growth in Nigeria

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