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THE IMPACT OF FISCAL
POLICY ON INVESTMENT EXPENDITURE IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The Nigerian investment expenditure has been plagued with
several challenges over the years. Researchers have identified some of these
challenges as: gross mismanagement/misappropriation of public funds, corruption
and ineffective economic policies, lack of integration of macroeconomic plans
and the absence of harmonization and coordination of fiscal policies as well as
inappropriate and ineffective policies. Imprudent public spending and weak
sectorial linkages and other socioeconomic maladies constitute the bane of rapid
economic growth and development (Amadi, 2006). It is evident that one of
Nigeria’s greatest problems today is the inability to efficiently manage her
enormous human and material endowment.
Fiscal Policy is the budgetary policy of the government
relating to taxes, public expenditure, public borrowing and deficit financing
(Sanni, 2012). Thus, fiscal policy aims at stabilizing the investment
expenditure. As noted by Anyanwu (1993), the objective of fiscal policy is to
promote economic conditions conducive to business growth while ensuring that
any such government actions are consistent with economic stability.
Economic Growth on the other hand is an increase in real
output or real per capita output of an investment expenditure (Udabah, 1999).
Similarly, Kuznets (1973) also defined economic growth as a long term rise in
capacity to sustain increasingly, diverse economic goods and services to its
population, growing capacity based on advancing technology, institutional and
ideological adjustments that it demands. The interpretation of economic growth
emphasizes a sustained rise in the output level which is the only manifestation
of economic growth.
The relationship between fiscal policy and economic growth
has continued to generate series of debate among scholars. Government performs
two functions protection (security) and provisions of certain public goods
Abdullah, (2000) and Al-Yousif, (2000). Protection function consists of the
creation of rule of law and enforcement of property rights. This helps to
minimize risks of criminality, protect life and property, and the nation from
external aggression. Under the provisions of public goods are defense, roads,
education, health, and power, to mention a few. Some scholars argue that
increase in government expenditure on socio-economic and physical
infrastructures encourages economic growth. For example, government expenditure
on health and education raises the productivity of labour and increase the
growth of national output. Similarly, expenditure on infrastructure such as
roads, communications, power, reduces production costs, increases private
sector investment and profitability of firms, thus fostering economic growth.
Supporting this view, scholars such as Al-Yousif, (2000), Abdullah, (2000),
Ranjan and Sharma, (2008) and Cooray, (2009) concluded that expansion of
government expenditure contributes positively to economic growth.
Researchers on fiscal policy and related topics have been
many and varied and so are the theories. For instance Ram (1986) found that a
stronger positive relationship exists between fiscal policy and economic growth
in lower income countries than in higher income countries. In contrast, Landan
(1983, 1985 and 1986) concluded that the data he examined support the view that
government spending is associated with a reduction in a country’s capacity to
grow. Easterly (1992) seems to support Landan’s results as he implied that
government consumption spending is negatively associated with economic growth
and GDP per capita. Ezirim and Muoghalu (2006) investigated the extent to which
factors like population growth, urbanization effects and taxation affect the
size of public expenditure in less developed countries like Nigeria; and
concluded that inflation constituted the most important factor that accounted
for changes in government financial management. Offurum (2005) in an extensive
study investigated the impact of public expenditure on economic growth.
However, some scholars did not support the claim that
increasing fiscal policy promotes economic growth, instead they assert that
higher government expenditure may slowdown overall performance of the investment
expenditure. For instance, in an attempt to finance rising expenditure,
government may increase taxes and/or borrowing. Higher income tax discourages
individual from working for long hours or even searching for jobs. This in turn
reduces income and aggregate demand. In the same vein, higher profit tax tends
to increase production costs and reduce investment expenditure as well as
profitability of firms. Moreover, if government increases borrowing (especially
from the banks) in order to finance its expenditure, it will compete
(crowds-out) away the private sector, thus reducing private investment.
Diamond (1990) notes that in Nigeria, less attention has been
given to examining the productiveness of the various components of public
spending. Longe (1984) examines the growth and structure of fiscal policy in
Nigeria with a view to ascertaining if the pattern fits with the result of
other countries. Thus, his study revealed that government expenditure has shown
many considerable structural shifts over the review period and that the ratio
of government expenditure to GNP has been rising and corresponds with the
rising share hypothesis. For instance, government capital expenditure on economic
services, social and community services, and transfers increased from N15.5
million N1.4 million and N100.7 million respectively in 1970 to N809120.5
million, N120049.2 million and N211758.1 million respectively in 2009,
recurrent expenditure on same services increased from N25.95 million, N43.55
million and N511.42 million respectively in 1970 to N340193.77 million,
N346071.95 million and N622171.10 million respectively in 2009. About 60
percent of the population lives on less than US$1 per day. This is inspite of
astronomical increases in various fiscal policies over the years. It is on this
background that this study would investigate the impact of fiscal policy on the
economic growth of Nigeria.
1.2
Statement of the Problem
There exists a consensus in the literature that an adequate
and effective macroeconomic policy is critical to any successful development
process aimed at achieving high employment, sustainable economic growth, price
stability, long-viability of the balance of payments and external equilibrium.
Despite the lofty place of fiscal policy in the management of
the investment expenditure, the Nigerian investment expenditure is yet to come
on the path of sound growth and development. Studies by Agiobenebo (2003),
Gbosi (2002) and Okona (1997) indicate that the investment expenditure is still
married by chronic unemployment, rising rate of inflation, dependence on
foreign technology, monoculture foreign exchange earnings from crude oil, and
more. Furthermore, stagnating revenue mobilisation in particular and some
upward movements in expenditures led to a reversal of the fiscal stabilisation
process since the second half of the Nineties. An improved fiscal performance
during 2003-04 engendered by containment of the non-planned expenditures and
supported by high revenue mobilisation on the back of buoyant real activity
paved the way for renewed commitment towards fiscal consolidation in Nigeria.
The poor growth performance of the Nigerian investment
expenditure since 1986 has generated interest in issue of growth and
development. From 1970 to 1985 there was financial repression. However,
financial liberalisation was introduced in 1986 to realise necessary finance to
promote growth. This has made it necessary to study and understand the
relationship between finance and growth. Nigeria is endowed with enormous
potential for growth and development with her vast oil and gas resources, rich
and expensive agricultural land, solid minerals and abundant human resources.
Despite these factors, since 1960 when she got her independence from Britain, the
successive governments have not done enough to put the nation’s resources to
effective productive use as to chart the path of growth and development. The
net result is that the Nigerian investment expenditure is now performing below
her potential as the crown prince of the Gulf of Guinea.
Prior to 1975, there was lots of uncontrolled spending in the
investment expenditure. The monetary control was minimal in the domestic
science, ports were congested, the civil service was overloaded and largely
corrupt and the investment expenditure lacked positive thrust. Data available
indicate that by 1985, government expenditure was N13040.9 million, by 1990, it
increased to N60268.2 million and N254038 million in 1995. In 1998, the total
expenditure of the federal government recurrent and capital was N443,563.3
billion, increased by N87,3010 billion or 2.45% above N356,262.3 billion for
the period of 1997. The expenditure also exceeded the 1998 budget estimate of
N370, 000 billion by N73,563.3 billion or 19.9% also between the year 2005 and
2009, the general government expenditure has also been increasing rapidly. In
2005, it was N3986.2 billion representing 28.67% of the gross domestic product
(GDP). It increased to N4290.7 billion in 2006 which constitute 23.23% of GDP,
in 2007, it moved up to N5394.4 billion making up about 28.7% of the GDP, in
the same manner, it increased to N7644.6 billion in 2008 which represented
about 28.2% of the GDP and N7258.0 billion in 2009 which represent about 30.3%
of GDP. At N7,258.0 billion, the aggregate expenditure of the federal
government fell by 5.1% from the level in 2008.
The question then is what form of fiscal policy rules will
perform better in reducing debt accumulation and promote the necessary medium
term budget deficit stability. Can fiscal policy curb the problem of economic
growth and development in Nigeria? What tier of government should influence the
level of economic growth in Nigeria? The answers to these questions are the
concern of this study for proper economic management in Nigeria.
Fiscal policies are fundamental tools used by various
government of the world to stimulate the level of economic activity some of the
problem to dividing the Nigeria economic include:
a. High rate of
unemployment
b. Poor investment
climate in the investment expenditure
c. High rate of
inflation
1.4 Purpose
of the Study
The purpose of this study is to develop concepts to describe,
conceptualize and analyze the emerging software component market from the point
of view of the industrial buyer. In this study, existing concepts and
theoretical model describing markets are explored and brought into the specific
context of industrial purchasing in emerging software components. The research
includes preliminary theory building. The theory building in this study is
about using the existing conceptualizations and theoretical models and on the
basis of these, compiling a conceptualization that is applicable in the
specific industry setting. The building of the theoretical conceptualization of
the market from the buyer’s perspective is conducted through applying the
existing literature, due to the fact that there exist a lot of knowledge on the
phenomenon of market in the literature. This knowledge, however, is scattered
across various streams of research and thus it needs to be gathered and
elaborated in such a form that it can be applied in analyzing the research
phenomenon under study in this research. The existing knowledge needs to be
brought into the industrial purchasing perspective in the software component market
setting.
In order to accomplish this aim, the study focuses on solving
the following research problem. How to manage industrial purchasing in the
emerging software component market.
a. To identify the
fiscal policies employed between 199-2009.
b. To find out bow
the policies have impacted on employment and unemployment in Nigeria.
c. To find out the
extent to which the policies have helped to improve investment climate in
Nigeria.
d. To ascertain the
extent to which the policies have reduce inflation in the country.
e. To recommend
measures for overcoming the negative effects of monetary and fiscal policies on
the Nigeria investment expenditure.
The solution to the described research problem is generated
through finding answers to the following, more focused research questions.
1.5 RESEARCH
QUESTIONS
The following questions were formulated as a good to the
researcher.
a. Which fiscal
policies did the monetary authority employed in Nigeria between 1994 - 2009?
b. How have the
fiscal policies employed in Nigeria between 1994 - 2009 imported on employment
and unemployment?
c. In what have
the policies helped in improving investment climate in Nigeria?
d. What impact have
the policies created in inflation in Nigeria?
1.6
SIGNIFICANCE OF THE STUDY
The study is to enable the researcher himself, as one of the
condition necessary for the partial fulfillment for the award of the National
Diploma in the financial studies in the school of Business and Management
studies. These policies of fiscal are instrument employed fiscal are instrument
employed by government as a measure to stabilize the pricing system.
Furthermore, this same researcher work will be of immense, benefit to students,
of various school on the campus particularly, financial students, practicing
accountants, economic on profession as well as financial manager, to keep them
embrace of fiscal policies.
1.7 SCOPE OF
THE STUDY
Research work is confine, because it involves some necessary
material to be used. To discuss this topic “the impact of fiscal policies in
Nigeria investment expenditure” present, a long and broad view which
unequivocally present herculean task to the researcher to write upon.
Therefore, the researcher will present a task to Boki local
government area to discuss underproduction investment expenditure within the
state, the researcher also divide the local government into two Buje zones,
which the researcher can discuss under the topic “The impact of fiscal policy
in Nigeria.
1.8 DEFINITION OF TERMS
Fiscal policy: This policy focuses on altering the level and
composition of government receipt and expenditure to influence the level of
economic activity. It is also for adjustment of tax rates and or government
spending in order to affect aggregate demand and investment expenditure as a
whole. Fiscal policy is, therefore, concerned with the raising of government
revenue, through taxes. Other means and its expenditure.
Monetary policy: This is a policy that relates to monetary
and non-monetary measured which are geared toward the sole purpose of
influencing the value, volume and stability of money. The end result and effect
such policy measure will culminant in achieving social economic and policies
objective is the management of the expansion and contraction of the volume of
money in circulation for specific purpose of achieving circulation for specific
purpose of achieving predetermined national objective. It is also adopted by
Central Bank of Nigeria (CBN)
Fiscal policies: This
policies and complementary, there are instrument employed by various government
all over the world to bring about stabilization in the pricing of economic
factors such as materials and labour as well as sustain economic growth and
improvement on the National product.
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