BACKGROUND OF THE STUDY
Any economic system is characterized
by the households, firms, and government, all undertake useful measures aimed
at shaping the various developmental aspirations. The government of both
developed and developing nations strive to achieve the desired economic growth
which also leads to economic development. Their main objectives can be seen as
full employment, general price stability, external equilibrium, economic growth
and development as well as efficient distribution of natural resources and
income between the public and private sectors. The government does this with
the use of fiscal policy. This policy focuses on the way the revenues and
expenditures accruing to the government are utilized for a given period.
In the
process of working to achieve these objectives, the government sometimes tends
to spend more than they receive as revenue. This is termed budget deficit.
Thus, budget deficit could be seen as a situation where total expenditure
exceeds the revenue for a given period. When a deficit is involved, it is
important to find remedy for financing such deficit so as to eradicate the
negative effects. The growth and persistence of developing countries in recent
times has brought the issues of budget deficit into sharp focus. The issues
surrounding fiscal deficits are certainly not new, but the economic development
of the past decade developed the interest in fiscal policy issues. In the
developing countries like Nigeria, budget deficits have been blamed for much of
the economic crises that beset them about two decades ago resulting in over
indebtedness and the debt crises, high inflation, poor investment performance
and growth.
The impact
of budget deficits on economic activity has been one of the subjects of a long
standing debate in macroeconomics. Three distinct views emerge from the
literature revealing the complex relationship that exists between budget
deficits and macroeconomic variables. Keynesian economics supports the ideas
that budget deficits have, by the working of the multiplier, a positive effect
on the macroeconomic activity. In contrast, neoclassical economics argues that
budget deficits have detrimental effects on economic growth while the Ricardian
equivalence approach supports that budget deficits have detrimental effects on
economic growth. These three contrasting views have made less attractive the
use of fiscal policy in stimulating economic activity in some monetary union’s
explicit targets for public debt and deficits have been adopted to monitor the
fiscal situation among members and achieve sustainable growth. The conventional
wisdom is that a large budget deficit is a source of economic instability.
Empirical research, however, does not conclusively support this conventional wisdom.
READ RELATED TOPICS ON
DEFICIT BUDGET
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In Nigeria
and many countries of the world, government deficits can be financed by
borrowing from the Central Bank (deficit financing or money creation),
borrowing from the domestic money market (mainly from the banks) and borrowing
from abroad. One of the most important objectives of fiscal policy is to reduce
national debt and to check the interest payment on such debt from rising, and
to prevent it from leading to higher deficits in the future.
Unfortunately
in Nigeria, government fiscal deficits increased continuously in the past two
decades. For instance, deficits increased from N3,902.10 million in 1981 to
N8,254.30 million in 1986 and further to N15,134.70 million in 1989. The rising
trend of deficits continued except in the year 1995 when it registered a
surplus (that N1,000million). By the year 1998, an overall deficits has jumped
to N133,389.30 million and further to N301,401.60 million in 2002. Beginning
from 2003, government fiscal deficits declined moderately from
N202,724.70million and N101,395.70 million in 2004, 2005 and 2006 respectively.
Similarly, fiscal deficits as a percentage of GDP (at 1990 factor cost),
deteriorate from-3.8.
However,
the value of deficits as a percentage of GDP declined to -0.1 percent in 1999. The
share of deficits in total GDP has been declining from -2.0 percent in 2003 to
-1.1 percent and -0.6 percent in 2005 and 2006 respectively. Government debt
(domestic debt and external debt increased continuously from N13,526.70 million
in 1981 to N69,892.60 million in 1981 and further to N960,994.10million before
falling to N954,961.10 million in 1996). Total debt assumed a rising trend
moving from N1170,507.90 million in 1998 to N3995,637.80million and
N6260,594.70million in 2000 and 2004 respectively. However, the value of government
debt dropped to N4,220,978.80million in 2005 and further to
N2,204,702.70million in 2006. In the same vein, government debt as a percentage
of GDP (at 1990 cost) also worsened during this period. For example, the share
of government debt in total GDP increased from 5.4 percent in 1981 to 27.1 in
1986 and further to 261.1 percent in 1992. Even though the value of the debt
declined to N252.7 percent in 1997, it soon rose sharply to 857.8 percent in
1999. Government debt as percentage in GDP continued to increase, jumping to
1128.6 percent in 2002 and 1186.7 percent in 2004 but gain declined to 751.2
percent and 37.0.0 percent in 2005 and 2006 respective.
The
emergence of any macroeconomic instability depends on the way and how budget
deficits are financed. There are several options of the budget deficits
financing:
-
Government bonds selling
-
Borrowing from abroad
-
Selling go state assets
The bond selling
at the home financial market leads to increase in demand for private funds in
the economy. The excess demand for money will invoke rise in interest. However,
interest rates according to the theory stimulate private sector and households
to increase savings and shift some investments towards the future. In this
case, public crowds out private investment.
On the
contrary, external borrowing usually causes appreciation of real exchange rate,
deepening current account deficit, increases of foreign debt and loss of
foreign reserves. Extreme and very serious result of this foreign borrowing can
be currency crises, for which this scenario is vary common (Hakio, 1996).
Monetisation causes hyperinflation and that’s why this method of budget deficit
financing is forbidden in many industrial and some developing countries.
The impact of budget deficit onto
macro economic stability is also influenced by absorption ability of a particularly
economy. In general, it can be said that long-term budget deficits are much
more easily absorbed by countries with high level of private savings and full
developed financial markets. Since less developed countries possess less
private savings, and not fully developed financial markets and regulated
prices, they should try to reduce budget deficits and thus, avoid possible
macroeconomic problems.
If there
is a negative budget balance (deficit), it is necessary to cover it. The
government has several options, how to settle. This deficit provided that
deficit will be covered by issuing bonds. There are also several subject to
whom these bonds can be sold:
-
Foreign subjects (Private and public)
-
Households and firms
-
Domestic banking system
-
Central bank
Especially, the
developing countries buy the greater proportion of governmental bonds through
central Bank because of insufficient financial capacity of private domestic
subjects and usually government doesn’t have to pay any interest to Central
bank, if there are some problems, when the government owe Central Bank, it’s
only a shift of public debt from one public organization to another, because
the Central Bank usually owns the government.
Foreign subjects are usually not
very interested in government bonds of developing countries. Financial markets
of these countries are not developed much and such investment involves high
investment risk.
Finally, impact of budget deficits
depends on the means of its financing. Every alternative of financing causes
macroeconomic instability when used exclusively.
This study aims at gaining insight
into the channels through which the budget deficit has been operating in
Nigeria prior to and equally culminating into the period of oil boom and also
its impact on economy growth. This is due to the fact that since the 1980s,
Nigeria has often experienced budget deficit overtime. Thus, budget deficit and
economic growth in Nigeria is a major issue to be analysed in this study.
STATEMENT OF PROBLEM
Oluba (2008) asserted that the
Nigerian government has been addicted to fiscal deficits since the early days
of independence. Nigeria’s overall fiscal balance has been in deficit. Some of
the years actually declared as surplus were years of fiscal deficits, which
were so converted through arithmetical manipulations by the Ministry of
Finance. In some years budgeted deficits when exhausted, are supplemented with
another round of financial injection: a practice that was rampant during the
period administration. The addiction has equally not abated as is evident in
the 2008 deficit budget proposal. Some economists have awarded some pass mark
to the budget saying that its size has been significantly reduced to comply
with the deficit benchmarked specified by the World Bank. This position is very
deceptive and tends to sweep the consequences of chronic deficit budgeting
underneath. When the GDP is used as a denominator to the amount of fiscal
deficit, the true size of the deficit is cloaked and makes to look
comparatively smaller than it really is. The tendency is often to assume that
the effects will be minimal and non-destabilizing whereas the adverse
consequences arising from it does not in any way depend on such comparative
size but on the volume of paper income or money that will be pumped into the
system when it is been financed. The culture of extra-budgetary spending in
Nigeria is as entrenched as the culture of deficit budget itself.
The high budget deficits are
considered as the causes of macroeconomic problems. Among these problems in
many cases are:
·
High level of inflation
·
Current account deficits
·
High indebted economy
·
Slow economy growth
Given the above identified problems existing in an economy running a deficit and considering the nature of budget deficit in the face of macroeconomic activities in an economy, this research will attempt to answer the following questions:
Given the above identified problems existing in an economy running a deficit and considering the nature of budget deficit in the face of macroeconomic activities in an economy, this research will attempt to answer the following questions:
·
What is the nature of the relationship
between budget deficit and economic growth in Nigeria?
·
What is the causal relationship between
budget deficit and economic growth in Nigeria?
OBJECTIVES OF STUDY
The main objective of this research
work is to analyse budget deficit and economic growth in Nigeria. However, the
sub objectives of this work include:
·
To determine the nature of the relationship
between budget deficit and economic growth in Nigeria.
·
To determine the causal relationship between
budget deficit and economic growth in Nigeria.
·
To ascertain the macroeconomic variables that
greatly influenced or impact on budget deficit and economic growth in Nigeria.
·
To make recommendations on the possible ways
of growing Nigerian economic in the presence of budget deficit.
HYPOTHESIS
H0: There is no significant
relationship between budget deficit and economic growth in Nigeria.
H1: There is significant
relationship between budget deficit and economic growth in Nigeria.
SIGNIFICANCE OF STUDY
Budget deficit is a concept that
needs to be thoroughly dealt with an attempt to achieve economic growth.
Therefore, this study shall be of immense benefit to government, private
individuals, students of Economics Department and other related disciplines,
policy makers, tax payers, international agencies and the society as a whole.
Precisely,
the government of this country will understand the effects of budget deficit in
Nigeria and strengthen out parts or areas in their administration that will
improve the economy. The private individuals will get a clear understanding of
the concept of budget deficit and its impact in economic growth in Nigeria. The
students of Economics department and other related discipline who wish to
further their research on this topic will use this work as their baseline study
and subsequently work on them for better results. Policy markets also having
studied this work will be in a better position to make policies that will yield
the best result for Nigeria. Tax payers on their own part will clearly under
the circumstance surrounding the nature of the tax system in Nigerian and how
far their fulfilled tax obligations are being harnessed. On the part of
international agencies, this study will give them an understanding of what consists
budget deficit in Nigeria which will enable them know when to engage in
business with Nigeria and the benefits that accrues to such investment. In
addition to the above importance, the society as a whole will understand what
makes for budget deficit in a country and how to work for the achievement of
economic growth in Nigeria and other developing nations of the world.
SCOPE OF STUDY
This study of will cover the period
of 1980-2008, a sample size of 29 years. This being large sample and enough
observation figures for estimating the model will yield better results that
will explain budget deficit and economic growth in Nigeria thoroughly. The
choice of this period is informed by the fact that since 1980s till date
Nigeria has been recording deficits at the end of each fiscal year. Also, this
research work is restricted to studying the impact of budget deficit and
economic growth in Nigerian because Nigeria is the case study on which the
researcher’s interest lies.
LIMITATIONS OF STUDY
This work is also characterized by a
number of limitations. These include.
·
Lack of finance
·
Limited time
·
Few (little) literature or previous works on
budget deficit and economic growth in Nigeria.
·
Most of the previous work centre on the
determinants of budget deficit and also budget deficit with other macroeconomic
variables.
·
Most previous works were done outside
Nigeria.
READ RELATED TOPICS ON
DEFICIT BUDGET
SUMMARY, CONCLUSION AND
RECOMMENDATION OF BUDGET DEFICIT
METHODOLOGY OF BUDGET
DEFICIT (TECHNIQUES, MODEL, STATISTICAL DATA