CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study
A fundamental problem facing Nigeria and other
development nations is fluctuations in macroeconomic variables such as general
price level, economic growth, balance of payment equilibrium and many others.
Many authors have written on the
impact of fiscal policy on Nigeria’s economy but they have been different views
on the issue. Some group believes that fiscal policy affects economic growth
while some other group has a contrary view.
Iyoha (2004) defines fiscal policy
as the use of changes in government expenditures and changes in taxes to
influence the level of key economic aggregates like GDP, employment, the
general price level and balance of payments.
Byins and Stone (1992), on their own
said that fiscal policy involves the deliberate legislative changes in
government outlays or taxes to alter aggregate demand (AD) and stabilize the
economy. To Jhingan (1997:646), fiscal policy through the variations in
government expenditure and taxation profoundly affects national income,
employment, output and prices. In the traditional view, fiscal policy
emphasized the direct impact of government revenue and spending on aggregate
demand.
The problem of economic instability
has become a difficult problem for government of Nigeria to tackle. For
instance, during inflationary period, the value of money is lost and the
economy is overheated. The aggregate demand is too high. On the other hand,
during deflationary period, the aggregate demand is too low and needs to solved
or tackled.
Keynes was the first to opinion that
fiscal policy is the best policy measure of achieving macroeconomic objectives.
According to Keynes, during inflation in the economy, the policy prescription
is to reduce government expenditure and increase taxation or use both. It means
that inflation can be handled by the use of concretionary fiscal policy. On the
other hand, during deflation, the policy measure will be to increase government
expenditure and reduce taxation or both are employed.
A proper understanding of the
country’s fiscal system requires adequate discussion of the movement of tax
rates and government expenditure overtime. Fiscal policy in Nigeria has not
been impressive. For instance, a policy measure was adopted in 1986 in an
effort to implement the policy of Structural Adjustment Programme (SAP).
Government’s outlay which was about N15
billion in 1980 leapt to about N6
billion in 1990, and further to N10,180
billion in1990 and further rose to over N221
billion in 2001. although, an economic policy was introduced between the
periods of 1986 till date, the policy measures have not been able to achieve
its goals.
The study is relevant, considering
the rate of fluctuations in macroeconomic variables such as price level,
employment rate, economic growth and balance of payment equilibrium. Nigerian
economy has not performed up to expectation unless adequate measures are taken
to reduce the rate of economic instability in the country. Having had a view on
the impact of fiscal policy on Nigerian economy and realizing that the problem
crated by these effects is becoming increasingly intolerable to the economy, it
becomes necessary to critically evaluate the impact of fiscal policy on the
Nigeria economy (1994-2010)
1.2 Statement
of Problem
Instability in macroeconomic
variables like price level, economic growth, full employment, balance of
payment equilibrium has been a difficult problem facing Nigerian economy.
Over the years, the Nigeria
government has been trying through various policy measures to curb the problem
of instability.
Prominent among the policy measures
that has been in use to arrest the instability in the economy is fiscal policy.
The important research question that
arises includes:-
·
Why has Nigerian
fiscal policy not been able to achieve a meaningful result?
·
Does the policy
need further review to make it more effective?
1.3 Objectives
of the Study
The study is aimed at achieving the
following objectives:-
·
To determine the
impact of fiscal policy on Nigeria economy.
·
To ascertain how
fiscal policy had influenced Nigerian economy.
1.4 Hypothesis
of the Study
To properly carry out the research,
the hypothesis that will guide the study is stated as:-
H0:
Fiscal has no significant impact on Nigeria economy.
H1:
fiscal policy has significant impact on Nigerian economy
1.5 Significance
of the Study
This study will be of tremendous
help to government authorities and policy makers especially in the area of
policy formulation. The study will also be beneficial to business sector,
students of economics and other related courses will find the work beneficial.
Infact, this study will be useful to the general public.
1.6 Scope
of the Study
To cut down on the constraints that we might
encounter, the study has been narrowed down to cover the period 1994 -2010.
1.7 Limitation
of the Study
The paucity of data and other relevant statistics
placed a heavy limitation to this study. Thus, lack of fund poses as a limiting
factor to this work; also, time factor is included because the issue of
combining lectures with research project is not an easy task.
CHAPTER THREE
RESEARCH METHODOLOGY
Regression analysis based on the classical linear
regression model, otherwise known as Ordinary Least Square (OLS) technique is
chosen by the researcher in the research method. The researcher’s choice of
technique is based not only by its computational simplicity but also as a
result of its optimal properties such as linearity, unbiasedness, minimum
variance, zero mean value of the random terms, etc (Gujarati 2004).
3.1 MODEL
SPECIFICATION
In this study, hypothesis is stated
with the view of examining the impact of fiscal policy on the economic growth
in Nigeria with respect to domestic investment and company income tax. In
capturing the study, these variables were used as proxy. Thus, the model is
represented in a functional form. It is shown as below:
INV = F (CIT, VAT)…………. 3.1
Where
INV = Domestic Investment
(Dependent variable)
CIT = Company Income Tax (Independent variable)
VAT = Value Added Tax (Independent
variable)
In a linear function, it is
represented as follows,
INV = b0 +
b1CIT + b2VAT
+ Ut ……………3.2
Where
b0
= Constant term
b1 = Regression coefficient of CIT
b2
= Regression coefficient of VAT
Ut = Error Term
3.2 MODEL
EVALUATION
At this level of research, using a
time series data, the researcher estimates the model with ordinary least square
method. This method is preferred to others as it is best linear unbiased
estimator, minimum variance, zero mean value of the random terms, etc
(Koutsoyiannis 2001).
The
tests that will be considered in this study include:
Coefficient
of multiple determination (R2 )
Standard
Error test (S.E)
T-test
F-test
Durbin
Watson Statistics
Coefficient of Multiple Determination (R2 ):
It is used to measure the proportion of variations in the dependent variable which
is explained by the explanatory variables. The higher the (R2 ) the
greater the proportion of the variation in the independent variables.
Standard Error test (S.E): It
is used to test for the reliability of the coefficient estimates.
Decision Rule
If S.E < 1/2b1, reject the
null hypothesis and conclude that the coefficient estimate of parameter is
statistically significant. Otherwise accept the null hypothesis.
T-test: It is used to test for the statistical significance
of individual estimated parameter. In this research, T-test is chosen because
the population variance is unknown and the sample size is less than 30.
Decision Rule
If T-cal > T-tab, reject the null hypothesis and
conclude that the regression coefficient is statistically significant.
Otherwise accept the null hypothesis.
F-test: It is used to test for the joint influence of the
explanatory variables on the dependent variable.
Decision Rule
If F-cal > F-tab, reject the null hypothesis and
conclude that the regression plane is statistically significant. Otherwise
accept the null hypothesis.
Durbin
Watson (DW): It is used to test for
the presence of autocorrelation (serial correlation).
Decision Rule
If the computed Durbin Watson statistics is less than
the tabulated value of the lower limit, there is evidence of positive first
order serial correlation. If it is greater than the upper limit there is no
evidence of positive first order serial correlation. However, if it lies
between the lower and upper limit, there is inconclusive evidence regarding the
presence or absence of positive first order serial correlation.
3.3 SOURCES OF DATA
The data for this research project
is obtained from the following sources:
-
Central Bank of Nigeria Statistical Bulletin for various years.
- Central
Bank of Nigeria Annual Account for various years.
-
Central Bank of Nigeria Economic and Financial Review for various years.