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.
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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
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
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.
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
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
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)
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.
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.
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.
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).
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.
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