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1.1 Background of the study
The growth and development of the Nigerian economy has not been stable over the years as a result, the country’s economy has witnesses so many shocks and disturbances both internally and externally over the decades. Internally, the unstable investment and consumption patterns as well as the improper implementation of public policies, changes in future expectations and the accelerator are some of the factors responsible for it. Similarly, the external factors identified are wars, revolutions, population growth rates and migration, technological transfer and changes as well as the openness of the country’s Nigerian economy are some of the factors responsible. The cyclical fluctuations in the country’s economic activities has led to the periodical increase in the country’s unemployment and inflation rates as well as the external sector disequilibria (Gbosi, 2001). In other words, fiscal policy is a major economic stabilisation weapon that involves measure taken to regulate and control the volume, cost and availability as well as direction of money in an economy to achieve some specified macroeconomic policy objective and to counteract undesirable trends in the Nigerian economy (Gbosi, 1998). Therefore, they cannot be left to the market forces of demand and supply as well as other instruments of stabilization such as monetary and exchange rate policies among others, are used to counteract are problems identified (Ndiyo and Udah 2003). This may include either an increase or a decrease in taxes as well as government expenditures which constitute the bedrock of fiscal policy but in reality, government policy requires a mixture of both fiscal and
monetary policy instruments to stabilize an economy because none of these single instruments can cure all the problems in an economy (Ndiyo and Udah, 2003). The Nigeria economy started experiencing recession form early 1980s that leads to a depression in the mid 1980s. This depression continued until early 1990s without recovering from it. As such, the government continually initiated policy measures that would tackle and overcome the dwindling economy. Drawing the experience of the grate depression, government policy measure to curb the depression was in the form of increase government spending (Nagayasu, 2003). According to Okunroumu, (1993), the management of the Nigerian economy in order to achieve macroeconomic stability has been unproductive and negative hence one cannot say the Nigeria economy is performing. This is evidence in the adverse inflationary trend, government fiscal policies, undulating foreign exchange rates, the fall and rise of gross domestic product, unfavourable balance of payments as well as increasing unemployment rates are all symptoms of growing macroeconomic instability. As such, the Nigeria economy is unable to function well in an environment were there is low capacity utilization attributed to shortage in foreign exchange as well as the volatile and unpredictable government policies in Nigeria (Isaksson, 2001),Fiscal policy is the means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy. It is used along with the monetary policy which the central bank uses to influence money supply in a nation. These two policies are used to achieve macroeconomic goals in a nation. These goals include price stability, full employment, reduction of poverty levels, high and sustainable economic growth, favourable balance of payment, and reduction in a nation’s debt. Nigeria’s potential for growth and poverty reduction is yet to be realized. A key constraint has been the recent conduct of macroeconomics, particularly fiscal and monetary policies. This has led to rising inflation and decline in real incomes. National economic management became a Herculean task as the economy has to contend with volatility of revenue and expenditure. The widespread lack of fiscal discipline was further exacerbated by poor coordination of fiscal policy among the three tiers of government. Also, there is a weak revenue base arising from high marginal tax rate with very narrow tax base, resulting in low tax compliance. (Odewunmi, 2012). As a result of these and other factors serious macroeconomic imbalances have emerged in Nigeria. A review of these macroeconomic indices shows that inflation has accelerated to double-digit levels (from 6.94 in 2000 to 18.87 in 2001), (IMF,2001). This double digit inflation continued up to 2005, and decreases to single digit in 2006 and 2007. In 2008 the inflation rate reverted to double digit - 11.58 and continued to increase and in 2010 it was 13.72% (IMF, 2011). Unemployment is a major political and economic issue in most countries. In Nigeria the years of corruption, civil war, military rule and mismanagement have hindered economic growth of the country. Nigeria is endowed with diverse and huge resources both human and material. However years of negligence and adverse policies have led to the under-utilization of these resources (Economic Watch, 2010), and this has contributed to the increasing unemployment rate in Nigeria. In 2000 the unemployment rate was 13.1%. on the average there has been an upward trend and in 2010 it was 21.10% (Nigerian Bureau of Statistics 2010, CBN 2005, 2006, 2009).
1.2 STATEMENT OF THE PROBLEM
Fiscal policy is the means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy. It is used along with the monetary policy which the central bank uses to influence money supply in a nation. These two policies are used to achieve macroeconomic goals in a nation. These goals include price stability, full employment, reduction of poverty levels, high and sustainable economic growth, favourable balance of payment, and reduction in a nation’s debt. Irrespective of the application of this microeconomic tools in the economy the outcome is not producing expected result in the economy. It is on this note that the researcher intends to ascertain the impact of fiscal policy in Nigeria’s economic growth.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to ascertain the role of fiscal policy in the economic growth of Nigeria from 1980-2012. But for the successful completion of the study the researcher intends to achieve the following sub objective;
i) To ascertain the impact of fiscal policy on economic growth
ii) To ascertain the relationship between fiscal policy and economic development
iii) To ascertain the role of fiscal policy in the actualization of macroeconomic objectives
iv) To ascertain the effect of fiscal policy in the reduction of unemployment
1.4 RESEARCH HYPOTHESES
The researcher therefore formulates the following research hypotheses to aid the successful completion of the study;
H0:fiscal policy does not have any significant impact on the economic growth of Nigeria
H1:fiscal policy does have a significant impact on the economic growth of Nigeria.
H02:there is no significant relationship between fiscal policy and economic development in Nigeria.
H2:there is a significant relationship between fiscal policy and economic development in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
It is believed that at the completion of the study; the findings will be of great importance to the federal government and the national economic planning committee as thefindings of this study will guide them in policy formulation and implementation; the study will also be of great importance to the management of the central bank of Nigeria as the study will guide them on when to use the policy as contractionary or expansionary policy.
The study will also be beneficial to researchers who intend to embark on study in similar topic as the study will serve as a guide to their study. Finally the study will be beneficial to academia’s students and the general public.
1.6 SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers fiscal policy and economic growth in Nigeria from 1980-2012. In the cause of the study, there are some factors which limited the scope of the study;
(a)Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study.
(b)Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
(c)Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover
1.7 DEFINITION OF TERMS
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms
Gross domestic product (GDP)
Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly). Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. Nominal GDP per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between nations.
1.8 Organization of the study
This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion and also recommendations made of the study.
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