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FISCAL DEFICIT AND ECONOMICS PERFORMANCE IN

NIGERIA

TABLE OF CONTENTS
Title Page -

ii

Certification

iii

Dedication

iv

Acknowledgement

Table of Contents

vii

Abstract -

1.1 Background to the Study -

1.2 Statement of the Problem -

1.3 Objectives of the Study

CHAPTER ONE: INTRODUCTION

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1.4 Hypothesis of the Study -

10

1.5 Scope of the Study

11

1.6 Research Methodology

12

1.7 Justification of the Study -

12

1.8 Organization of the Framework -

14

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Theoretical Literature

15

2.2 Empirical Literature -

20

2.3 Fiscal Policy and its Objectives -

28

2.4 Trends in Fiscal Deficits

32

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

36

3.2 Nature and Sources of Data

36

3.3 Estimation Technique -

37

3.4 Definition of Variables

39

3.5 Model Specification -

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CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION OF
RESULTS
4.1 Introduction

42

4.2 Presentation of Results

42

4.3 Trend in the Variables

44

4.4 Policy Implications -

46

CHAPTER

FIVE:

SUMMARY,
CONCLUSION
RECOMMENDATION

AND

5.1 Summary of Findings

48

5.3 Conclusion -

49

5.3 Policy Recommendations -

50

51

5.3.1

Recommendations for Further Studies

References

52

Appendix -

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ABSTRACT
This study is designed to find out the input of fiscal deficit on
economic importance in developing countries. A case study of
Nigeria situation is considered. Fiscal deficit is negatively related
to Gross Domestic Product (GDP) in such a way that if
government involves itself in extra budgetary expenditure
thereby incurring deficit along the way the GDP has the tendency
to fall censing economy to decline in economic growth. The Gross
Domestic Product, Fiscal deficit, money supply, inflation and
foreign reserve data were collected and analysed by the means
of ordinary least square technique (OLS). The finding shows that
about eighty percent of Nigeria fiscal deficit are founded by the
banking sector especially through money creation thereby
affecting inflation. The conclusion was reached that large and
growing fiscal deficit harm macroeconomic performance impose
unacceptably large burden on future generations and raise the
risk of major financial market disruption or hard land. Solution
to the fiscal deficit problem should stress expenditure reduction,
not tax increase though it should include innovative ways of
increased collection of existing tax. Fiscal reforms will need to
be decisive, transparent and equitable if they are to receive
public support and if they are to be successful. The way forward
out of the fiscal deficit problem in Nigeria will need the
application of relief measures concerning longer period and
hence create a conducive climate for investment and hence
provide an incubation period of the growth of GDP. An
approximate mix of fiscal and monetary policies should be the
best government policy in the 2000s and beyond.

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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
This study purpose to examine the macroeconomic effects
of fiscal policy, particularly deficits, in developing countries. The
roles of the fiscal authority is developed and the developing
countries vis a vis developed countries are markedly different.
In both developed and developing countries there is a concern
for raising living standard over time but their needs is much
more pronounced in developing countries, given the extent and
depth of poverty in the countries. In relative absence or
perpetual weakness of role of state is crucial in harnessing the
resources for development. Since the regulatory apparatus is
weak and market signals imperfect the state has an important
role to play in allocating investment funds. Furthermore, with
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widespread poverty there

is

the

expectation

that

fiscal

expenditures would play a major role in anti-poverty programs.

Pressure populism through price controls and the like are
considerable.
However, one of the vital aspects of fiscal policy is the
management of public sectors fiscal deficit. Fiscal deficit simply
refers to an excess of the public sector spending over its revenue
(World Bank, 1988). The fiscal deficit is the difference between
the governments total expenditure and its total receipts
(excluding borrowings). Such fiscal deficit has been at the
forefront of macroeconomic adjustment.
Although

fiscal

adjustment

was

recommended

to

developing countries during 1980s as being able to lead them

out of their economic maladjustment, it is widely recognized that
fiscal deficit a key fiscal indicator influences economic growth
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(Central Bank of Nigeria) good fiscal management preserves
access to foreign lending and avoids the crowding out of private
investment while economic growth stabilizes the budget and
improves the fiscal position of the country. At this time, and for
some reasons which include absence of good fiscal management,
the government in developing countries is handicapped in its
ability to play an active role. First, the government in a
developing country is weaker entity political than in most
developed countries. This means that there is often very little
consensus on the colours of tax and expenditure program.
Second, the resources available to the government are
meager since tax bases are small and tax administration weak.
Much of tax income comes from inefficient and distortionary in
directional trade is heavily taxed. Effective personal income
taxes are low and easily evaded and corporate taxes are high.
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Even so expenditure routinely and even increasingly, outpace
revenues. With poor credit bond markets and fiscal expenditure
that are flexible in the downward direction, some of the resultant
deficit spill over into the external sectors and the central banks.
The decades of the 1960s and the 1970s are often
described as the golden years for developing countries in most
economic development literatures. This is as a result of the
countries was not only high but was mostly internally generated
and it increased their investment with least reliance on period of
the late 1970s and early 1980s most of the economic growth of
the less developed persistently maintain current deficit (World
Bank, 1994). There are differences within countries in the
developing country group with respect to the options available
for public borrowing in the event of their being a large fiscal
deficit.
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Indeed the poorest among the LDCs are caught in
insidions resources trap (UNCTAD, 2000). The relation between
per capital income and savings appears no different in these
countries than in the presently developed nations. However,
because of low per capital incomes, savings are low and because
of this economic growth is low. In addition, as UNCTAD 2000
estimates, external schocks have, for more serious effect in
LDCS than other developing countries. Nigeria in particular in a
bid to speed up economic growth after experiencing the global
oil glut which made the government of the day at that time to
involve itself in excess spending of the revenue such that the
country was faced with the problem of fiscal deficit there by
joining other countries like Ghana, and Columbia which also
experience fiscal deficit with other developing countries. The
Nigeria fiscal deficit was contracted for various purpose such as
financing of trade, execution of projects and provision of social
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amenities and economic

needs

of

the

people

including

infrastructure, health and educational facilities.

The main source of the Nigeria revenue has been through
petroleum oil and taxation and other sources of revenue. The
experiences of countries like Mexico in 1982 and Nigeria since
1981 have however heralded the end of an era of belief in the
non-detrimental nature of an unrelieved current account deficit
(Blegar and Chesty, 1992). Since that period, the issue of fiscal
deficit has assumed critical dimensions and as a result growth in
Nigeria has been blamed in a number of factors including the
constantly deteriorating terms of trades, high inflation, poor
investment,

inappropriate

domestic

policies

as

well

as

subsequent credit rationing (Ball and Mankin, 1995). With

rapidly diminishing official aid and poor private equity flows,
external financing of the fiscal deficit in the poorest countries
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has to rely increasingly on private loans. These are available at
increasing difficult terms, as Hebedger (1985) has noted as the
domestic resources cost of servicing these goes up with
additional borrowing. Several attempts have been made to
reserve the trend. These ranged from various domestic
economic policies and the management of fiscal deficit applied
by Nigeria to initiatives by the international monetary funds
(IMF) and the World Bank as embodied in the Structural
Adjustment Program (SAP). Despite the entire attempt at a
solution to this fiscal problem it has definitely remained. This
project work aims at finding enough clues to resolving this
problem.
1.2 Statement of the Problem
In the Nigerian economy it has been observed that lack of
fiscal discipline is the bane of the economy. Despite the fact that
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realized revenues often above budgetary estimates, extra
budgetary expenditure have been rising so fast and resulting in
ever bigger fiscal deficit. There is an increasing concern about
the unfavourable effect on the productive capital stock of
persistent and large government deficit, which inevitably has
resulted in increased government debt as a ratio of Gross
Domestic Product (GDP) and total private wealth. Thus it is
feared that an increase in public debt will continue to feed upon
itself as the government borrows to pay the interest debt, it
previously incurred and debt eventually become excessively
large relative to other macroeconomic variables.
In Nigeria, different government have come and gone
between 1970 and now. Different regimes have come out with
different fiscal policies which look good but have not been able
to succeed due to weak fiscal institutions put in place for their
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implementation of these policies. The question of sustainability
has become an issue of great importance to many because
unsustainability becomes a more and more important problem
as time goes on as deficit increase because of debt accumulation.
It is precisely a conviction that the government is short sighted
in its policies and that is biased towards ever spending because
of the nature of our political economy that makes sustainability
an issue (World Bank, 1988). We also have the problem of the
unpleasant fiscal arithmetic being engaged in the federal
ministry of finance since 1995 to manipulate fiscal operation so
as to arrive at fiscal surplus and to convince the international
financial institutions that its fiscal position does not lend
credence to such.
In an attempt to contain this situation Nigeria has adopted
so many strategies ranging from various macroeconomic policies
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to various fiscal deficit management strategies but not much has
been achieved so far. Hence the question therefore is exactly the
Nigeria economy? What is the impact of fiscal deficit on the
economy? What impact has fiscal management policies made on
economy? These are some of the questions that study tends to
answer.
1.3 Objectives of the Study
The general objectives of the study is to examine the
impact of fiscal deficit on economic performance in developing
nations from 1970 to 2004.
The general objectives was achieved by examining the
specific objectives of the study are to:
i.

Empirically determine the effect of public spending on

the economic development of Nigeria.
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ii.
Determine the effect of taxation of the Nigeria
economy.
iii.

Establish empirically relationship between budgetary

deficit and production capacity.

a.

Examine the relationship between domestic financing

of deficit to inflation and real interest rates.

b.

Offer policy recommendations as arising the study.

1.4 Hypothesis of the Study

The study will be guided by the following hypothesis:
i.

There is no significant relationship between increased

government expenditure and greater fiscal deficit.

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ii.
There is no significant relationship between budgetary
deficit and production capacity of a developing
economy.
iii.

There is no significant relationship between the

creation of wealth and budgetary deficit.

iv.

There is no significant relationship between the

budgetary deficit and growth in the GDP of Nigeria.

v.

There is no significant relationship of a growing debt

and inflation.

vi.

There is no significant relationship between inflation

and printing of money.

1.5 Scope of the Study

This study covers the period between 1980-20 12. It is a
national study and thus not specific to any state. The variable
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used in the study include: fiscal deficit, Gross Domestic Product,
external debt, debt service.
1.6 Research Methodology
The ordinary least square technology (OLS) with its
desirable property of being a best linea and unbiased estimator
for use of the study. The various component of the ordinary least
square (OLS) estimator for the use of the study include
coefficient of determinator, adjusted R2, F statistics, T-statistics
and the Durbin Waston Statistics. This will be done after the
various signs and magnitude have been analysed.
1.7 Justification of the Study
This study ensures that for the government of Nigeria to
meet the need of Nigerians that is spending money on wide
variety of things from the military and police to service like
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education and health care, as well as transfer payments such as
welfare benefits.
The expenditure can be funded in a number of different
ways:
i.

Taxation of population

ii.

Seignorage, the benefit from printing money

iii.

Borrowing money from population, resulting in a fiscal

deficit.

The study would enable the country to determine ways of

financing fiscal deficit through issuing of bonds, like treasury bills
or consol. This study would enable the country to determine the
direction of the fiscal policy by consistently keeping low external
debt burdens. And this can be done by encouraging high rate of
domestic savings. This study touches on every aspect of life and
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if the policy is wrongly formulated and implemented it would
have a multiplier effect in the economy that is why this research
is important. It contributes to knowledge because it would create
room for further research into some areas that was not covered
in this research.
According to the Keynesian economics, high government
spending, funded by a deficit can be beneficial to the economy
by

stimulating

aggregate

demand

and

decreasing

unemployment during recession.

This

study

would

also

make

people

to

familiarize

themselves with how this new technique works effectively and

to know the true meaning of the subject matter.

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1.8 Organization of the Framework
This research work will be structured into five chapters,
chapter one, introduction to the study examines the background
of the study, statement of problems, objectives of study,
justification of the study, scope of the study, research
methodology etc., chapter two covers literature review, chapter
three covers theoretical framework, chapter four contains data
presentation analysis, chapter five talks on summary, conclusion
and recommendations.

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