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IMPACT OF GOVERNMENT DEFICIT SPENDING ON GROSS DOMESTIC PRODUCT

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IMPACT OF GOVERNMENT DEFICIT SPENDING ON GROSS DOMESTIC PRODUCT

 

ABSTRACT

This study is on the impact of government deficit spending on Gross domestic product in Nigeria 1970-2017 it was carried out to determine the long-run effect of deficit budgeting and the inflationary pressure in Nigeria using regression data. Two null hypotheses to determine whether there is a significant relationship between inflation and deficit budget, inflation and money supply were stated. The researcher used the method of Time Series (OLS) regression analysis to analyse the data. Further, ADF was used to test for the stationarity of the variable while cointegration test was conducted to determine the long-run relationship among the variables. The found that there is a significant relationship between the deficit budget and inflation as well as money supply and inflation. Finally, the researcher recommended among others, that the Nigerian government should display a high sense of policies to act as checks and balances used to complement fiscal policies.

 

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Similarly, history of deficit spending can be traced to the history of deficit financing that emanates from budget deficit in Nigeria starting from 1978 when the country absorbed US$1 billion jumbo credit presumably required to reconstruct, rehabilitate and develop infrastructures destroyed during the Nigerian civil war (1967 – 1970). This incident subsequently led to massive borrowing by governments at various levels including their agencies in a bid to revitalize the battered economy (Akinmulegun, 2014). In view of this, Asogwa&Okeke (2013) noted that the country does not present an impressive record of fiscal prudence as she has been addicted to budget deficits from her early days of independence, and every measure put in place to wriggle out of the quagmire has not been fruitful (Wosowei, 2013).  For instance, the overall fiscal balance deteriorated from 1980 – 1994, and in 1982 greater deficit of about -12.44% of GDP on the average (CBN 2012).

In Nigeria, the continuous increase of fiscal deficits have been blamed for much of the economic crisis that beset them about two decades ago resulting in over indebtedness and debt crisis, high inflation, poor investment and growth (Chimobi&Igwe, 2010). For instance, the country recorded an increase in budget deficits from N3,902.10 million in 1981 to N8,254.30 million in 1986 to N15,134.70 million in 1989 but catapulted to N133,389.30 million and N301,401.60 million in 1998 and 2002 respectively (CBN, 2012). As of 2003-2006, government fiscal deficits witnessed a moderate declined from N202,724.70 million in 2003, N172,601.30 million in 2004, N161,406.30 million in 2005, to N101,397.50 million in 2006 (CBN, 2012). The causes of the persistent annual increase of fiscal deficits are bloating of government bureaucracy, cost of providing critical infrastructures and shortage of revenue generation, etc (Umeora, 2013). For example; a rundownof government annual expenditure from 1970 (at the end of the Nigeria–Biafra war) to 2014 shows that thegovernment ran annual deficits for 39 years.

Nigeria recorded budget deficit equal to 1.80 percent of the country’s GDP in 2013 (CBN, 2014). The Nigerian government budget averaged 2.10 percent of the GDP from 2006 up till 2013, attaining an all-time high of 4.60 percent of GDP in 2008, and subsequently declined to -6.6 percent of GDP in 2009 (CBN, 2014). A macro economy may be adjudged to be healthy when there is steady growth and near absence of excessive fluctuations in the system.

Large budget deficits in Nigeria over time probably have reduced the amount of loanable funds available to private investors for investment in the financial market through a raise in the interest rate. Increase in the interest rate was made possible by the sale of government securities in the financial market was of high value due to loan repayment ability of the government and similarly, anincrease in interest rate reduces loanable funds (the amount of money available in commercial banks to lend in the economy). Since there is large number of private firms that operate locally, an increase in interest rate may result in reduction of firm size, thereby culminating in cutting the work force, inflation (if the budget deficit is financed through minting of money), low rate of industrialization, low aggregate demand and low economic growth. Normally when deficit arises a number of pragmatic approaches are open to the government for adoption so as to fill the revenue-expenditure gap. 

In this regard, government can raise funds internally (through bank credit, issuance of financial instruments, print more paper currencies, increase tax rate or use foreign reserve) or from foreign sources in order to nip the shortfall in the bud.  Note that prolong deficit financing impacts negatively on the economy by crowding out private investment (Paiko, 2012).  Borrowing (from internal or external sources) requires government to subscribe to a repayment term and condition, which are usually stringent. This will eventually exacerbate the deficit as government will defray the cost of servicing the debt thereby creating more expenditure and deficit.  Continuation of this may lead to high and variable inflation, debt crisis, with crowding out of investment, growth, as well as macroeconomic imbalance generally (Paiko, 2012).  Borrowing is considered as a better source as it does not cause a rise in the money supply, which is regarded as the major catalyst of inflation.

In contrast, the printing of more currencies (Ways and Means method) may result in inflationary trends in the economy on account of increased money supply (Onwe, 2014). The constant practice of deliberately permitting government spending to surpass its revenues (deficit financing) in order to attempt to stimulate economic activities and reduce unemployment rate, among other desirables was expected to put Nigeria on better springboard towards economic turnaround.  On the contrary, the economy seemed to deteriorate by the day with worrisome unemployment rate, lower living standard, poorer infrastructure development, uncontrollable inflation and interest rates, etc. Clearly, this phenomenon has remained the focus of research and public debate.  It is against this backdrop that this paper intends to investigate empirically the extent utilization of deficit financing has positively and significantly influenced the unemployment level in Nigeria.

The controversy relating to deficits in spending - macroeconomy nexus in the literature is far from producing clear-cut results and therefore, remains inconclusive. Government deficit spending apparently is viewed as a major cause of macroeconomic instability, but most empirical findings do not entirely support this assumption as findings from various studies are mixed and contentious across countries. In light of this, researchers seem to focus more on spending deficit-economic growth; while less emphasis has been put on another economic index like unemployment shocks on the performance of an economy.

1.2   STATEMENT OF THE RESEARCH PROBLEM

In Nigeria today, the public sector is predominant. The reason appears to lie in what the government perceived as its social responsibility or share of commitment in the growth and development process. Its largeness has been stimulated by the urge to adopt shock adjustment to economic growth for quicker realization of national aspiration. This has led to the overwhelming consistent increase in the public sector expenditure in Nigeria. Okoro (2013).

Specifically, the public sector expenditure in Nigeria has continued to rise for over three decades, due to the increased demand for public (utilities) goods like roads, communication, power, education and healthChude (2012).However, it has been argued by scholars if the rising state of public sector expenditure in Nigeria has gainfully contributed to economic growth in Nigeria.However, the study alarmed that many Nigerians have continued to wallow in abject poverty, while more than 50% live on less than US$1 per day.

Furthermore, Public sector has incurred expenses in areas such as physical infrastructure, health, education, economic services, defence and general administration. Economic theory predicts that increases in productive public spending in areas like physical infrastructure, health and education leads to increases in economic growth of a country. Some governments have tried to promote public spending due to an understanding that large public sector expenditure is a source of economic growth and development, especially, in a country where public sector is predominant like Nigeria. Therefore, understanding the relationship between public expenditure and economic growth could have a significant impact on the formulation and implementation of major macroeconomic policies. It could also guide the formulation of major economic policies required urgent funding and attention. Controlling for the influence of non-oil revenue.

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