1.1 Introduction
Fiscal policy is the collection of objectives, guidelines, decisions, and acts that the government adopts to affect the country's economy and society with the aim of preserving its overall stability, development, issues, and evolving conditions (Tcherneva, 2011). As one of the most crucial instruments of economic management for attaining economic development and resolving issues that threaten economic stability, financial policy is significant because it can contribute more to the accomplishment of the various goals of the national economy (Alam et al., 2017).
Similarly, according to Shihab (2014), fiscal policy is defining the government's revenue sources and methods of distribution; in other words, it explains where the money comes from, which sources are most significant, and where the most significant and effective channels for distributing this money are. This is carried out to help the government realize its social and economic goals and ensure the success of its economic policies (Shihab, 2014).
This chapter will address the background information that motivated this study, the challenges that prompted it, its aim, and its objectives as a preface to subsequent sections of the study. Additional factors include the study's significance, scope, limitations, research questions and hypotheses, and the definition of technical terms.
1.2 Background of Study
Historically, fiscal policy has been associated with the use of taxes and public spending to affect a nation's economic operations. The government's budget is essentially the foundation upon which fiscal policy is implemented. A public budget's ability to govern an economy is its most important feature (Omitogun & Ayinla, 2007). In order to manage the pattern of economic activity, the rate of output growth, employment, inflation, and employment, the government consciously uses borrowing, taxing, and spending (Ugwanta, 2014).
The growth impact of fiscal policy has produced a significant amount of theoretical and empirical work throughout the past ten years. One of a nation's main macroeconomic goals is economic growth, which is supported by increased government spending on physical and socioeconomic infrastructure as well as on health and education, which also accelerates the rate at which the nation's output grows (Barro, 1990). Investments in infrastructure, such as roads, electricity, communications, and railroads, among other things, lower production costs, increase private sector investment, and boost business profitability, all of which contribute to economic growth.
Barro (1990) endorsed the claim that higher government spending promotes economic expansion. On the other hand, a different school of thought maintained that rising public spending impedes economic expansion. According to this school of thinking, an economy's overall performance tends to decline as government spending increases. Additionally, the government frequently raises taxes and/or borrows more money in an effort to pay for growing expenditures, which may have an impact on her spending habits. Increased income taxes discourage people from looking for work or putting in lengthy hours at work, which lowers aggregate demand and revenue (Maku, 2015).
Similarly, greater profit taxes typically result in higher manufacturing costs as well as lower investment and business profitability. The government will drive out the private sector and discourage private investment if it borrows more money, particularly from banks, to pay for expenditures. Given the inconsistent findings of earlier research, the question of whether fiscal policy is a useful instrument for promoting growth and development is still open for dispute.
Oshinowo (2015) noted that the research on the subject of fiscal policy's ability to promote economic growth is divided into two camps. The first is that both short- and long-term growth may be stimulated by government support for knowledge, research and development, productive investment, upholding law and order, and providing public services. Fiscal policy is thought to skew the effects of taxes and wasteful government expenditure, which would undermine economic progress. Furthermore, there are theories on how fiscal policy affects the results of economic performance.
Proponents of the classical school of thought believed that government spending had a temporary and ineffectual effect, particularly when prices finally adjust and output reaches its full potential (Khosravi and Karami, 2010). Similarly, endogenous theorists proposed that government expenditure and taxation affect economic growth in both short- and long-term ways. The study examined the impact of Nigeria's fiscal policies on the nation's economic performance in order to substantiate this assertion.
1.3 Statement of Problems
Investigation revealed that Nigeria has not been able to realize its potential for long-term, sustainable economic growth and development. It is extremely depressing that the economy has been underperforming relative to expectations, even given the nation's vast mineral and human resource reserves and rising public expenditure trends. The low performance of the Nigerian economy has been ascribed by economists, policy analysts, and other experts to a number of factors, including political instability, bureaucracy, poor accountability and transparency, bad governance, and a dearth of visionary leaders who can steer the economy towards growth.
According to Asaju, Adagba, and Kajang (2014), implementation of non-market friendly instruments and improper use of monetary and fiscal policies were significant obstacles to achieving Nigeria's budgetary goals.
The public sector in Nigeria is supposed to lead the economy through fiscal policies, but the public sector's incompetence in service delivery, infrastructure deterioration, high rate of corrupt practices, and lack of accountability and probity in the management of public policies and resources demonstrate just how incompetent this sector is. These have led to a high unemployment rate, increased inflation, slower growth, falling real earnings, and a high poverty rate. Without a doubt, the macroeconomic goals of full employment, price stability, balance of payments equilibrium, effective resource allocation, unequal income and wealth redistribution, exchange rate stability, and economic growth have not been achieved by fiscal policy.
Furthermore, there has been a great deal of disagreement in the literature on the best course of action for achieving macroeconomic stabilisation in developing nations. According to proponents of the monetarist theory, emerging economies ought to adopt monetary policy as it has a more significant impact on economic performance. However, the Keynesian school of thought asserted that fiscal policy has a stronger impact on economic performance and that developing nations need to implement it. However, according to Ugwanta (2014), neither fiscal nor monetary policies have been applied effectively to encourage better economic performance in Nigeria.
1.4 Aim and Objectives of Study
The aim of the study is to examine the Impact of Fiscal Policy on Economic Performance in Nigeria (1981-2016). In achieving this aim, the following specific objectives were laid out as follows:
- To determine the extent to which government total expenditure has contributed to economic performance of Nigeria;
- To assess the extent to which direct taxes has contributed to economic performance of Nigeria; and
- To explore the extent to which government total revenue has contributed to economic performance of Nigeria.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- To what extent has government total expenditure influenced the economic performance of Nigeria?
- To what extent has direct taxes influenced on the economic performance of Nigeria?
- What is the magnitude of government total revenue on the economic performance of Nigeria?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Tax revenue does not have any significant effect on the growth of Nigerian economy
- H1: Tax revenue has significant effect on the growth of Nigerian economy
Hypothesis Two
- H0: Government expenditure does not have any significant effect on the growth of Nigerian economy
- H1: Government expenditure has significant effect on the growth of Nigerian economy
1.7 Significance of Study
The impact of fiscal policy on Nigeria's economic performance, or economic growth, has been the subject of several studies. Empirical previous studies generally agree that fiscal policy has a favourable effect on Nigeria's economic growth. But there has been disagreement on the extent of the influence.
According to academics like Audu (2012) and Agu, Idike, and Okuwo (2014), fiscal policy has a significant influence on the Nigerian economy. Quite the reverse, according to academics like Onwe (2014) and Abdulrauf (2015), fiscal policy has little effect on Nigeria's economy.
Unfortunately, this has caused a gap in the literature. As the years 2014, 2015, and 2016 have not been covered in the literature, the study builds on earlier findings to determine the degree to which fiscal policy influences Nigeria's economic progress.
1.8 Scope of Study
The scope of the research is focused on the Impact of Fiscal Policy on Economic Performance in Nigeria (1981-2016).
The government's total revenue, total spending, and direct taxes are the tools of fiscal policy taken into consideration. Economic growth a proxy for actual gross domestic product is prioritized above economic performance in a similar way.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Research Material: availability of research material is a major setback to the scope of the study.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Technical Terms
Fiscal Policy:
This refers to the discretionary power of the government to control and regulate an economy through government spending and taxation.
Economic Performance:
This refers to the extent to which an economy has accomplished its macroeconomic objectives. Economic performance can be ascertained through price stability, full employment, economic growth and soundness of foreign account. However, the study used economic growth as an index of economic performance.
Government Total Expenditure:
This refers to the total spending of government over a period of time. Government total expenditure is the summation of recurrent and capital expenditure over a period of time.
Government Total Revenue:
This refers to the total amount of funds realized by the government of a country. Government total revenue in Nigeria can be broadly sub-divided into revenue from oil and non-oil sources.
Direct Taxes:
This refers to a compulsory levy imposed by the government on the personal income of individuals and profits of companies and industries.
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