INTRODUCTION
1.1 Background to the Study
Budgeting generally can be said to be a control device in an organisation designed to ensure that activities pursued within the budget period are such that contribute to the achievement of the organisation’s objectives. For government, its objectives are the provision of services and improvement of the living standard of the people.
Budget deficits have been a subject of great interest and debate among economists for many years, and so the issues surrounding fiscal deficits are certainly not new, but have led to renewed interest in fiscal themes. In developed countries, the continued growth of the Nigerian deficit has provided the impetus for a reassessment of the effect of fiscal deficits on economic activity. In developing countries, fiscal policy, particularly the reduction of fiscal deficits, has been one of the cornerstones of short-term stabilization and medium-term adjustment programs.
Budgeting generally can be said to be a control device in an organisation designed to ensure that activities pursued within the budget period are such that contribute to the achievement of the organisation’s objectives. For government, its objectives are the provision of services and improvement of the living standard of the people.Budget deficit is one of the most discussed economic issues in Nigeria. Baiter (1985) as cited in Asa (2013) states that deficit are bad, always and everywhere, regardless of the country circumstance. There is a common believe among economist, that budget deficit priori harmful for the total function of economy.
The budget deficit arises when a government outlays exceed revenue for that fiscal year. In an attempt to reduce large budget deficit, government usually recourse to deficit financing namely;
A deficit is financed from government borrowing which may result to accumulated debt burden or a debt overhang situation. Inflation may result from increased money used to finance the deficit. There would be a decrease in disposable income of the consumers if the deficit is financed by raising the level of taxation, it could affect economic behaviour by changing the financial rewards to various activities. Budget deficit is a fiscal instrument used by government to affect increase in aggregate demand during depression. Budget deficit has its theoretical background from the proposition made by Keynes in the 1930s during the event of the great depression; Keynes’s advocate increased government spending as a panacea to the world economy.When the developed and developing countries prepare their budget, they concern three types of budgets such as balance budget, surplus budget and deficit budget. The balance budget means the government revenue and expenditures are same, the surplus budget means the government revenue is exceeded the expenditure, and if the government revenue is less than the expenditure it is called deficit budget. Most of developing countries prepare the deficit budget because they think whether this type of budget is helping to promote economic welfares and economic growth in macro level (Mohamed – Aslam, (2016), MohamedAslam, (2015), Fatima, Ahmed, &Rehman, (2011).
The budget deficit is a serious economic issues in developing countries because the criticizers of the developing countries argue that the budget deficit impact on economic growth negatively. On the other hand the developing thinkers promote and support the deficit budget of the countries; they argue that this type of budget promotes the economic growth of countries.In theoretical view of economics, there are three concepts regarding the relationship between budget deficit and economic growth such as Neo – classical, Recardian and Keynesian concepts (Fatima, Ahamed, Rehman, (2012),Edame&Okoi, (2015),Briotti, (2005)).The neo classical economists declare that there is inverse relationship between the budget deficit and economic growth. On the other hand, the Keynesian economists argue that the budget deficit maintains the positive relationship with economic growth, while the Recardian economists state that there is neutral relationship between the budget deficit and the economic growth Briotti, (2005).
From 1999 to 2015, economic growth in Nigeria rose substantially, with annual average of 7.4 percent between 1999 and 2015. But the growth was not inclusive, broad-based and transformational. The implication of this trend is that economic growth in Nigeria has not resulted in the desired structural changes that would make manufacturing the engine of growth, create employment, promote technological development and induce poverty alleviation. Available data has put the national poverty level at 54.4 per cent between 2015 and 2017. Similarly, there has been rising unemployment with the current level put at 19.7 per cent by the National Bureau of Statistics (NBS) which shows that between 2015 and 2017, the nation’s budget has not made any positive impact on the economy. Deficit budgeting as used in this study is viewed as a conscious or deliberate plan by government for an excess expenditure over revenue in its budgetary allocation over a long period of time. For instance, between : 1996 – 2000, 3.87% of deficit to the gross Domestic Product (GDP), while between 2000- 2004, 2005-2009, 2010-2014, 2015-2017 are 4.96%, 0.16%, 2.30% and 2.65 respectively (Jibrin, 2013).
According to Central Bank Annual Report, (2015)Â the economic growth of Nigeria was recorded as 1.5 percent in 1972 and it increased as 8.2% in 1988, then it was decreased -1.5% in 2001 due to the ethnic conflict of Nigeria. However it recorded as 7.3% in 2013. Likewise, the budget deficit of Nigeria in 1959 was recorded 0.03% to gross domestic product and it was increased as 23% to GDP in 2012. However, the budget deficit was declined to 13% in 2014. In a report by World Bank, (2013); Nigerian economic statistics reveal a puzzling contrast between rapid economic growth and quite minimal welfare improvements for much of the population. Annual growth rates that average over 7% in official data during the last decade place Nigeria among the fastest growing economies in the world. This growth has been concentrated particularly in trade and agriculture, which would suggest substantial welfare benefits for many Nigerians. Nevertheless, improvements in social welfare indicators have been much slower than would be expected in the context of this growth. Poverty reduction and job creation have not kept pace with population growth, implying social distress for an increasing number of Nigerians. Progress toward the fulfilment of many of the Millennium Development Goals has been slow, and the country ranked 153 out of 186 countries in the 2013 United Nations Human Development Index.
The trends in macroeconomic management during 2011-2012 showed a positive relationship. The Government has reined in the excessive fiscal expansion of 2010. The general government deficit (including budgets, extra budgetary funds, the fuel subsidy, and net accumulation in the Excess Crude Account) was reduced from an estimated 5.7% of GDP in 2010 to 2.2% in 2011 and a projected 1.9% in 2012. In this context, the Excess Crude Account (ECA) balance increased from negligible levels at the end of 2010 to an estimated US$ 8.6 billion in 2012. This is still far less than the US$ 22 billion that the country had accumulated on the eve of the world financial turmoil in 2008. Two primary factors prevented a more rapid increase in the ECA balance during the time of generally strong oil prices in 2011-2012. In 2011, a major increase in fuel subsidy payments (4.6% of GDP) limited the accumulation of the ECA.
In 2012, the Government succeeded in reducing fuel subsidy obligations significantly, but a decline in oil output and revenues tightened the budgetary position of the country. Nigeria’s balance of payments position has strengthened along with oil prices and the improved management of fiscal policy. Since September, 2011, the balance of payments has been in surplus most of the time, allowing the Central Bank to build its foreign reserve position from US$ 32 billion naira in mid-2011 to US$ 49 billion by April, 2013. Foreign inflows to the Government bond market have been a contributing factor to a stronger BoP surplus in 2012 and early 2013. Portfolio investment inflows by official data amounted to US$ 17 billion in 2012, in contrast to US$ 5billion in 2011. While these inflows have helped strengthen the balance of payments and reserve position of the country, they also pose new risks. Following a balance of payments shock, these inflows could be expected to reverse very quickly, thereby even magnifying the BoPswing.
In the absence of an oil price shock, Nigeria’s short term macroeconomic outlook looks generally strong. The foreign inflows and balance of payments surplus should continue at the existing exchange rate. The macroeconomic policy stance should also succeed in reducing the pace of inflation in 2013. The Government thus has a prime opportunity to make major progress on key reforms and public investments associated with the Transformation Agenda for job creation, diversification, and more effective governance. Given the continuing trend of slow output growth in the oil sector, however, the budgetary situation of the country should remain rather tight (World Bank, 2013).
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Modern fiscal thinking underscores the importance of deficit budgeting as a potent instrument of stabilization but modern fiscal practice demonstrates that the success of this instrument predicates on its judicious use by the government. The success of a stabilization policy instrument can be generally assessed by its ability to smoothen-out fluctuations that usually occur in the economy. Hence, the use of the alternative terminology countercyclical fiscal policy is not uncommon. Very few countries have been successful at adopting this policy, especially deficit budgeting, as remarked in Encyclopaedia (1998):
“Experience with countercyclical fiscal policy has been disappointing; in many cases, the lag between identifying the problem and fiscal response has been too long, with the result that a fiscal boost coincided with the next boom while a contraction might coincide with the next recession. Fiscal policies that were intended to be countercyclical could end up exacerbating the original problemsâ€.
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The prominent danger associated with a persistent use of deficit budgeting as a countercyclical instrument is the escalation of the debt stock of a country. High unstabilized debt can lead to vicious circles that make the conduct of fiscal policy extremely difficult because the government must issue more debt or run a surplus to pay the interest on the existing debt. This shows an undesirable mutual-reinforcing relationship between budget deficit and government debt, which unambiguously has serious implications on the growth of the economy if not properly checked. One of the greatest challenges that confronts Nigeria as a developing nation is the need to effectively coordinate its fiscal policy in the face of a rising external debt created by past budget deficits. A sizeable proportion of the country’s annual budget sinks into this seemingly non-productive expenditure. The implication of this is the diversion of resources which were originally meant to promote the objectives of economic growth and development to debt servicing. The problem has deteriorated to the extent that the country seldom pays the full annual interest due on loan. Each year the deferred debt service earns additional interest that contributes to the astronomical growth of the outstanding debt.
According to Central Bank Annual Report, (2015) the economic growth of Nigeria was recorded as 1.5 percent in 1972 and it increased as 8.2% in 1988, then it was decreased -1.5% in 2001 due to the ethnic conflict of Nigeria. However it recorded as 7.3% in 2013. Likewise, the budget deficit of Nigeriain 1959 was recorded 0.03% to gross domestic product and it was increased as 23% to GDP in 2012. However, the budget deficit was declined to 13% in 2014.In the real world, the relationship between the budget deficit and economic growth were studied by (Al- Khedair, 1996; Ghali, 1997; Fatima et. al., 2011; AbdRahman, 2012; Fathima et. al., 2012;Edame and Okoi, 2015). In these studies, they found the mixed results about the relationship between budget deficit and economic growth.
It is against this background that this paper tends to examine the impacts of budget deficit on Nigeria economy.
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1.2 Statement of the Problem
The budget deficit in Nigeria has recorded more deficits in her budget over the years and also the economy has an unhealthy growth rate even to recording deficit in some of the years. Most importantly, the successive governments in Nigeria have devised many strategies and means to control the unhealthy rise in the budget deficit and improve the economy such as in year 2009, there were initiative to spend less on salaries, the establishment of monitoring committee who would inspect project and further confirm proper utilization of funds before disbursement and strict orders that disbursement should be made based on proper utilization of previous ones, reduce importation and improve on homemade goods and so on. Despite these measures, the budget deficit continues to be on the increase and the economy keeps fluctuating.
1.3 Objectives of the Study
The broad objective of this study is to investigate econometrically the impact of budget deficit on Nigerian economy. The specific objective is
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1.4 Research Question
The following research question will guide the study.
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1.5 Research Hypotheses
H 01
H 02
H 03
1.6Significance of the Study
This study is relevant since it will inform the policy makers in Nigeria the nature of the relationship between government budget deficit and its impact on the nation’s economy where in no small measure will aid in appropriate fiscal policy measure.
The research work will provide insight to the policy makers in making policies that is related to budget deficit and the entire economy. Furthermore it will contribute immensely in developing the analysis of budget deficit on macroeconomic variables and serve as useful platform tool in policy making. The study will be useful to future researchers who might be working on the topic or other related topics.
1.7Scopeof theStudy
In any research study of this nature, there is normally the zeal to touch as many areas as possible which are connected to the various needs of such study. However, this study will investigate the impact of budget deficit on Nigerian economy covering the period of 1970 to 2016.
1.8 Organization of the Study
This work will be organized in Six (6) chapters:
Chapter 1 of this study would introduce the problem statement, objective and described the specific objectives addressed in the study as well as design components while chapter 2 presents a review of conceptual literature on the impact of budget deficit in the Nigerian economy.
Chapter 3 presents theoretical literature review, empirical literature review, limitations of previous studies and theoretical framework while chapter 4 presents research techniques, model specification, method of data analysis and sources of data and collection
Chapter 5 contains an analysis of the data and presentation of the results while chapter 6 offers summary findings, policy recommendation, limitations of the study and indications for further research.