Fiscal Policy and Growth of Real Economic Activities in Nigeria (1980-2016)

Abstract

Several empirical studies have investigated the effect of fiscal policy on various macroeconomic variables such as inflation, debts, interest rates, unemployment and growth (GDP) for diverse economies, using variant methods. This paper examined the influence of fiscal policy on growth of real economic activities in Nigeria from 1980-2016, using 2010 as base year to adjust for price level. Secondary data sourced from Central Bank of Nigeria (CBN) (2016) were analysed. After verifying the stationarity property of the variables, Johansen cointegration test result revealed evidence of long run relationship among public revenues, expenditure, real GDP and inflation. The results from Vector Error Correction Method (VECM) showed that government expenditure positively and significantly impacted real economic activities' growth, but converse was the effect of public revenues on RGDP. The results, therefore, imply that government should cut tax to increase disposable income which has aptitude to enhance real aggregate production in Nigeria. Contribution of this paper to the literature:This study contributes to the existing literature by examining the effect of fiscal policy on growth of real economic activities in Nigeria with particular interest in period after 2008-2009 global financial crisis, using 2010 rebased real GDP.

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“…There is an overwhelming evidence of a positive impact of fiscal policy on economic growth in SSA countries. However, some isolated studies-particularly in Nigeria-provide inconsistent results on the effects of fiscal policy on economic growth (see, e.g., Salako & Oyeleke, 2019;Bodunrin, 2016). In addition, to the best of our knowledge, there is no study in SSA that has used the SVAR and quarterly data to model fiscal policy shocks on economic growth.…”

“…In addition, the choice of the study variables was informed by economic apriori and empirical literature from other studies, except for LCPI which introduces novelty to our study. For example, most empirical literature (Blanchard & Perotti, 2002, 2016Salako & Oyeleke, 2019;Ritcher et al, 2015;and Stoilova & Todorov, 2021), showed that the expected sign for LGDP is negative when reacting to the effect of domestic tax revenue shocks, and positive to government expenditure shocks.…”