Fiscal Instruments and Economic Growth in Nigeria

Abstract

The study investigated the impact of fiscal policy instruments on economic growth in Nigeria for the period 1970- 2015, using time series data obtained from the Central Bank of Nigeria (CBN) statistical bulletin. Cointegration test, Vector Error Correction Model (VECM) and Granger causality test were utilized in the analysis. The variables employed in the investigation include real gross domestic product (RGDP), government recurrent expenditure (GRE), government capital expenditure (GCE), tax revenue (TAR), external debt (EDT), domestic debt (DDT) and total export (TEXP). The results of the cointegration test indicated that long run equilibrium relationship exists among the variables under study. Similarly, the results of the Vector Error Correction Model (VECM) revealed that government capital expenditure (GCE), tax revenue (TAR) and domestic debt (DDT) have negative and significant impact on economic growth in Nigeria. The results also indicated that government recurrent expenditure (GRE) and total export (TEXP) have positive and significant impact on economic growth in the economy. Similarly, the results showed that external debt (EDT) has positive and insignificant impact on economic growth in Nigeria. Furthermore, the result of the Paiwise Granger causality test revealed that unidirectional relationship exists between RGDP and GCE, GRE, TAR, TEXP with causality running from real GDP to GCE, TAR, and TEXP respectively. The result also indicated that causality runs from GRE to RGDP. However, the result showed no causality between EDT and RGDP. The implication of these results is that while RGDP is the major determinants of GCE, TAR and TEXP; GRE is one of the major determinants of real GDP in the Nigerian economy. Therefore, the study recommends that government should expand its recurrent budget expenditures more than its capital budget expenditure in Nigeria, since it has positive and significant contribution to economic growth in the economy. In so doing, economic growth will improve. More so, government should as a matter of urgency review its tax policy in the country, bring in experts free of corruption in the implementation and administration of tax policy in Nigeria. It is only in this way that the contribution of tax revenue to economic growth will positively improve in the economy.

Keywords: Fiscal policy, Economic growth, Cointegration, Vector error correction model, Granger causality