The Effectiveness of Fiscal Policy on Economic Stabilization in Nigeria

Abstract

The effectiveness of fiscal policy in Nigeria over the years has been a matter of great controversy. Thus, this study investigated the effectiveness of Nigeria’s fiscal policy on economic stabilization over the periods 1983–2015. The Auto Regressive Distributed Lag Error-correction model (ARDL-ECM) was employed to take care of short-run dynamics. The fiscal policy variables considered in the study include government expenditure, taxes, government borrowing. Economic stabilization was mirrored with GDP and unemployment level. Over all, the results indicate that both government expenditure and government borrowing has a negative significant impact on unemployment. It reveals an increase in unemployment as government expenditure and government borrowing (public debt) increases. In addition, the outcome supports key conclusion that jointly, government expenditure, government borrowing and taxes have significant positive impacts on gross domestic project (GDP). Consequent upon the findings of the study, we recommend that fiscal policy should be designed in such a way that government expenditure resources are spent on projects that enhance the earning capacity of the low income people and goods required mostly by poor households like education and medical facilities. In addition, there should be re-allocation of capital expenditure so as to enhance employment opportunities for unemployed people. Also, fiscal indiscipline on the part of the government should be curbed while a good, transparent and accountable expenditure system should be put in place.

Keywords: Economic Stabilization, ARDL, Fiscal Policy, ECM, Economic Growth