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ASSESSI NG THE EFFECTS OF GOVERNMENT DEFI CI T SPENDI NG ON THE NI GERI AN ECONOMY SECTI ON 1.0 1.00. I NTRODUCTI ON A government deficit spending is when the government spends more than its

revenue-usually this occurs during the fiscal year. From the colonial era until during st

Shehu Shagari Presidency (1979-83), the fiscal year was 1

then

changed

st

st

to 1

January to 31

December.

st

April to 31

March. It was

Government units budget can

be

balanced when planned expenditure equal planned revenue. When planned revenue is

more than planed expenditure it is surplus. It is deficit when planned revenue is less

than planned expenditure. When it is surplus, the surplus is held as revenue reserve. When it is deficit the government has to source for other ways of raising funds to make

up the deficit. Burda and Wyplosz (1995) caution that annual “deficits differs from debt

which is an accumulation of yearly deficits”.

1.01. TYPES OF DEFI CI T SPENDI NG When a government spends more than its revenue, deficit spending results.

There are a number of types of deficits spending such as:

1.01.1 REVENUE DEFI CI T:

A revenue deficit occurs when the amount of revenue

received falls short of amount of expected revenue. For example, is the projected

revenue for 2012 is N500 billion and, the actual revenue raised is N490 billion, there is

revenue deficit of N10 billion.

1.01.2 FI SCAL DEFI CI T:

A fiscal deficit comes about as a result of revenue deficit.

The government projects for its income and expenditure for the fiscal year and the

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expectation is to get certain net amount of funds for its operations. At the end of the

fiscal year, if actual expenditure exceeds the projected revenue, the government has a

fiscal deficit. Sometimes unexpected expenditures such the occurrence of a natural

disaster cause the government to undertake extra budgetary allocation. When this

happens, deficit spending occurs or if already there, it can be exacerbated. Fiscal deficit

is sometimes referred to as total deficits (Burda and Wyplosz (1995).

1.01.3 PRI MARY DEFI CI T:

Burda and Wyplosz (1995) define primary deficit as “the

difference between current government spending

on goods and services and

total

current revenue from all types of taxes net of transfer payment”. As the government

has a fiscal deficit, it needs to borrow from CBN and other lending institutions to cover

its expenditure. Interest on the borrowing has to be paid. Interest on borrowing has to

be paid and it is subtracted from the fiscal deficit which is also called the primary

deficit.

1.01.4 CYCLI CAL DEFI CI T AND STRUCTURAL DEFI CI TS: Market economies are subject to fluctuations in the level of economic activities.

These fluctuations form what has been known as business cycle which has phases. The

first phase is when the economy is expanding with economic activities with increase in

output of goods and services and growths in employment. The period is called the

upswing and the reaches the peak. On reaching the peak it starts to go down called the

period of downswing and reaches the lowest point called the Trough when it starts on

upswing again. The diagrammatic illustration is shown under theoretical foundations.

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At the lowest point in the cycle, there is high level of unemployment resulting in

reduction in tax revenue for government while the expenditure while the expenditure

remains high. Conversely, at the peak (boom) of the cycle, unemployment is low with

increasing tax revenue and decreasing social spending. The borrowing required at the

lowest point is called cyclical deficit. It is believed that cyclical deficit will be off-set by a

cyclical surplus that will occur at the peak of the cycle.

The Structural Deficit is the deficit that remains after the business cycle because

the general level of government spending exceeds the prevailing tax levels.

1.02. ECONOMI C EFFECTS OF DEFI CI T SPENDI NG Some economic effects associated with government’s deficit spending are:-

1.02.1. I NCREASED BORROWI NG:

The government has to borrow mainly from the

Central Bank and sometimes from other sources. In Nigeria, the Central Bank of Nigeria

(CBN) may issue money market

instruments such

as Treasury Bills and

Treasury

Certificates (the issuing of Treasury Certificates was discontinued in 1996). Long term

Bonds are also issued by Debts Management Office (DMO). The CBN also finances

government deficit spending by ‘ways and means’ which is raising loan for government

by way of issuing currency notes. Government borrowing is from Domestic and external

sources.

1.02.2. HI GHER DEBT I NTEREST PAYMENTS Issuing of Treasury Bills and Bonds carries with it the problem of repayment of

principal and interest payments. This is because all borrowings have to be repaid with

interest.

3

1.02.3. HI GHER TAXES AND LOWER SPENDI NG:

As deficit spending increases the

government may be constrained to increase tax and reduce spending in order to reduce

deficit. Sometime this action may bring about discontent and restiveness among the

citizens and also cause disincentive to economic efforts.

1.02.4. I NFLATI ON:

When the government finances its deficit spending through the

Central Bank creating money especially by ‘ways and means’ inflation results. We recall

the monetarists’ view that inflation is always and everywhere caused by government

and that inflation is a monetary phenomenon. Ways and means in particular increases

Money Supply without any production of goods and services.

1.02.5. CROWDI NG OUT EFFECT:

Increased

government

spending

is

met

by

increased borrowing. The more the government borrows, the less that is left for the

productive sector to borrow. This results in crowding out of the private sector.

1.03. STATEMENT OF PROBLEM The

relationship

between

government

deficits

spending

and

macroeconomic

variables such as GDP, Money Supply, Exchange Rate, Inflation represents one of the

most

widely

spending

discussed

may

be

issues

necessary

among

especially

macroeconomists.

in

times

of

Some

economic

argue

that

downturn

deficit

when

the

government needs to raise the level of Aggregate Demand. Some express the view that

deficit

spending

government.

can

create

major

Literature is replete

economic

with

problems

these discordant

for

the

views.

nation

This

and

study

the

is thus

undertaken to examine the effects of government deficit spending on the Nigerian

economy. Most studies in the literature have looked at deficit spending on different

4

aspects of the economy such as effects on Interest Rate, on inflation and on GDP. This

study is trying to expand the variables to include effects on GDP, Inflation, Money

Supply, Exchange Rate and Interest (lending) rate.

1.04. OBJECTI VES OF STUDY For past decades the government spending in Nigeria has been that of deficit.

The main objective is then to find out the effects of the persistent deficit spending on

the economy. The study will try to x-ray the effects of the persistent spending some

macroeconomic variables such as GDP, Inflation, Money Supply, Interest (Lending) Rate

and Exchange Rate.

1.05. SI GNI FI CANCE OF STUDY The study will try to bridge the discordant views seen in the literature by using

variables in the study more than the number taken in any other single study. The

results of the study will hopefully enlighten the government on possible ways of finding

its way out of the unending deficit financing quagmire. For example, Karel (no date)

said that findings of a study in Czech Republic repressed the view that deficit spending

are unambiguously bad for economic growth. Researchers will also find the study

rewarding and enlightening.

1.06. STATEMENT OF HYPOTHESES Two hypotheses are proposed:

Ho (Null)

Hypothesis

Government

Deficits

Spending

has

no

significant

effects

on

macroeconomic variables of GDP, Inflation, Money Supply, Exchange Rates and Lending

Rates.

5

H1 (Alternative) Hypothesis: Government deficits spending has significant effects on macroeconomic variables of GDP, Inflation, Money Supply, Exchange Rates and Lending

Rates. Ordinary Least Squares (OLS) analysis will be applied to isolate the effects on

each of these variables but this has not necessitated proposing separate hypothesis on

each variable.

1.07. SCOPE OF STUDY The study is limited

macroeconomic

variables

to the

namely

effects of

GDP,

government

Inflation,

Money

deficit spending

Supply,

on

Exchange

five

Rates,

Lending Rates. The list is not exhaustive but the researcher is of the view that they are

very important variables that

can

assist make informed

opinion

on

the effects of

government persistent deficit spending on the Nigerian economy. The study also limits

itself to the period when Structural Adjustment Programme (SAP) was introduced in

1986 to 2010. Secondary data of time series for the variables are collected as in

chapters

3

with

Government

Deficit

spending

as

dependant

variables

and

GDP,

Inflation, Money Supply, Exchange Rates and Lending Rates as independent variables.

1.08 PLAN OF STUDY The study is arranged in chapters. Section 1 deals with the introduction and all

the points discussed so far. Section 2 is on Review of literature and theoretical issues,

Section 3 deals with methodology of study and model specification. Section 4 is on data

presentation, analysis of data, interpretation and discussion while Section 5 concludes

the study with recommendation(s).

6

SECTI ON 2 2.0

REVI EW OF LI TERATURE AND THEORETI CAL I SSUES Karel

(no

date)

writing

on

the

Czech

Republic

economy,

said

that

many

developing (and some possibly transitional) economies experience high deficit spending

on

the

part

of

governments,

which

spending

has

caused

many

macroeconomic

problems. Among the problems are high level of inflation, highly indebted economies

(high domestic and external debts), Current Account deficits (disequilibrium in external

balance of foreign trade) and retarded economic growth. He however opined that

macroeconomic problems and instability ‘per se’ but on how the deficit are financed.

Deficit spending can be financed by selling of instruments such as Treasury Bills and

Bonds. The more the government wants to finance its deficits, the less will remain for

the private sector. This gives rise to the crowding out of the private sector which is the

real sector. The government may finance its deficits from external borrowing which

over time will worsen the balance of payments position, increase foreign debt with

repayment problems. It will also lead to depletion of external reserves and often results

in foreign currency crisis leading to World Bank and IMF coming in to force down

unwanted policies on the nation. Nigeria experienced this for decades up to 2005 when

it exited the debt holes of Paris Club and London Club.

Printing of Paper money called “ways and means” in Nigeria has caused high

level of inflation. Privatization and commercialization to some extent has been applied

with questionable results.

7

2.01 GOVERNMENT DEFI CI T SPENDI NG AND ECONOMI C GROWTH I N NI GERI A Kustepeli

(no

date)

studied

the

effect

of

nominal

government

deficits

on

economic growth (GDP) in Turkey. He made extensive study of literature such as

Cebula (1995), Ludvigson (1996), Ahking and Miller (1985) among others whose studies

showed that “when government deficits are financed by monetary expansion, the result

is usually inflation”. The reason is because government “deficits lead to increase in

inflation”. He added that high inflation rate has adverse effect on the economy and

results in steady fall in G.N.P. Having accepted the results of the literature he reviewed,

he carried out his own tests using co-integration and causality tests. He came to the

same conclusion that when sustained governments deficit spending are financed by

increase in the monetary base, inflation becomes an undeniable outcome which for

prolonged periods adversely affect economic activities and therefore GNP. His study

emphasized on deficits financed by increased monetization (ways and means) and did

talk about other factors.

Back here in Nigeria, a number of studies have been done to determine the

effects of prolonged government deficit spending on the economic growth. Dalyop

(2010) did his study to determine the effects of fiscal deficits and the growth of

domestic output in Nigeria. His study is preceeded by extensive review of literature. For

example, he referred to Akor (2001) who observed that government expenditures grew

large as bureaucracy grew. But when there was glut in the crude oil market, revenues

declined “but government was reluctant in reducing the bloated expenditures that had

resulted during the oil boom. Government then resorted to fiscal deficits as to continue

8

its deficit spending. Dalyop (2010) explains that fiscal deficits occur when government

expenditures exceed revenues and “have become a recurring feature of public sector

financing

in

Nigeria”.

However,

Keynesian

demand

side

economics

justifies

deficit

financing by governments to reflate and economy that is in a recession or depression

(Anyanwu and Oaikhenan (1995) and Ogboru (2006). Dalyop (2010) recounting Asfaha

(2007) and Neaime (2008) noted that fiscal deficits may be caused by inadequate

collection of taxes and heavy government expenditures in infrastructure. Dalyop’s study

stated that most government’s deficit spending is financed by monetization. Using time

series data for the period 1982-2008, he ran a linear regression analysis to show that

government’s deficit spending has a negative though insignificant impact on economic

growth. According to them deficit spending has resulted in heavy borrowing which in

turn has given rise to debt burden and its attendant problems. Aliyu and Elijah (2008)

add

that

the

excessive

government

deficit

spending

has

been

exacerbated

“by

corruption as corruption tends to inflate public expenditure”.

2.02 GOVERNMENT DEFI CI T SPENDI NG, MONEY SUPPLY AND I NFLATI ON I N NI GERI A Omoke and Orunta (2010) studied Budget Deficits, Money Supply and Inflation in

Nigeria. Using inflation as independent variable and budget deficit and Money supply as

dependent variables and with the application of ADF and P-P techniques to test for unit

root, they concluded that there is long term relationship between fiscal deficits, money

supply and inflation.

Onwiodukit (no date) studied fiscal deficits and inflationary dynamics in Nigeria.

Using time series data from 1970-1994, he wanted to ascertain the impact of fiscal

deficits (deficit spending of government) on inflation as well as impact of inflation on

9

deficits spending. In other words he wanted to establish whether it is deficit spending

that causes inflation or the other way round. Using Granger Causality test, his study

says that fiscal deficits cause inflation. He recommended that government should not

only control deficit spending but also the mode of financing the deficits.

Olusoji and Oderinde (2011) in their study of fiscal deficit and inflation Trend in

Nigeria, like Onwioduokit wanted to find out whether deficit spending cause inflation or

is it inflation that cause deficit spending. They used what they called more robust Toda-

Yamama to Granger non-causality test. Their study did not establish any “clear evidence

of causality relationship between fiscal deficit and inflation in Nigeria for the period of

study 1970-2006. Their finding is somewhat close to the finding of Onwiodnokit. The

finding indicate a causality link between deficit spending and inflation but not from

inflation to deficit spending. Olusoji and Oder...