Impact of Fiscal Policy on the Manufacturing Sector of the Nigerian Economy
Objectives of the Study
The main objective of this study is to examine the impact of fiscal policy on the performance of the Nigerian manufacturing sector. Other specific objectives are:
- To determine the impact of Company Income Tax Rate on the growth of the Nigerian manufacturing
- To examine the significance of government expenditure on the growth of the Nigerian manufacturing
- To examine the relationship existing between Federal Government Domestic Debt and Nigerian Manufacturing.
- To recommend policy options based on the results or findings of this study
REVIEW OF RELATED LITERATURE
- Fiscal Policy
The term fiscal policy has conventionally been associated with the use of taxation and public expenditure to influence the level of economic activities. The implementation of fiscal policy is routed through government budget.
A budget is a projection of the flow of funds and how such funds will be spent to achieve valued objectives, which may be of individuals, households, business firms, government and institutions.
Fiscal policy is one of the basic macroeconomic phenomenon. In other to achieve macroeconomic goals such as full employment, price stability, sustainable growth and balance of payment, etc. which is not automatic but requires policy guidance, government has to make deliberate move through the use of fiscal and monetary policy as instrument to achieving the macroeconomic targets.
Therefore, a budget is a financial plan, which typically contains a detailed estimate of expenditures, revenues and surplus or deficits for the present and succeeding fiscal years.
Both fiscal policy and budget reflect and shape a country’s economic life. In fact, the most important aspect of a public budget is its use as a tool in the management of a nation’s economy (Omitogun and Ayinola, 2007).
Peter and Simeon (2011), define fiscal policy as the process of government management of the economy through the manipulation of its income and expenditure and to achieve certain desired macroeconomic objectives.
Central Bank of Nigeria (2011), defines fiscal policy as the use of government expenditure and revenue collection through tax and amount of government spending to influence the economy.
Geoff (2012) contended that fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and job creation. It is the government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government in an effort to control the economy. Fiscal policy is the means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy.
Various researchers have submitted that fiscal policy goals include the following: increasing employment opportunities; attaining full employment; stabilization of domestic prices; promoting economic growth and development through industrialization; achieving stable exchange rate ; and increasing the rate of investment in the country (Anyanwu, 2004, Omitogun and Anyinola, 2007, Abeng 2009; CBN,2010 and Ogbele, Sonny and Isaac, 2011).
Sanni, (2012), sees fiscal policy as the budgetary policy of the government relating to taxes, public expenditure, public borrowing and deficit financing. Thus, fiscal policy aims at stabilizing the economy.
Again, Afam, (2012) maintained that fiscal policy is the aspect of government policy dealing with the raising of revenue through taxation and other sources and deciding on the level and pattern of expenditure for the aim of influencing economic activities.
Leslie (2018), defines fiscal policy as the means by which a government adjusts its spending level and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply. These two policies are used in various combinations to direct a country’s economic goals.
The Nigerian Manufacturing Sub-Sector
Manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge in either creation of new commodities or in value addition (Adebeya, 2010).
Manufacturing involves the conversion of raw material into finished consumer goods or intermediate goods. Manufacturing can also be seen as the process of converting raw materials, components, or parts into finished goods that meet a customer’s expectation or specifications. Manufacturing commonly employs a man-machine setup with division of labour in a large scale production.
This section is aimed at model specification and estimation method as well as the description of the material sources used in the analysis. The rest of this chapter comprises of the nature and sources of data, model specification and estimation technique.
Nature and Sources of Data
The data that will be generated for this study covers the period of 1980 to 2017, which is specifically secondary in nature. This is sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, Annual Report and Statement of Accounts for various years.
The empirical regression model specified below following the hypotheses stated in chapter one of this work shows the relationship between fiscal policy and the Nigerian manufacturing sub-sector.
Using the variables as defined below:
PRESENTATION/INTERPRETATION OF REGRESSION RESULTS
This section presents empirical regression estimates of the impact of fiscal policy on the manufacturing sector of the Nigerian economy as specified in this project.
This will follow systematically by presenting the result and interpretation of the result. Dependent Variable: LOG(IMS)
Method: Least Squares
SUMMARY, RECOMMENDATIONS AND CONCLUSION
This study examined majorly the impact of fiscal policy on the manufacturing sector of the Nigerian economy which covers the period of 1980 to 2017.
From the empirical analysis carried out in this study, it was found out that fiscal policy, that is Government Expenditure and Company Income Tax do not have significant relationship with the manufacturing output, while Federal Government Domestic Debt Outstanding showed a negative and statistically significant impact on the manufacturing sector. This therefore triggered the non-performance of the manufacturing sub-sector of the Nigerian economy.
The decline of the manufacturing sub-sector could be attributed to the inherent unstable enabling environment in Nigeria. This is not unconnected with Nigeria political instability and fraudulent practices in our political system. For example, government expenditure has been increasing over the years but the actual fiscal infrastructure does not tally with the expenditure quoted. This has negative impact on the growth of the manufacturing sector.
Fiscal policy plays an important role in the development of the manufacturing sector. It determines the extent government spends money and the rate of tax charged on the productive sector of the economy.
It was found in the empirical estimation that Federal Government Domestic Debt Outstanding (FDDO) over the years, at least for the period under study (1980-2017), has a negative relationship towards the growth of the manufacturing sub-sector. This suggests that Federal Government Domestic Debt Outstanding (FDDO) has depressed the manufacturing sector. The study reviewed that fiscal policy pursued by government has not achieved its targeted aim particularly in the areas of promoting sustainable economic growth in the country.
The empirical review showed that Company Income Tax and Government Expenditure assumed a positive relationship in the model which suggests that an increase in tax rate will increase the level of manufacturing output. This is contrary to a priori expectation of the expected relationship between company income tax and manufacturing growth rate.
Based on the empirical evidences and the findings of this study, the following recommendations will be paramount to the government, researchers and students of this field of study towards the restatement of the manufacturing sub-sector of the Nigerian economy.
- The effect of governmental and political factors exacted much influence on the performance of themanufacturing sub-sector of the economy.
- Governmenttherefore should channel her expenditure into the provision of direct physical structure that will be able to stand the competitive nature of both domestic and global market.
- Increase in company income tax will increase the constraint or adverse structural effects on themanufacturing sector and the economy. Therefore, government should draw a policy plan that will subsidize for the manufacturing sub-sector rather than increase tax.
- Government should also encourage the manufacturing of local resources as input in the productionprocess of the manufacturing sector of the country. This will reduce the level of high dependency on imported factor inputs, which will also reduce the cost of production.
- Fiscalpolicy may not be effective without the proper co-ordination of monetary
Therefore, government should draw a policy plan that will synchronize both policies in other to stimulate the growth of the economy.
In general, until macroeconomic policies are effectively implemented and particularly geared towards enhancing the overall productivity of the economy, the beneficial effects cannot be appreciably felt in the country.
The achievement of sustainable growth in the manufacturing sub- sector and the economy as a whole through fiscal policy in Nigeria has remained a mirage. Despite the substantial increase in government expenditure over the years, the rate of growth has been very slow and sluggish. The poor performance of fiscal policy has been ostensibly blamed on the problems of policy inconsistencies, high level of corruption, wasteful spending and poor policy implementation.
To put the manufacturing sub-sector and the Nigerian economy as a whole along the path of sustainable growth and development, the government must put a stop to the unproductive foreign borrowing, wasteful spending and uncontrolled money supply and embark upon specific policies aimed at achieving increased and sustained productivity in all the sector of the economy.
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