There are two powerful tools our government and the Federal Reserve use to steer our economy in the right direction: fiscal and monetary policy. Since money is easier to get, people will spend more and businesses will invest more. Noting that the literature has focused on the link between the level of public expenditure and growth, we derive conditions under which a change in the composition of expenditure leads to a higher steady-state growth rate of the economy. Fewer people will be hired because there is less demand. A strong fiscal outlook is an essential foundation for a growing, thriving economy. Impact of fiscal policy on Nigeria economic growth within the period of 1981-2016.
In this case, the causal effects of fiscal policy can be obtained as the least-squares estimates of δ h in regressions of the form: 2. Higher income tax discourages individual from working for long hours or even searching for jobs. Fiscal consolidation that concentrates on the expenditure side, especially transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation. When the economy contracts, tax receipts automatically decrease because incomes decrease. Thus, seemingly productive expenditures, when used in excess, could become unproductive.
One major weakness of the study was that it omitted impact of important variables such as education, health care and public order and security. Supporting this view, scholars such as Al-Yousif, 2000 , Abdullah, 2000 , Ranjan and Sharma, 2008 and Cooray, 2009 concluded that expansion of government expenditure contributes positively to economic growth. Results and Discussions Descriptive statistics involve the use of mean, median, maximum and minimum value to evaluate the selected variables. As expected, all the economic services expenditure has positive relationships with economic growth suggesting that a growth in budgetary allocations to this sector will certainly drive economic growth. It broadly concludes that fiscal policy could play a fundamental role in affecting the long-run growth performance of countries.
The efficacy of fiscal policy in improving economic conditions in the long run is, however, a controversial issue and needs further investigation. The expenditure pattern of Nigeria has been on the increase. This process is called open market operations. If the economy is heading into a recession, a central bank will increase the money supply, which is expansionary policy. Unemployment and poverty is also a serious concern in the country.
Recognising the shortcomings of traditional procedures, this study adopts modern econometric techniques to identify the effects of fiscal policy on macroeconomic activities. Similarly, expenditure on infrastructure such as roads, communications, power, reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth. The size of the economy is the same whether people choose to produce and consume private goods angora sweaters or public goods army uniforms. Government bonds will be perceived as net wealth only if their value exceeds the capitalized value of the implied stream of future tax liabilities. When the government is exercising its powers by lowering taxes and increasing their expenditures, they are practicing. State-dependent multipliers yield a boost in output that is only one-third or one-quarter of the boost predicted by linear multipliers, which do not account for the stage of the business cycle.
Tapering from implementation assumes that the effect of pre-announced fiscal tightening is not offset by monetary policy or other factors in anticipation of implementation; tapering from announcement assumes that the effect is at least partly offset. Lesson Summary Let's review what we've learned. Ezirim and Muoghalu 2006 investigated the extent to which factors like population growth, urbanization effects and taxation affect the size of public expenditure in less developed countries like Nigeria; and concluded that inflation constituted the most important factor that accounted for changes in government financial management. In 2008 the inflation rate reverted to double digit - 11. The required affects the money supply by regulating how much money banks must hold in reserve.
The overall result however indicates that the data fits into the regression model since the regression model for the entire data put together is significant at 0. Despite the lofty place of fiscal policy in the management of the economy, the Nigerian economy is yet to come on the path of sound growth and development. Interest costs, however, are not investments in programs that build our future. We employ historical data, recent cross-section data and newly constructed public investment series. A cut in government spending may hurt Barry's business, because there will be less money in people's pockets to spend at his store, possibly from being laid off. Offurum 2005 in an extensive study investigated the impact of public expenditure on economic growth. It's the Fed's primary policy tool because it can affect spending and interest rates, as we will see later.
If Barry and other business people don't expand their businesses, they won't hire new employees, who will then have less money to spend. The government should also curtail non-productive expenditures. Optimal fiscal policy in Pakistan and in other developing countries plays a pivotal role in growth process and, hence, serves as a vital instrument for economic growth. Where is the actual equilibrium point for the economy? This topic has been hotly debated for decades, and the answer is both. The implication is that less percentage of the total expenditure is spent on capital project which creates job in the economy. This number is obtained by applying the same fiscal impulse —1. Also, programs of unemployment insurance and public assistance help to ease the burden of tough times on households.
Given that many if not most changes in fiscal policy are made in reaction to current or expected cyclical conditions, a naïve regression of Δ y t+h on all changes in fiscal policy would lead to inconsistent estimates of the parameter γ h. Where the total demand of households, businesses, and government—C + I + G—equals their production. Thereafter, it started rising again and reached N5,241,667m in 2010. According to these economists, government spending may crowd out private investment. A draft of the paper is available from the authors upon request. If the Federal Reserve wants to increase the money supply, it can decrease the amount of reserves required, and if it wants to decrease the money supply, it can increase the amount of reserves required to be held by banks. The study made use of ex-post facto research design.
Similarly, in an overheated economy, the government could increase taxes and decrease spending, if it wanted to dampen growth and enrage voters. If a government wants to stimulate growth in the economy, it will increase spending for goods and services. Using just one method may not be the best idea. Proponents of minimal government spending, however, are of the opinion that high government spending do crowd out private investments and hence, undermine economic growth. It is on this background that this study would investigate the impact of fiscal policy on the economic growth of Nigeria. Second, the multiplier will boost the effect of an increase or reduction in taxes or spending. The Near-Term Growth Impact of the Tax Cuts and Jobs Act.