CHAPTER ONE
INTRODUCTION
Background to the Study:
The relationships between government budget deficits and macroeconomic performance have received tremendous attention amongst researchers and policy makers around the globe. Persistent increases in budget deficits have assumed greater height in many emerging economies like Nigeria (Oladipo and Akingbola, 2011). However, evidence has shown that government budget deficit has been an issue of discuss in Nigeria because of the persistent increase recorded since 2000 till date as shown on the figure 1 below. For example, budget deficit was about N 2 billion and N 3.9 billion in 1980 and 1981 respectively. In 1986, it rose to N8.2 billion and later fell to N5.8 billion in 1987. Notwithstanding the significant recorded fall from 1987 to 1999, between 2000 and 2004, there was an amazing increase which led to a record of about N 101 and N 609.2 billion in 2006 and 2007 respectively. However, considering the international financial crisis that eroded world economy in 2008, its ugly consequence which result to a sharp fall in demand for the nation’s crude oil, witnessed N0.56 trillion increases which stand to be over 2.5% of GDP. In addition, during the 2009 and 2010 fiscal years, Nigeria recorded about N249 billion and N1.1trillion respectively. Thus, in 2011 and 2012, it rose from N9, 152.5 billion to N9, 905.6 billion respectively (NBS, 2012). However, according to Keynesian theory on budget deficit, there is nothing wrong in government borrowing if it is properly channeled to boast economic performance of a country (Olusoji and Oderinde, 2011).
The development of deficit financing is often traced to adoption of the Keynesian inspired public expenditure which Nigeria adopted to motivate economic performance. Keynes recommended deficit spending to moderate or end a recession. To him, when an economy is recording high unemployment, an increase in government purchases will help a market for business output thereby creating income which through multiplier effect encourages the demand for business output. The policy of deficit spending has however posed challenges to the Nigeria economy with regard to its effectiveness and the accumulation of debt, the justification of growth notwithstanding (Anyanwu and Oaikhenan, 1995; Ogboru, 2006).
Persistent deficits were perceived to have adverse effects on the macroeconomic indicators. Various governments having the power to exercise a lot of influence over economic activities and budget deficit being their prominent instrument felt that the deficits have to continue to stimulate the economy. In 1986, the government introduced SAP with the hope that with restructuring of the economy, there would be reduction in the deficit spending. But this appears not to have been achieved as the deficits continue to escalate on yearly basis. The consequences of such deficit spending on many macroeconomic variables cannot be underestimated (Oladipo and Akinbobola, 2011). Over the years expansionary monetary policy has been pursued together with rise in private and public consumption and growth of the internal and external debts. All these have acted to exacerbate the annual government deficits. Hence, statistics in Nigeria showed that, the gross federally collected revenue registered barely N633million in 1970 surged through N4.5billion in 1974 to slightly above N15billion in 1980. The disparity between government revenue and expenditure generated enlarged deficit in Nigeria. And this has made budget deficit to oscillate between 3% and 9% in the period (NBS, 2012).
Attempts to grow the Nigerian economy has created a situation where the nation has become frequently used to large deficit, which has over the years resulted to sale of government bonds and borrowing (domestic and foreign) in order to meet up with the required expenditure. The magnitude of nominal expenditure of the government which recorded N839 million in 1970 leapt dramatically to about N5 billion in the same 1970; and this further rose to over N14 billion. Indeed, expenditure grew annually at the rate of about 70% during 1970-1980, and since then till the present year, the deficit spending has been identified in Nigerian economy. The federal government of Nigeria total expenditure was N4.7 trillion in 2012 and the 2013 total expenditure was N4.92 trillion. (i.e. about 5% rise over the 4.70 trillion in 2012). These rapid growths have been observed to be enhanced by the huge increase in oil revenue (MTEF and FSP, 2010).
This increase in oil revenue has effect on the recurrent expenditure. Evidence has shown that Nigeria’s recurrent expenditure is more than what it should be. This suggests that there is need to cut down on recurrent expenditure: the over-head cost of running Ministries, Department and Agencies (MDAs), to reduce the budget deficit to a manageable level of 3 percent of GDP, while boosting infrastructure investment to create jobs. Sanusi (2011) stated that, it will be historically difficult to stabilize the macroeconomic variables in Nigeria, if large proportion of the money borrowed to finance deficit is spent on consumption instead of investment. Furthermore, the current situation where recurrent budget takes on entire 75 percent of total budget could not support the type of aggressive capital development that Nigeria yearn for. (Iwuala, 2011). The 2013 recurrent expenditure is over N2.41 trillion, amounting to over 68.7% of total expenditure. Although, recurrent (non debt) expenditure fell from 71.4% in 2012 to 68.7% in 2013, the ratio of capital to recurrent over the years has not been encouraging. Busari and Omoke (2007) opined that the extent, to which the economy can be stabilized particularly in the short to medium term, will depend largely on the fiscal behaviour of the government.
Be that as it may, lack of fiscal discipline poses a threat to macroeconomic stability in Nigeria. Thus, large budget deficits overtime are mostly explained as a consequence of corruption ranging from planned political decision order than the resultant external shock or reactions on prevailing internal economic situation as stipulated by Sheneko, 1993; Olomola, 2000 and Obadan, 2003. In view of the above, the understanding of the effect of budget deficit on economic performance in Nigeria becomes paramount.
- Statement of the Problem: