1.1 Background of the study
Price stability is one of the fundamental economic objectives that are pursued in all economies of the world. Price stability involves maintaining general price level at low and stable rate of inflation. That is, a situation in which general price level of goods and services is immured from sudden and persistent rise as a result of some dynamics in the economy, Neith and Paul (1986). In spite of the importance of the goal of maintaining price stability, inflation has ravaged most economy, especially those of the third world countries in the last decade. Jerome, (2003:2) observe that in the last 20 years, a more than 50 percent inflation rate has bedeviled the Nigerian economy. Macroeconomy tools of monetary and fiscal policies are among the key weapon employed in the pursuit of major economic goals of which maintaining economically desirable inflationary rate take a prominent position.
One of the macroeconomic problems confronting Nigeria is the problem of inflation. Since the 1970’s, there has been a continuous increase in inflation rate. It is an economic cankerworm which has eaten deep into the fabric of the country’s economy. Its effect on the economy is so calamitous that the real GDP of the country over the years is stunted. Inflation is a very popular happening in an economy. Opinion survey conducted in India, the U.S.A and other countries reveal that inflation is the most concern of the people as it negatively affects their standard of living (Ahuja 2013). The political fortunes of many political leaders and government in Nigeria and abroad have been determined by how far they have succeeded in tackling the problem of inflation, so much so that some researchers called inflation as “enemy number one”. Inflation is the most hotly debated issues among the macroeconomic variables of the economy. Inflation rate has a great effect on the poor and make the life of the poor very miserable. It is therefore described as anti-poor. It redistributes income and wealth in favor of some, and greatly harms others.
Inflation is the continuous and persistent increase in the general price levels of goods and services. One of the goals of modern government is to control inflation and ensures price stability in the economy. The finance minister in collaboration with the central bank of a country must ensure and manage the budget proposal and growth of money supply in the economy in a way that it does not cause inflation. Inflation occur due to the emergence of excess demand for goods and services relative to their supply of output at a prevailing prices.
In all ramifications, price stability has become one of the most desirable objectives of macroeconomic management. Economists all over the world are unanimous in their affirmation of this position. This is because, frequent price fluctuation, whether persistent increase (inflation) or decrease (deflation), create risks and uncertainties in an economic environment. Fielding (2008) reveals that price instability creates uncertainties about future prices, increases business risks and unanticipated changes in the distribution of wealth. It is important to know that, risks and uncertainties make planning by both consumers and producers difficult, by implication, lead to a fall in the efficiency of the free market in allocating scarce resources and solving other societal and/or economic problems. Whenever prices rise above interest rate of savings, savings is discouraged. This however led to a fall in loanable funds for investment, and consequently, a fall in potential output and employment.
Interestingly, steady and gradual changes in the price level also come with some desired implications. Chiefly among these is its ability to serve as impetus for growth if properly controlled. There is a general believe that at least 3 percent steady growth in the price level in an economy would help boost economic growth. This position is based on the premise that investors are motivated to commit their scarce resources into production of goods and services when they expect a steady rise in the prices of these goods and services. On the other hand, deflation benefits the consumers. It increases their level of demand and consumption and, as a result, increases their standard of living. However, as rightly opined by Berlemann and Nelson (2002), the negative distributional and allocative effects of price instability are typically supposed to dominate the positive ones. There is therefore a need to stabilize prices in such a way that it retains its powers to boost economic growth and employment while ensuring it does not create market risks uncertainties. This has been the target of fiscal and monetary policy instruments which have been jointly administered by most economies today in promoting the macroeconomic goal of price stability.
The Nigerian economic environment is experiencing its own unfortunate share of uncontrollable price fluctuations. Till date, inflation continues to be one of the most challenging of all the numerous economic problems faced the by Nigeria economy.
Kumapayi et al. (2012) attributed Nigeria’s inflation problem to the oil boom of 1970s, and the rise in government expenditure in the wake of the government’s determination to enhance post-civil war reconstruction and development. The implication was a rise in domestic money supply without a corresponding increase in domestic production of goods and services. This adversely affects funds mobilization and disbursement for investment, thereby adversely affecting output and employment. This result is an uncontrollable rise in domestic prices of goods and services. Current available economic indicators, which present her as a poverty engulfed country and an unfavourable business environment, point to this fact.
For the basis of this research, policy implementation which seek to address Nigeria’s inflation problem so as to stabilize price level, by successive government measures (i.e, fiscal and monetary policy) is the fiscal policy.
Fiscal policy, is defined as the use of government expenditure, taxes, borrowing and financial administration to further national economic objectives. Government uses its expenditure and revenue activities to effect desired changes in income, production, prices and employment. These changes concern national economic objectives, which are targets of monetary and fiscal policy and include acceleration of economic growth and development, balance of payments equilibrium, price stability, and reduction of rate of unemployment.
Fiscal policy is the government’s management of the economy through the manipulation of its income and spending power to actualize some desired macroeconomic objectives amongst which are price stability and economic growth (Ozurumba (2012). It is also a deliberate alteration of the government spending and taxation to help achieve desired macroeconomic objectives by changing the level and composition of aggregate demand (AD). This simply means that fiscal policy works through the manipulation of subsidies, exchange rate, checks on the external reserve, borrowing which may be used to finance deficits where the projected expenditure exceed revenue.
Fiscal policy is essentially concerned with manipulating the financial operations of the government with a view to furthering certain economic policy objectives. In other words, it consists of government decisions to vary certain fiscal aggregate such as total government spending and tax revenues as opposed to some other aspects of public finance which are primarily concerned with the effect of specific government expenditures and taxes (Stein 1968). Fiscal policy is majorly measured in terms of government expenditure, tax revenue,government investment, budgeting and debts.
Fiscal policy fosters economic growth and development through a number of different channels. These include the macroeconomic (influence on budget deficit on growth) as well as micro (influence on efficiency of resource use). The question is how precisely do these channels work in developing economies? What kind of revenue and expenditure policies should developing countries adopt to help realize these objectives?
Realistically, fiscal policy is used in gearing the economy towards achieving a variety of economic transformation such as economic development and growth, price stability, reduction in unemployment, external equilibrium as well as income redistribution. Fiscal policy was not generally recognized as important until the birth of Keynessian Economics in the mid-nineteen thirties which enhanced its significance as a policy tool to overcome the economic depression of Western Europe and North America. The threat of inflation in the immediate post-war years and the desire to maintain continuous full employment following World War II has also meant the continued use of fiscal policy in these same economies. In more recent years, however, the general disentrancement over the limited success in the achievement of the above objectives has brought into sharp focus the question of the effectiveness of fiscal policy in relation to other policies especially monetary policy and the consideration as to whether or not the continued heavy reliance on fiscal policy as an economic stabilization tool is desirable (Samuelson 1970).
However, government of Nigeria over the years has not folded its hands; it has adopted several fiscal policy measures to counteract this menace called inflation in order to achieve price stability within the economy, but still the problem has been at increase, which means that despite the government’s position to have minimal single digit inflation, it seems nothing has actually been done. It is for this reason that this study is meant to investigate the impacts of fiscal policy on price stability in Nigeria from 1987 to 2017.
1.2 Statement of the problem
Many attempts being made by the Nigeria authorities to attain higher rate of economic growth and development have generally being accompanied by certain degree of price increase in recent years, the phenomenon developed into several and prolonged inflation and stag inflation. Indeed, it is increasingly being recognizes that a process of rapid economic growth is likely to provoke inflationary pressures. However, whether the problem of inflation in this country is due to mismanagement of fiscal policy tools or structural deficiencies still remain a controversial matter.
During previous decades the problem of inflation and deflation to economic growth and development have been extensively discussed. The problem is not peculiar to Nigeria but has assumed a global phenomenon. The Nigerian economy started experiencing recession from early 1980s that led to a depression in the mid-1980s. This depression continued until early 1990s without recovering from it. As such, the government continually initiated policy measures that would tackle and overcome the dwindling economy. Drawing from the experience of the great depression, government policy measure to curb the depression was in the form of increased government spending (Nagayasu, 2003). According to Okunroumu (1993), the management of the Nigerian economy in order to achieve macroeconomic stability has been unproductive and negative, hence one cannot say the Nigerian economy is performing. This is evident in the adverse inflationary trend, government fiscal policies, rippling foreign exchange rates, the fall and rise of gross domestic product, unfavourable balance of payments as well as increasing unemployment rates which are all symptoms of growing macroeconomic instability. As such, the Nigerian economy is unable to function well in an environment where there is low capacity utilization attributed to shortage in foreign exchange as well as the volatile and unpredictable government policies in Nigeria (Isaksson, 2001).
It is generally agreed worldwide that inflation is socially unjust. Inflation also affects general economic behavior and the pattern of resource allocation. By distorting price relations and undermining general confidence, prolonged inflation tends sector; and thus slackens growth. Furthermore, inflation discourages private saving and encourages speculation among the various economic units. Another consequence is that it result to balance of payment difficulties and reduces the external value. Nigeria being a market economy and therefore having its national economic management strategies largely informed by Neo-classical and Keynesian persuasions have sought over the decide for the solution to this problem through the adoption of the analysis and recommendation of these school of thoughts.
Economic aggregate as; national income, savings, investment and consumption expenditure have been experimental upon to varying degrees with respect to taxes public expenditure, savings campaign, credit controls wages adjustments and all the conceivable anti- inflation measures propensities to consume, save and invest which all combined should determine in general level. All the measure so far adopted were inadequate in solving the problem of inflation in the country. The suffering of masses are unending as daily price surges occur indeed a more for reaching solution to the problem is needed hence, this study seek to find what control has fiscal policy over price stability.
1.3 Research Questions
This research study will contribute to the stock of knowledge by considering the impact of fiscal policy on price stability from 1987 to 2017 in Nigeria. Therefore, the following questions will be examined in this study:
What are the causes of price instability (inflationary trends) in Nigeria?
What is the impact of fiscal policy on price stability in Nigeria?
To what extent has fiscal policy been efficient or not in the achievement of price stability in Nigeria?
1.4 Objective of the Study
The broad objective of this study is to examine the impact of fiscal policy on price stability in Nigeria from1987 to 2017. However, this broad objective is subdivided into the following specific objectives:
To identify the causes of price instability (inflationary trends) in Nigeria.
To examine the impact of fiscal policy on price stability in Nigeria.
To identify the extent to which fiscal policy can be efficient in the achievement of price stability in Nigeria.
1.5 Research Hypothesis
Ho: fiscal policy has no significant impact on price stability in Nigeria
H1: fiscal policy has significant impact on price stability in Nigeria
1.6 Significance of the study
This study aims at making meaningful contribution to the general knowledge and understanding of the impact of fiscal policy on price stability in the economy of Nigeria. The work also intend at arousing interest and to stimulate further research in the area of effectiveness of this instruments in Nigeria.
Finally, it would provide policy recommendations to policymakers on measures to ensure price stability and the growth of Nigeria economy as a whole and would serve as a basis or reference for further research.
1.7 Scope and Limitation of the Study
This study aims at assessing the impact of fiscal policy on price stability in Nigeria (1987 - 2017), taking cognizance of the various episode of it's effectiveness on inflationary trends cum stabilization of the Nigeria economy between the periods under study. Data and information for this study shall be sourced from the CBN statistical bulletin, annual report and statement of account, books, internet among others.
The researcher likely constraints in the course of this research will include; inadequate materials, finance, data sourcing or data inconsistence due to poor nature of information management in Nigeria. In spite of these foreseen problems, efforts are put in place to enhance the quality of this study.
1.8. Organization of the Study
This study will be divided into five (5) chapters and each chapter for specific purpose to make the work easier. Chapter one is Introduction, chapter two which covers literature review, theoretical literature, empirical literature, theoretical framework and gaps in literature. Chapter Three entails the research methodology. Chapter Four focuses on empirical analysis, data presentation and presentation of the result. Chapter Five (5) is devoted for the summary of the study, the conclusion on the study, recommendations and suggestions for further study.