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1.1 Background of the Study
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and government expenditure. It can also be seen as government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy.
Government over the years have embarked on various macroeconomic policy options to grow the economy in terms of growth and development and the policy option employed is that of fiscal policy (Peter and Simeon, 2011).
Hence, the role of fiscal policy on the output and capacity utilization of manufacturing industry in Nigeria has been a growing concern, despite the fact that the government had embarked on several policies aimed at improving the growth of the Nigerian economy through the contribution of manufacturing industry to the economy and capacity utilization of the sector (Adebayo, 2010; Peter and Simeon, 2011 and Loto, 2012).
Fiscal policy as a tool for macroeconomic management has been defined as a purposeful use of government revenue (majorly from taxes) and expenditure to manipulate the level of economic activities in a country (Akpapan, 1994). It can also be conceived as part of government policy relating to rising of revenue through taxation and other means and choosing on the level and pattern of expenditure for the purpose of manipulating economic activities or achieving some needed macroeconomic goals.
The execution of fiscal policy is essentially routed through government's budget. Budget as a fiscal policy tool could be conceived as a structure that balances the changes in government revenue against expenditure over a period of time. It is a comprehensive financial plan, setting forth the expected route for achieving the financial and operational goals of a country (Meigs & Meigs, 2004).
The intent of fiscal policy is to stimulate economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, expenditure and borrowing that is consistent with sustainable growth. Macroeconomic policies (fiscal and monetary) are indispensable tools that can be used to lessen short-run fluctuations in output and employment (Oke, 2013). They have been recognized in policy debates by both developed and developing economies as potent apparatus in the hands of policy markers for handling macroeconomic issues like high unemployment, inadequate national savings, excessive budget deficits, and large public debt burdens.
The role of fiscal policy on the output and capacity utilization of the industry sector cannot be overemphasized. Fiscal policy drives the market for the manufacturing sector through the purposeful manipulation of government revenue and expenditure. When government is pursuing an expansionary policy, it reduces taxation and increases expenditure and the purchasing power of the economic units which in turns expands the market for manufactured products. This in turn sends a signal to the manufacturers to increase their productive capacity to take opportunity of the increase market demand. The reverse holds when a contractionary policy is being pursued. Fiscal policy also provides the legal, social and economic framework required for a profitable operation.
Libanio (2006) through the use of Kaldor’s first law defined manufacturing sector as the engine of growth of the economy. Manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge or give free rein in either the creation of new commodities or in value addition (Adebayo, 2010).
To Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in developed countries. The final products can either serve as finished goods for sale to customers or as intermediate goods used in the production process.
Mbelede (2012) opined that manufacturing sector is involved in the process of adding value to raw materials by turning them into products. Thus, manufacturing industries is the key variable in an economy and motivates conversion of raw material into finished goods.
In the work of Charles (2012), manufacturing industries creates employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings
The need to achieve improved balance of payments position, balanced industrial development, high employment level, increased productivity, equitable income distribution, high revenue sources, price stability and economic growth has necessitated the development of various macroeconomic policies. Macroeconomic policies suggest the combination of government fiscal and monetary policies. It incorporates all policy frameworks geared at achieving a sound, stable and vibrant economy.
The Manufacturing sector could be conceived as any economic unit that processes or creates new commodities the transformation of raw materials or semi finished through goods (Eze & Ogiji, 2013). Adebayo (2010) conceived manufacturing sector as those industries which are involved in the manufacturing and processing of items and which indulge or give free rein in either the creation of new commodities or in value addition. Manufacturing plays a vigorous role in the economic transformation of any nation, whether developed or developing. In Nigeria, Loto, (2012) refers to manufacturing sector as an avenue for increasing productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capita income which causes unrepeatable consumption pattern. It occupies a leading position in promoting productivity, investment, import substitution, export expansion, employment and per capita income at a faster rate than any other sector (Shebeb, 2002). It provides wider and more efficient linkage among different sectors. In spite of these numerous roles played by the manufacturing sector, scholars believe that the high interest rate on lending, poor.
1.2 Statement of the Problem
Upon several government policies on the stability of Nigerian economy through manufacturing industry, there have been a lot of challenges facing the growth of Nigerian manufacturing industry as identified by researchers. These challenges include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policy (Onoh, 2007); gross mismanagement/misappropriations of public funds (Okemini and Uranta, 2008); and lack of economic potential for rapid economic growth and development (Ogbole, 2010). Despite the emphasis placed on fiscal policy in the management of the economy, the manufacturing sector inclusive, Nigerian economy is yet to come on the path of sound growth and development because of low output in the manufacturing sector to the economy (GDP).
1.3 Research Questions
The following research questions will guide the study
What is the effect of government expenditure and manufacturing industry in Nigeria?
Does government revenue have a significant impact on the manufacturing industry in Nigeria?
1.4 Objectives of the Study
The major objective of this study will be to examine the impact of fiscal policy on the performance of the manufacturing sector in Nigeria. The specific objectives include:
(i) To assess the impact of government expenditure on the output of the manufacturing sector in Nigeria.
(ii) To investigate the extent to which government revenue affects the output of the manufacturing sector in Nigeria.
1.5 Research Hypothesis
The following null hypotheses will be formulated for this study.
H0: There is no significant impact between government expenditure and manufacturing sector output in Nigeria.
H0: There is no significant impact between government revenue and manufacturing sector output in Nigeria.
1.6 Significance of the Study
The study will supply enormously in aiding the government, policy makers, economic planners, researchers and the academia generally. This will provide an insight and understanding to the government on how to be cautious in spending public funds that would bring about economic growth and development. It is also of immense help in providing an insight and knowledge to the general public, policy makers, economic planners, and manufacturing sector regulatory authorities on the impact of fiscal policy on the manufacturing sector in Nigeria.
To the academia, the findings of the study will contribute to the available literature on the current scenario of manufacturing sector in Nigeria and its level of contribution to the GDP. Based on our empirical findings and analysis, the result of the study will be of immense benefit to researchers who will rely on their contributions to existing knowledge for further research. The findings of this research will assist monetary authorities in assessing the performance of the fiscal policy in Nigeria particularly in terms of their impact on the output of manufacturing sector. This work is also of immense benefit to the policy makers and economic planners in terms of using its findings in formulating and implementing appropriate policy measures towards accelerating economic growth through the manufacturing sector.
1.7 Scope of the Study
The study shall cover the impact of fiscal policy operation on manufacturing sector performance in Nigeria. This study will not cover all the phases that make up the monetary sector, but shall focus only on fiscal policy operation on manufacturing sector performance in Nigeria from 1982 to 2017. However, the limitation of the study ranges from financial constraints, time, etc in Nigeria, controlled access to federal office of statistics and National Bureau of Statistics. Also, to exactly explain some of the effects of various monetary instruments will require delving into the areas of pure science, which is beyond the scope of this study.
1.8 Organisation of the Study
There are five chapters in this research work. Chapter one is the general introduction, chapter two is the review literature and theoretical framework, chapter three handles the research methodology, chapter four shall present the empirical data for analyses and testing and finally, in chapter five the entire findings in the research process shall be summarized, conclusions drawn which will then lead us to making appropriate recommendations.