Empirical analysis of the potency of fiscal policy variables on economic growth in Nigeria

Abstract

The efficacy of fiscal policy as a tool for promoting growth has remained a controversial issue and needs further investigation. The aim of the current study is to conduct a disaggregated analyses of the impact of fiscal policy variables on economic growth in Nigeria using annual time series data spanning the period 1980-2017. The empirical investigation is based on the Autoregressive Distributed Lag (ARDL) modelling technique. The bound test results revealed that there exists a unique long-run relationship between fiscal policy variables and economic growth. The empirical results confirmed that corporate and personal income taxes, government capital expenditure, fiscal deficit, domestic and external debt affect economic growth negatively whereas government recurrent expenditure, customs and excise duties showed a significant positive effect on economic growth both in the long and short run. The structural break dummy variable had an unexpected positive effect on economic growth that was significant only in the short run while petroleum profit tax, being the most important tax element in Nigeria showed a negative impact on growth that was not significant both in the long and short run. The study recommended expanding the revenue base through an efficient tax administration and collection system, increased investment in productive sectors of the economy by increasing capital expenditure and reducing recurrent expenditure and curtailing excessive deficit financing.