FISCAL POLICY
UNIT 3 FISCAL POLICY
3.0 Main Content
3.1 The Government Sector
3.2 Major Instruments of Fiscal Policy
3.3 Major Instruments of Fiscal Policy
3.3.1 The Role of Fiscal Policy in the Economy
3.4 Fiscal System in Nigeria
3.4.1 Allocation of Functions among the Tiers of Government in a Federation
3.5 Allocation of Functions
3.5.1 Local Government Reform of 1975
3.5.2 Exclusive Legislative List
3.5.3 Concurrent Legislative List
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading
1.0 INTRODUCTION
We continue this unit with fiscal policy, which is the use of government spending and taxation policies to influence the level of economic activity, inflation and economic growth. Fiscal means having to do with taxation, public revenue or public debt. The fiscal year is a 12-month accounting period without regard to a calendar year. The fiscal year for
the federal government is from 1 st January to 31 December. Fiscal year is also used as all-purpose adjective to refer to anything that has to do
st
with government finances and its management.
Thus, at each level (tier) of government, fiscal integrity is a characteristic of that government budget that spends no more than anticipated revenues. You will be deemed to have fiscal integrity when the person so deeming agrees with your fiscal policies. If that same person disagrees with your policies, you may be deemed to so lacking in fiscal responsibility as to be considered fiscally irresponsible.
In this unit, you will learn about definition of fiscal, fiscal year and fiscal policy. You will also learn about the major instruments of fiscal In this unit, you will learn about definition of fiscal, fiscal year and fiscal policy. You will also learn about the major instruments of fiscal
2.0 OBJECTIVES
At the end of this unit, you should be able to:
define fiscal, fiscal year and explain fiscal policy identify major instruments of fiscal policy explain fiscal system in Nigeria identify allocation of functions of tiers of government.
3.0 MAIN CONTENT
3.1 The Government Sector
The government sector is defined as comprising “all units that implement public policy by providing non-market services and transferring income. These units are financed mainly by compulsory levies on other sectors. The central government includes all units representing the territorial jurisdiction of the central authority throughout the country”. (IMF: Government Financial Statistics Year Book 1994, p.6).
The government sector in Nigeria includes all the three tiers of government, comprising the federal, state and local governments as well as government agencies that provide public goods and services with funding from public treasuries.
The government sector is also commonly known as the public sector largely as the result of the characteristic of the type of goods and services that are supplied by the sector. Due and Friedlander (1977) described public goods as “goods possessing the basic characteristics of non-appropriate-ability,
non-excludability in consumption”. What we are saying here is that the goods are perishable and not tangible as physical consumable goods. They are mostly in the form of infrastructural facilities, social amenities and capital goods which could be used to generate further goods and services (utilities).
non-rivalry and
3.1.1 Public Goods
They are collectively and indivisibly consumed while consumption by an individual those reduce the amount available to others. The consumers of public goods do not reveal their preferences. These They are collectively and indivisibly consumed while consumption by an individual those reduce the amount available to others. The consumers of public goods do not reveal their preferences. These
Examples of public goods are roads and highways, defense and national security, environmental protection etc. These characteristics of public goods render price mechanism ineffective in allocating resources effectively in a market economy, providing the rationale for public sector intervention in order to ensure efficient allocation of resources, income redistribution and stabilisation objectives.
3.1.2 Private Goods
This is in contrast to the situation in private sector that engages in the production and sale of private goods which are divisible and individually consumed while consumer’s preferences can be readily ascertained through effective demand.
Consequently, private goods such as bread residential accommodation vehicles etc are produced in units and offered for sale in markets. People who cannot pay for private goods can be excluded from its consumption in the absence of effective demand.
SELF-ASSESSMENT EXERCISE 1
Differentiate between public and private goods.
3.2 Fiscal Policy
Fiscal policy consists of the manipulation of government finances by raising or lowering taxes or levels of spending to promote economic stability and growth. This role of government sector in economic management is performed through the formulation and implementation of economic policy generally and fiscal policy in particular. It is designed to achieve the objective of price stability, growth, balance of payments equilibrium, full employment, mobilisation of resources and investment. These objectives have influenced government’s economic policy design and development efforts in Nigeria since independence.
Nigerian governments had designed and implemented four development plans between 1960 and 1985, adopted Structural Adjustment Programme (SAP) in 1986, three-year rolling plans thereafter, vision 2010 programme, National Economic Empowerment and Development Strategy (NEEDS) and currently the Seven Point Agenda of the present Administration, all with the objectives of achieving economic development and bringing about significant improvement in the living conditions of the people.
SELF-ASSESSMENT EXERCISE 2
What is a fiscal policy?
3.3 Major Instruments of Fiscal Policy
The major instruments of fiscal policy have been taxation, government expenditure and borrowing from domestic and external sources to finance budget deficits when there is a fiscal gap in the operation of a budget.
During the review years, the result of government role in economic activities and the achievements in economic performance in Nigeria have been mixed. The economy experienced growth in real output in some years and declines in others. But the overall picture is low scoring for the country’s development efforts. The economic crisis from the 1980s and early 1990s brought out vividly the distinction between growth and development.
A country may achieve growth of Gross Domestic Product (GDP) without corresponding economic development. The oil boom of the 1970s propelled Nigeria into the class of countries with higher per capita income. However, as the oil market weakened and foreign exchange earnings from the sector declined and Nigeria regressed into the group of countries with low capita income. The crisis is not only that of low capita income but also that of macroeconomic instability, characterised by high inflation rate, steep depreciation of national currency, high unemployment and balance of payments disequilibrium. These problems have resulted from the continued dependence on the export of crude oil for foreign exchange earnings and government revenue.
The experience in Nigeria as in many other sub-Saharan African countries, have also proved the public sector intervention in an economy can result in failure just as the rationale for government intervention is based on the inherent failure of price mechanism to achieve a stable equilibrium in the market economy.
3.3.1 The Role of Fiscal Policy in the Economy
Having identified the major instruments of fiscal policy, there is need to now discuss the role of these policy instruments, namely:
Taxation
Fiscal policy through taxation means the reduction of taxes in certain areas of the economy in order to increase disposable income among
businessmen, individuals and corporate bodies. Reduction of corporate taxes would be more available for the corporate bodies to expand their business thereby increase employment opportunities. On the other hand, individual consumers who may be affected by tax reduction would now
be in a better position to make effective demand for more goods and services produced by the corporate business firms and industries.
Price Stabilisation
Government may use fiscal tool i.e. contractionary fiscal policy to combat inflation and expansionary fiscal policy to combat deflation and unemployment. This approach helps to stabilise prices of goods and services in the economy. In using contractionary fiscal policy, government could increase the taxes of corporate bodies and those of individuals in order to lower the level of disposable income in the hands of these entities.
Government could equally reduce its expenditure on chosen special areas of the economy in order to curb aggregate demand in the economy.
Equity in Income Distribution
Fiscal policy through appropriate tax system may be used to reduce the gap between the incomes of the rich and the poor. A tax system which is highly progressive in nature may likely reduce the consumption and accumulation of wealth of the rich.
Increase in Investment
Fiscal policy can assist in generating revenue to increase investment in viable sectors of the economy if managed effectively. In the process, it helps to accelerate economic growth.
Maintain a favourable Balance of Payment
The government may impose taxes in order to reduce imports and encourage exports so as to minimise the balance of payment deficits. In so doing, it could engender a favourable balance of payment in its foreign trade.
Exchange Rate Stabilisation
Effective fiscal policy properly implemented could lead to exchange rate stability. A stable exchange rate is effective when there is no constant disequilibrium in the nation’s balance of payment position.
SELF-ASSESSMENT EXERCISE 3
State the process of economic development in the public sector of Nigeria.
3.4 Fiscal System in Nigeria
Nigeria is a federal system of political administration hence this has fundamental implications for the fiscal system and economic management of the country. The economic role of the public sector in a federal system is the joint responsibility of the multi-levels of government. This joint responsibility of local, state and federal governments in performing the fundamental functions of socio-political administration and economic management introduces complications in the fiscal system which must be technically and constitutionally resolved in the light of political factors and pressures that gave birth to the union.
For instance, in a unitary system of government, the basic economic functions of government, such as the attainment of stabilisation, efficient allocation of resources and income redistribution are performed by the central government with delegated power to sub-units, such as local councils or county authorities but in a federal system; but in a federal system the relationship between the local, state and the federal governments, is that of autonomy and inter dependence, an inter- governmental fiscal relationship that is adequately recognised in the constitution.
3.4.1 Allocation of Functions among the Tiers of Government in a Federation
Theoretically, there is an optimum allocation of functions among the tiers of government in a federation such that the fiscal relations would facilitate the achievement of macroeconomic objectives of price stability, full employment, economic growth and balance of payments equilibrium. If the three tiers of government were to provide the functions of stabilisation, income redistribution and resource allocation simultaneously, inefficiency would result (Musgrave& Musgrave; 1973; pp. 613-616).
The citizens of a country incidentally belong to all the tiers of government in a federal system. There is, therefore, intersection of jurisdiction among the tiers of administration. Local government areas intersect the state constituencies while the states intersect the national The citizens of a country incidentally belong to all the tiers of government in a federal system. There is, therefore, intersection of jurisdiction among the tiers of administration. Local government areas intersect the state constituencies while the states intersect the national
with the federal government in accordance with the provisions of the constitution. However, the Stabilisation and income redistribution functions are better performed when localised in the central government to avoid unintended spillovers.
In addition, the federal constitution always makes provision for the generation of financial resources to be used in providing public goods and services as well as ensuring a suitable arrangement for it s distribution or revenue sharing among the tiers of government. This has been the experience in Nigeria.
Table 1:
Tiers of Government in Nigeria (1967 – 1998)
Years Federal Regional / State Local Government
Compiled from Nigerian Constitutions and Official Gazettes (CBN Publications)
SELF-ASSESSMENT EXERCISE 4
What is fiscal responsibility at each tier of government?
3.5 Allocation of Functions
The need for sharing the role of government in the public administration among the component tiers of government was recognised and accorded priority importance in the constitutional evolution of the Nigerian federation. The Federal Constitution that ushered in independence in 1960 explicitly recognised two tiers of government, the federal and the regional governments. The function to be performed by each tier was spelt out under the exclusive and concurrent legislative lists.
The responsibilities of the federal Government were listed in the exclusive legislative list while those to be jointly performed by the regional and federal governments were listed in the concurrent list.
Other functions left in the residual lists were to be performed by the regional government to the exclusion of the federal government. Although there were Local Councils from independence, this tier of government was not explicitly recognised as an autonomous and interdependent entity until 1975 when a clear mission for the local government system was enunciated- to govern at the grass roots or local level.
3.5.1 Local Government Reform of 1975
This was clearly articulated in the guidelines for Local Government Reform of 1975. The guidelines acknowledged the local government in the federation as the third tier of government which implied that local government authorities were to be given definite powers, sources of revenue and functions for which they would be held accountable. In 1999 Federal constitution spelt out the function of the three tiers of government as follows:
3.5.2 Exclusive Legislative List
This list is reserved for federal government power to execute. Example is the keeping of accounts of the government of the federation involving issue of legal tender currency, external affairs, defense, construction and maintenance of federal trunk roads; collection of customs and excise duties, immigration and issuing of passports, exploitation of mines and mineral (including oil fields), oil mining, geological surveys, natural gas, public debt of the federation, regulation of political parties etc.
3.5.3 Concurrent Legislative List
This list is performed by the federal and state government. These include:
Allocation of public revenue among the federal, state and local governments
Collection of taxes Electric power Industrial, commercial and agricultural development University and post primary institutions Antiquities and monuments, archives etc.
SELF-ASSESSMENT EXERCISE 5
List the items on the Concurrent legislature list in Nigeria.
Functions of Local Government
Local governments were empowered to provide the following:
Provision and maintenance of primary adults and vocational schools, development of agriculture and natural resources other
than the exploitation of minerals, establishment and maintenance of slaughter houses, markets, motor parks public conveniences and health services, registration of birth, death and marriages etc.
In addition they were to perform other functions and provide other services that the state House of Assembly might assign to them.
SELF-ASSESSMENT EXERCISE 6
When was Local Government recognised as a tier of government?
4.0 CONCLUSION
In this unit, we conclude that the fiscal policy and the responsibility at each tier of government is the determinant of the level of involvement and commitment of each level of administration. The constitution is the guide and provides the benchmark of performance.
5.0 SUMMARY
We have taken look at the public sector and have considered fiscal policy/system at the three tiers of government in Nigeria, major
instruments of fiscal policy and allocation of functions defining fiscal responsibility to different levels of administration.
6.0 TUTOR-MARKED ASSIGNMENT
1. Explain fiscal year in Nigeria.
2. Identify major instruments of fiscal policy applied by the federal government of Nigeria.