CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The acts that governments do in the economic field are referred to as economic policy. It includes taxation systems, government budgets, the money supply and interest rates, as well as the labor market, national ownership, and a variety of other government interventions in the economy.
Most aspects of economic policy can be classified as either fiscal or monetary policy. Fiscal policy deals with government actions such as taxation and expenditure, while monetary policy deals with central bank actions such as money supply and interest rates.
International institutions such as the International Monetary Fund and the World Bank, as well as political ideas and party objectives, frequently impact such policies.
International institutions such as the International Monetary Fund and the World Bank, as well as political ideas and party objectives, frequently impact such policies.
Recently, government policies have become more concerned with economic management and improvement. The government has used a variety of macroeconomic policy alternatives to improve the economy in terms of growth and development over the years, with fiscal policy being one of them (Peter and Simeon, 2011). The use of government revenue collection (taxation) and expenditure (spending) to impact the economy is known as fiscal policy. Government taxes and government spending are the two fundamental instruments of fiscal policy. It’s also possible to think of it as government spending programs that have an impact on macroeconomic conditions. These policies have an impact on taxes.
Despite the fact that the government has implemented several policies aimed at improving the Nigerian economy’s growth through the contribution of manufacturing industry to the economy and capacity utilization of the sector, the role of fiscal policy on manufacturing industry output and capacity utilization has become a growing source of concern (Adebayo, 2010; Peter and Simeon, 2011 and Loto, 2012). Libanio (2006) used Kaldor’s first law to describe the manufacturing sector as the economy’s growth engine.
The manufacturing sector includes businesses that engage in the production and processing of goods, as well as those that engage in or allow for the creation of new commodities or value addition (Adebayo, 2010).
According to Dickson (2010), the manufacturing sector in developed countries accounts for a considerable portion of the industrial sector. The final products can be finished goods that are sold to customers or intermediate goods that are used in the manufacturing process. The manufacturing sector, according to Loto (2012), is a way to boost productivity.
Import substitution and export expansion, as well as the creation of foreign exchange earning capacity, increased employment, and per capita income, all of which result in a non-repeatable consumption pattern. According to Mbelede (2012), the manufacturing sector is involved in the process of turning raw materials into products, which adds value to them.
As a result, manufacturing sectors are a significant economic determinant that encourages the conversion of raw materials into completed commodities. Manufacturing industries, according to Charles (2012), provide jobs, which serves to enhance agriculture and diversify the economy while also assisting the country in increasing its foreign exchange revenues.
Manufacturing industries arose as a result of technological and socioeconomic changes in Western countries throughout the 18th and 19th centuries. The period was dubbed the “Industrial Revolution” by many. It all started in Britain, when mechanization and the utilization of fuels supplanted labor-intensive textile manufacture. Engineering sector, construction sector, electronics sector, chemical sector, energy sector, textile industry, food and beverage sector, metal-working sector, plastic sector, transportation and logistics sector are all part of the manufacturing sector. Some manufacturing businesses in Nigeria have experienced a decline in productivity and, as a result, job creation in recent years, owing to a lack of energy, smuggling of foreign products into the nation, trade liberalization, globalization, a high exchange rate, and minimal government spending. As a result, the manufacturing sector’s slow performance in Nigeria is primarily due to massive imports of finished goods, insufficient financial support, and other exogenous variables, all of which have resulted in a reduction in capacity utilization and output in the manufacturing sector of the economy (Tomola, Adebisi and Olawale, 2012). The manufacturing sector’s share of GDP has not remained reasonably consistent in recent years (1990-2010).
It was around 5.5 percent in 1990, but it plummeted to 2.22 percent in 2010. Similarly, global manufacturing capacity utilization increased from 40.3 percent in 1990 to 58.92 percent in 2010. (CBN, 2011). This could be due to the recent surge in government spending.
Furthermore, high interest rates on loans have had a detrimental impact on Nigeria’s manufacturing sector’s growth, and this high lending rate is accountable for the country’s manufacturing sector’s high cost of production (Adebiyi, 2001; Adebiyi and Babatope, 2004; Rasheed, 2010). Okafor (2012) also stated that the performance of Nigerian manufacturing industry will continue to deteriorate due to poor government budget implementation and difficulty in analyzing raw materials.
These shifts in manufacturing’s proportion of GDP and capacity utilization illustrate that effective businesses can help create jobs, promote technology, and assure a fair distribution of economic opportunities as well as the country’s macroeconomic stability.
The study is relevant in Nigeria because of the nature and relevance of the interaction between fiscal policy and the manufacturing sector, which has seen dramatic changes in output and capacity utilization in recent years. The researcher is interested in investigating the impact of fiscal policy on the manufacturing sector of the Nigerian economy because the government wants to increase total spending in the economy through fiscal policy, which can either increase spending or reduce taxes in order to maintain manufacturing sector stability.
STATEMENT OF THE PROBLEM
According to academics, there have been numerous barriers to the growth of the Nigerian manufacturing industry as a result of several government policies aimed at ensuring the stability of the Nigerian economy through the manufacturing industry. These issues include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of macroeconomic integration and fiscal policy harmonization and coordination (Onoh, 2007); gross mismanagement/misappropriation of public funds (Okemini and Uranta, 2008); and a lack of economic potential for rapid economic growth and development (Okemini and Uranta, 2008). (Ogbole, 2010). Despite the importance of fiscal policy in the management of the economy, the manufacturing sector included, the Nigerian economy has yet to achieve sustainable growth and development due to poor manufacturing output. Due to its minimal contribution to the growth of the economy, this study is particularly interested in studying the impact of major fiscal policy on manufacturing sector production in Nigeria. The majority of studies on fiscal policy focused on the determinants, their impact on economic growth, capital formation, capital stock, deficit, and macroeconomic variables, whereas studies on the manufacturing sector focused on productivity, bank lending, economic growth, global economic downturn, monetary policy, banking sector reform, and performance. However, these variables have a substantial impact on economic growth and stability in Nigeria; however, research on their relationship is lacking, as there appears to be little or no focus on the effects of fiscal policy on the manufacturing sector in Nigeria.
OBJECTIVES OF THE STUDY
The study’s overall goal is to determine the effect of economic policy in the diversification of Nigeria’s economy. The study’s particular goals are as follows:
Determine the influence of government spending on Nigeria’s manufacturing sector production. To determine the impact of tax income on Nigeria’s manufacturing sector output.
SIGNIFICANCE OF THE STUDY
The study will be extremely useful to the government, policymakers, economists, scholars, and academia in general. This will give the government knowledge and expertise into how to use public funds wisely in order to promote economic growth and development. It also assists in giving insight and knowledge on the influence of fiscal policy on the manufacturing sector in Nigeria to the general public, policymakers, economic planners, and manufacturing sector regulatory authorities.
The findings of the study will be added to the existing literature on the current state of the manufacturing sector in Nigeria and its contribution to the GDP.
The study’s conclusions, based on our empirical findings and analysis, will be extremely useful to researchers who will rely on their additions to current knowledge for future research.
The conclusions of this study will aid monetary authorities in evaluating the performance of Nigeria’s fiscal policy, particularly in terms of its impact on manufacturing production. In terms of formulating and implementing appropriate policy measures to accelerate economic growth through the manufacturing sector, this work will be extremely useful to policymakers and economic planners.
LIMITATIONS OF THE STUDY
The main constraints encountered in carrying out this research work, this includes;
Time Factor
This research work was conducted simultaneously with normal academic work within a short period of time in which some valuable information could be obtained.
Financial Difficulty
In an effort to have a sufficient research material to be able to write extensively on the subject matter, the researcher was faced with some financial predicament considering high cost of not only education materials coupled with the high transport fare.
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