Title:
FISCAL CONSOLIDATION, GROWTH AND POVERTY REDUCTION: EVIDENCE FROM NIGERIA.

Authors:
Attamah Nicholas (PhD) & Ogbodo J. C (PhD), Nigeria

Abstract:

This work empirically examined the impact of fiscal consolidation on economic growth and poverty reduction in Nigeria. The specific objectives are to investigate the impact of fiscal deficit and non – fiscal control variables on economic growth and poverty reduction in Nigeria for the period 1981 to 2018 using autoregressive distributed lag (ARDL) bounds test technique and also to assess whether significant causal relationship exists between fiscal deficit and economic growth, and between fiscal deficit and poverty reduction in Nigeria over the period, using Granger causality approach. Fiscal deficit has positive relationship with and statistically significant impact on economic growth in Nigeria in the long run; trade openness and foreign direct investment have no significant impact on economic growth in Nigeria over the period studied. Total government expenditure has negative relationship with and insignificant impact on real gross domestic product both in the long run and short run. Government total revenue, on the other hand, showed positive relationship with but insignificant impact on real gross domestic product both in the long run and short run. Government recurrent and capital expenditures impact significantly on economic growth in Nigeria in the long run. The result also showed that in the short run, capital expenditure of government significantly impacts economic growth while recurrent expenditure does not. Direct tax related negatively with economic growth in the short and long run, and that its impact on growth is statistically significant in short run and insignificant in long run. On the other hand, the result further indicated that indirect tax impacts significantly on growth in the long run and that it positively relates with economic growth in Nigeria. Fiscal deficit lag one was found to have statistically significant impact on poverty. Government expenditure, government revenue, foreign direct investment, and trade openness showed statistically significant impact on poverty reduction in Nigeria in the short run. The result further revealed that fiscal deficit (FISCD), government expenditure (LOG(GOVEXP)), government revenue (LOG(GOVREV)), foreign direct investment (LOG(FDI)), and trade openness (TOP) have statistically significant impact on poverty reduction in Nigeria in the long run. The coefficient of error correction mechanism (ECM) of the poverty model V is negative and statistically significant; indicating that approximately 26.5% of any movement into disequilibrium is corrected back to the long run equilibrium within a year. The result of Granger causality test indicated that there is no significant causality relationship between (i) real gross domestic product (proxy for economic growth) and fiscal deficit in Nigeria and (ii) per capita income (proxy for poverty) and fiscal deficit in Nigeria over the studied period. The study recommends that government should reduce the size of her deficits through fiscal consolidation so as to attain the desired level of sustainable economic growth; complement fiscal consolidation by comprehensive debt reduction strategies and structurally reform the economy to boost competitiveness and redistribute income through subsidizing government services. The future economic growth has to be pro-poor.