8 an empirical investigation (2000-2012) crowding-out

1GUSHIBET S. TITUS PhD, 2TSENBA S. WUMMEN&

3CHINONSO I. KAIRO

1&3Department of Economics, Faculty of Social Sciences, University of Jos

2Department of Business Administration, Faculty of Management Sciences, University of Jos

CROWDING-OUT EFFECTS OF FISCAL POLICY ON PRIVATE SECTOR INVESTMENT IN NIGERIA:

AN EMPIRICAL INVESTIGATION (2000-2012)8

ABSTRACTThe paper empirically examines fiscal policy and private sector investment with evidence from Nigeria's data. The objective of this paper is to determine the reality of crowding out effect and the impact of fiscal policy on private sector investment in Nigeria using time series data for the period 2000-2012.The choice of the period coincided with stable constitutional democracy in Nigeria which commenced from 29 May, 1999. Unit root and stability tests were conducted using the robust regression method to take care of stationarity or non-stationarity of data sets, as well as multiple regression analysis to confirm the impact of fiscal policy on the investment of private sector. Thus, the methodology of the study employs the use of multiple regression equation of a simple macro-econometric model to estimate the parameters of the fiscal policy equation using Ordinary Least Squares (OLS) analytical technique. Data collectedfrom Central Bank of Nigeria, the National Bureau of Statistics (NBS) and Federal Inland Revenue Service(FIRS) were used. The study shows that fiscal policy has impactednegatively on private sector investment in Nigeria.The study suggests that high level of government expenditure in unproductive sectors is unnecessary and should be reduced, while more public expenditures in critical sectors should be encouraged. Thus, the paper recommends that government expenditures should be tailored towards the provision of infrastructures, power, and regulatory support that could provide a level playing field for the private sector to thrive in Nigeria. This will facilitate capital accumulation and investment that will accelerate the growth of income, employment and output rather than limit the expansion of private investments in the country.

Keywords: Fiscal policy, Tax, Revenue, Government expenditure, Investment, Crowding out

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1.0 INTRODUCTION Fiscal policy is essentially used in fine-The role of government in economic growth tuning the economy; that is why Keynes is an issue of debate since the time of Adam (1930) advocated deficit financing (an Smith. Recent wave of privatisation in injection into the economy to stimulate many developing countries like Nigeria is aggregate demand via multiplier effect) to based on perceptions that for sustainable ach ieve a t r ans i t ion f rom mass development and efficient output, the role unemployment to near full employment. of government in the economy is of great Thus, excessive and prolonged deficit importance and should be retained. financing through the creation of high However, economists are of two different powered money may negate the attainment views about the role of government in of macroeconomic stability, which may in economic activities (Abu and Abdullah, turn affect the level of desired investment in 2010). According to the neo-classicals, an economy and thereby stripe growth. A reducing the role of private sector by major determinant that is mostly directly crowding out effect is important because it affected by macroeconomic policy is reduces the inflation rate in the economy. It investment, both public and private (Word implies that increase in public debt Bank, 1993). Such macroeconomic policies increases the interest rate which reduces involve the deliberate manipulation of inflation in the economy as well as output policy instruments, such as monetary levels. The new-Keynesians present their policy, government fiscal operations, multiplier effect in response and argue that exchange rates and trade policies, pricing the increase in public spending will increase and environmental policies for the purpose demand and thus increase economic of achieving broad macroeconomic growth. The study tries to investigate the stability in terms of relative price stability, effects of fiscal policies on private sector high level of employment, economic investment in Nigeria. It determines the growth, and equitable distribution of long and short run dynamics of fiscal policy national income and balance of payment as it crowds out private investments in equilibrium. These are macroeconomic Nigeria, and how fiscal inconsistency could indicators upon which investor 's raise questions about the sustainability of confidence, expectation and decisions on the economy. Fiscal policy can therefore be whether to invest or not are based.defined as a process by which government

The objective of the paper is to empirically raises revenue through taxation and examine the effects of fiscal policy on expends public funds for the purpose of private investment in Nigeria using stimulating aggregate demand and econometric techniques and proffer facilitating economic growth and solutions to the negative effects (crowding development in the economy.Crowding out out of private investment). The study effect refers to a situation whereby an reviews how fiscal policy works, how to

increase in government spending would monitor it and how its implementation may lead to a reduction in the investment of the affect different people and players in the private sector rather than facilitate economy.The paper comprises of six parts. aggregate demand and domestic output in Part one is the introduction. Part two of the the economy. paper reviews related literature, concepts

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and theories. Part three explains the ownership of Nigerian assets (including instruments, methods and workings of government debt). In the long run, however, fiscal policy. Part four gives an overview of the accumulation of external debt that fiscal operations, exchange rates and results from persistent government deficits private investment in Nigeria. While part can lead foreigners to distrust Nigeria's five is concerned with methodology, data assets and can cause a deprecation of the sources, hypothesis, results and discussion exchange rate.of findings, part six concludes with policy recommendations. Fiscal policy refers to the use of

government budget to influence economic activity. Adopting fiscal straightjacket 2 . 0 L I T E R AT U R E R E V I E W, would imply tighter fiscal policy. The Conceptual Frameworkconcept of a fiscal straitjacket is a general Conceptual Clarificationeconomic principle that suggests strict Crowding out of another sort (often referred constraints on government spending and to as international crowding out) may occur public sector borrowing, to limit or regulate due to the prevalence of floating exchange the budget deficit over a time period rates, as demonstrated by the Mundell-(Odusola, 1996). The term probably Fleming model of an open economy. originated from the definition of Government borrowing leads to higher straightjacket anything that severely interest rates, which attract inflows of confines, constricts, or hinders. A common money on the capital account from foreign example is the various forms of self-financial markets into the domestic imposed fiscal straitjackets by the various currency (i.e. assets denominated in that states in the United States of America currency). Floating exchange rates leads to (USA). Fiscal policy is the means by which appreciation of the exchange rate and thus a government adjusts its spending levels the crowding out of domestic exports and tax rates to monitor and influence a (which become more expensive to those nation's economy. It is the sister strategy to using foreign currency). This counteracts monetary policy through which a Central the demand-promoting effects of Bank influences a nation's money supply government deficits but has no obvious (Reem, 2013). These two policies are used negative effect on long-term economic in various combinations to direct a growth (CBN, 2001). For example, in an country's economic goals.Fiscal policy,

open economy like Nigeria, fiscal policy according to Weil (2008), is the use of

also affects the exchange rate and trade government spending and taxation to balance. In the case of a fiscal expansion, influence the economy. Weil opined that the rise in interest rates due to government when the government decides on the goods borrowing attracts foreign capital. In their and services it purchases, the transfer attempt to get more dollars to invest, payments it distributes, or the taxes it foreigners bid up the price of the dollar, collects, it is engaging in fiscal policy.causing an exchange-rate appreciation in the short-run. This appreciation makes Overview of Fiscal Operations in Nigeriaimported goods cheaper in the country and The performance of any economy is closely exports more expensive abroad, leading to a linked with the policies of government that decline of the merchandise trade balance. seek to regulate and stabilise the private Foreigners sell more to Nigeria than they sector to effectively perform the expanded buy from it and, in return, acquire role of investments. The impact of

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government's fiscal actions in Nigeria is a variation in government spending or high. Its conduct of fiscal operations taxation, fiscal policy aims at altering involves revenue generation, expenditure aggregate demand in order to move the and debt management, and the fiscal profile economy closer to potential output. Hence has persistently been in deficit for the the quality of fiscal policy should be period in review (Okpanachi, 2004).In evaluated by its capability to dampen output addition to tax proceeds, the government fluctuations. Nevertheless, its effects on obtains revenue from other sources such as private sector investment via taxation and rental payments, royalties, earnings of government expenditure cannot be ignored. some public investments and crude oil Fiscal policy is the government's decisions sales. These are federally collected about spending and taxes. When a revenues. All the tiers of government share government is running a deficit, it is in the proceeds of the federation account spending more than it is taking in (its according to a predetermined sharing revenue). Government finances its deficit formula. mainly by borrowing from the public

through selling bonds, which are promises Government expenditure programme is an to pay specified amounts of interest important component of fiscal policy in payments at future dates. Government Nigeria. Available statistics show that could also borrow from external sources. federal government expenditure grew Debt has its effects on fiscal policy, and substantially within the last three decades government spending has its effects on (CBN, 1999; 2001). These statistics output and private sector investment. Taxes indicate that government revenue have its effects on output and private sector persistently lagged behind expenditure. The investment too when government raises prevalence of fiscal crises on domestic and direct tax rates such as the rate of income external fronts necessitated a reversal of tax or reduces the rate of government government's role in the economy. subsidies on specific products or sectors. Although government beginning from 1986, as a product of SAP was supposed to Fiscal Policy, Exchange Rates and be downsizing, its expenditure did not Private Investment in Nigeriareflect this. Rather, the extra budgetary In the short run, a fiscal expansion has a component of government expenditure larger effect in an open economy with a grew rapidly (Okpanachi, 2004). It implies fixed exchange rate. In the long-run higher a continuing widening gap between aggregate demand would bid up prices and revenue and expenditure which must be wages, thereby reducing competitiveness financed. To finance the deficits, and net exports. This process will continue government mostly resorted to borrowing until internal balance or full-employment is from the banking system (the CBN being restored. Given private sector demands for the dominant), as well as from the public in consumption and investment, this the form of bonds and treasury bills, and determines the fiscal policy that the external loans. government will have to implement if the

economy is to attain both internal and In the debate on economic policy, fiscal external balance.In an open economy with policy is predominantly viewed as an floating exchange rates, the induced ins t rument to mit igate shor t - run reduction in the demand for net exports fluctuations of output and employment. By

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further reduces the power of a fiscal from September 4, 1929 to the late 1930s or expansion to stimulate aggregate demand in early 1940s, the approach of various the short-run. In this case, fiscal policy is governments to the global economy was now a weaker tool. Fiscal expansion laissez-faire. Following World War II, it increases interest rates and the exchange was determined that the government had to rate, crowding out not merely domestic take a proactive role in the economy to consumption and investment but also net regulate unemployment, business cycles, exports (CBN, 2005). inflation and the cost of money. By using a

mix of monetary and fiscal policies Theoretical Framework (depending on the political orientations and The attractiveness or otherwise of fiscal the philosophies of those in power at a policy is hinged on two opposing schools of particular time, one policy may dominate thought namely the classical view and the over another), governments are able to Keynesian proposition. The first argued that control economic phenomena.government participation is inimical to efficiency, productivity and growth in an In line with the Keynesian postulation, economy. The basis of this view is that the fiscal policy is based on the theories of public sector is not responsive to market British economist John Maynard Keynes. signals, has enormous regularity processes Also known as Keynesian economics, this that engenders high production debts and are theory basically states that governments prone to distortions arising from both fiscal can influence macroeconomic productivity and monetary policies. On the other hand, levels by increasing or decreasing tax levels the second school of thought (in favour of and public spending. This influence, in government participation/intervention) turn, curbs inflation (generally considered articulates the need for provisions of certain to be healthy when between 2-3%), goods and services by government that increases employment and maintains a would otherwise not be provided by the healthy value of money. Fiscal policy is private sector in order to place the economy very important to the economy. For on a predetermined growth path. The example, in 2012 many economists in the standpoint of the later position is the US worried that the fiscal cliff, a inability of the market economy to function simultaneous increase in tax rates and cuts efficiently due to externalities (Al-Yousif, in government spending set to occur in 2000 and Cooray, 2009). From the fabrics of January 2013, would send the U.S. the two divergent opinions, and despite economy back to recession. The U.S. these discernable views, government Congress avoided this problem by passing expenditures can breed economic growth in the American Taxpayer Relief Act Nigeria (Iyeli and Ijomah, 2013). This 2012(Reem, 2013).position was earlier supported by eminent scholars like Barro (1990), Chenery and Classical economists and the Keynesian Syrquin (1975), Landau (1983), Diamond school of thought would argue that the (1990), Longe (1984), Odusola (1996) and crowding out effect of government Ekpo (1995). expenditures on private investment occurs

when government spending raises output Before the Great Depression, which lasted and income of the private sector initially.

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Higher income raises desired real money rate reduces consumption and private balances in turn. Higher real money investment demand, and partly offset the demand and unchanged supply bid up expansionary effect of higher government interest rates consequently. Higher interest spending on aggregate demand and rates would eventually crowd out output.The Keynesian theory is relevant to consumption and investment (damping the this paperand provides the basis for expansion). Furthermore, an increase in analysis in this work since government government spending or a cut in taxes will intervention has become inevitable in most increase aggregate demand resulting to a if not all economies of the world.rise in prices, but not an increase in output. The impact of the fiscal expansion is to Empirical Reviewincrease aggregate demand if prices remain Hyder (2001) tested the crowding-out unchanged. But since private sector firms hypothesis for Pakistan, using a vector wish to supply potential output, there is error-correction model and found that there excess demand. Consequently, prices are existed a corresponding relationship bid up (instantaneously) until excess between public and private investments in demand for goods is eliminated. Pakistan. Looney (1995) examined large

manufacturing sector and concluded that With given nominal money, higher prices private investment does not suffer from real reduce the real money supply, drive up crowding-out associated with the interest rates, and reduce private government ' s non infras t ructural expenditure on consumption and investment programme. Kelly (1997) also investment. When aggregate demand has investigated the effects of public sector fallen to its full-employment level again, expenditure on economic growth. He full employment is restored. In this case, discovered that the effects of public the economy has higher prices and nominal expenditures on growth using the data of 73 wages, a lower real money stock, and countries for the period 1970-1989 showed higher interest rates. It implies that a significant contribution of public government expenditure would be higher investment and social expenditures on but private consumption and investments growth. Aschauer (1985, 1989) examined are sufficiently lower such that aggregate the role of public capital in explaining total demand would remain at its full- factor productivity and the rate of return on employment level. This means that the private capital in the United States' non-increase in government spending is exactly financial corporate sector. It was found that offset by a reduction in private expenditure public capital has positive marginal on consumption and investment. This is in product and that private investment can be consonance with classical economic theory enhanced by increasing public investment that an increase in government spending in viable sectors.Easterly and Schmidt-crowds out an equal amount of private Hebbel (1993) explored the relation expenditure, leaving aggregate demand between fiscal deficit and inflation. They unaltered at potential output (Begg, Fischer opined that in developing countries, there and Dornbusch, 1994). This is true of exists a correlation between inflation and Keynesian theory where higher interest the fiscal deficit when inflation rate tends to

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1998). These points are in accord with be high and government fulfills their economic theory in line with Keynesian school expenditures by money creation. Guess and of thought. For example, an expansionary fiscal Koford (1984) used the Granger causality policy through tax cuts or additional test to find the causal relationship between government spending leads to higher aggregate budget deficits and inflation, GNP, and demand and an increase in equilibrium income

private investment using annual data for and output of the private sector. This means that

seventeen OECD countries for the period an increase in government expenditure will 1949 to 1981. They concluded that budget shift the aggregate demand schedule upwards deficits do not cause changes in inflation, and will tend to increase income and output in gross national product and private the economy. However, with an unchanged investment. money supply, higher income will increase the The policy implication in periods of instability demand for money and raise interest rates. This is that government can embark on active or reduces investment demand of the private discretionary fiscal policies to alter spending sector and shifts the consumption function levels or tax rates in order to stabilise the level downwards. These effects tend to offset the of aggregate demand close to the full- original upward shift in aggregate demand employment output level. When aggregate caused by the increase in government demand is low, government stimulates demand spending, though they cannot offset it by cutting taxes, increasing spending, or both. completely.Using macroeconomic analysis, Conversely, when aggregate demand is crowding-out effect is illustrated graphically in abnormally high, the government raises taxes figure 1 below:or reduces spending (Keynes, 1930; Barro

Figure 1: Aggregate Output and Expenditure Curves

Figure 1shows that an increase in government causing (I)to decrease from I to I . The fall in I 0 1

purchases from G to G shifts the planned pulls the planned aggregate expenditure curve 0 1

aggregate expenditure curve (C + I + G ) back down, which lowers the equilibrium level 0 0

of income to Y*.The possibility of some upward. The increase in (Y) from Y to Y causes 0 1

crowding out of firms' investment by increased the demand for money to rise, which results in a government spending is a subject of political disequilibrium in the money market. The excess debate as well as economic analysis. To the demand for money raises the interest rate,

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extent that there is some crowding out, an of the studies reviewed above investigated the increase in government spending as a way to crowding-out effects of fiscal policy on private increase aggregate output leads to a reduced sector investment in Nigeria and the paper has share of private sector investment (firms' covered this knowledge gap. investment) in terms of GDP. This implies that increased borrowing leads to higher interest Instruments and Methods of Fiscal Policyrates by creating a greater demand for money The two main instruments of fiscal policy are and loanable funds and hence a higher price changes in the level and composition of taxation (ceteris paribus), the private sector, which is and government spending in various sectors. sensitive to interest rates will likely reduce These changes can affect the following investment due to a lower rate of return. This is v a r i a b l e s i n a n the investment that is crowded out. The economy: and the level of weakening of fixed investment and other economic activity; the ; interest-sensitive expenditure counteracts to the pattern of within the varying extents the expansionary effect of and relative to the government deficits. More importantly, a fall in .The three main stances of fiscal policy fixed investment by businesses can hurt long- are neutral, expansionary and contractionary term economic growth of the supply side (the fiscal policies. Neutral fiscal policy is usually growth of potential output) in the economy. undertaken when an economy is in equilibrium,

where government spending is fully funded by Thus, the situation in which borrowing may and overall the budget outcome has lead to crowding out of private sector a neutral effect on the level of investment is that companies would like to .Expansionary fiscal policy involves expand productive capacity, but because of high government spending exceeding tax revenue, interest rates, private investors are constrained a n d i s u s u a l l y u n d e r t a k e n d u r i n g from borrowing funds with which to expand recessions.Contractionary fiscal policy investment. According to American economist occurs when government spending is lower Jared Bernstein, this scenario is not a plausible than tax revenue, and is usually undertaken to story with excess capacity, the interest rate at pay down government debt (Begg, Dornbusch zero, and companies sitting on cash that they and Fischer, 1994).could invest with if they saw good reasons to do so (Bernstein, 2011). Another American However, these definitions can be misleading

because, even with no changes in spending or economist, Paul Krugman, pointed out that, tax laws at all, cyclic fluctuations of the after the beginning of the recession in 2008, the economy cause cyclic fluctuations of tax federal government's borrowing increased by revenues and of some types of government hundreds of billions of dollars, leading to spending, altering the deficit situation; these are warnings about crowding out, but instead not considered to be policy changes. Therefore, interest rates had actually fallen (Krugman, for purposes of the above definitions, 2011). When aggregate demand is low, government spending and tax revenue are government spending tends to expand the normally replaced by cyclically adjusted market for private-sector products through the government spending and cyclically adjusted fiscal multiplier and thus stimulates, or crowds tax revenue. Thus, for example, a government in – fixed investment (via theaccelerator effect). budget that is balanced over the course of the This accelerator effect is most important when business cycle is considered to represent a businesses suffer from unused industrial neutral fiscal policy stance.Governments capacity occasioned by a serious recession or

on a wide variety of things, from the depression. From the foregoing reviews, none

m a c r o e c o n o m i cAggregate demand

distribution of incomeresource allocation

government sector private sector

taxrevenueeconomic

activity

spend money

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http://en.wikipedia.org/wiki/Macroeconomic

http://en.wikipedia.org/wiki/Aggregate_demand

http://en.wikipedia.org/wiki/Income_distribution

http://en.wikipedia.org/wiki/Resource_allocation

http://en.wikipedia.org/wiki/Government_sector

http://en.wikipedia.org/wiki/Private_sector

http://en.wikipedia.org/wiki/Tax

http://en.wikipedia.org/wiki/Revenue

http://en.wikipedia.org/wiki/Economic_activity

http://en.wikipedia.org/wiki/Government_expenditure

military and police to services like education contractionary or tight if it reduces demand via and healthcare, as well as lower spending.such as welfare benefits. This expenditure can be in a number of different methods of Besides providing goods and services like funding: , , the benefit public safety, highways, or primary education, from printing , money from fiscal policy objectives vary. In the short term, the population (internal or domestic borrowing) governments may focus on macroeconomic or from abroad (external debt), of stabilisation - for example, expanding fiscal reserves, and of fixed assets such as. spending or cutting taxes to stimulate an ailing

economy, or slashing spending or raising taxes Significance and the Workings of Fiscal to combat rising inflation or to help reduce Policy external vulnerabilities. In the longer term, the When policymakers seek to influence the aim may be to foster sustainable growth or economy, they have two main tools at their reduce poverty with actions on the supply side disposal - monetary policy and fiscal policy. to improve infrastructure or education. Central banks indirectly target activity by Although these objectives are broadly shared influencing the money supply through across countries, their relative importance adjustments to interest rates, bank reserve differs, depending on country circumstances. In requirements, and the purchase and sale of the short term, priorities may reflect the government securities and foreign exchange. business cycle or response to a natural disaster Governments influence the economy by or a spike in global food or fuel prices. Again, in changing the level and types of taxes, the extent the longer term, the drivers can be development and composition of spending, and the degree levels, demographics, or natural resource and form of borrowing. Governments directly endowments. The desire to reduce poverty and indirectly influence the way resources are might lead a low-income country to tilt used in the economy. A basic equation of spending toward primary health care, whereas national income accounting that measures the in an advanced economy, pension reforms output of an economy–or gross domestic might target looming long-term costs related to product (GDP) - according to expenditures an aging population. In an oil-producing helps show how this happens: country, policymakers might aim to better align

GDP = C + I + G + NX fiscal policy with broader macroeconomic developments by moderating pro-cyclical

On the left side is GDP - the value of all final spending; both by limiting bursts of spending goods and services produced in the economy. when oil prices rise and by refraining from On the right side are the sources of aggregate painful cuts when they drop.spending or demand - private consumption (C), private investment (I), purchases of goods and If the economy faces a recession, the services by the government (G), and exports government is supposed to cut taxes and minus imports equals net exports(NX). This increase spending. When it does this, people equation makes it evident that governments have more money and can buy more goods and affect economic activity (GDP), controlling G services. This will lead to more jobs for people directly and influencing C, I, and NXindirectly, who make those goods and services. By through changes in taxes, transfers, and contrast, if the government fears inflation, it is spending. Fiscal policy that increases aggregate supposed to raise taxes and cut spending. This demand directly through an increase in decreases the amount of disposable income that government spending is typically called people have and so they spend less and prices expansionary or loose fiscal strategy. By do not rise. Fiscal policy deals with contrast, fiscal policy is often considered government's decisions on taxing and spending

transfer payments

fundedTaxation Seigniorage

money borrowing

consumptionsale

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http://en.wikipedia.org/wiki/Transfer_payment

http://en.wikipedia.org/wiki/Revenue

http://en.wikipedia.org/wiki/Taxation

http://en.wikipedia.org/wiki/Seigniorage

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Debt

http://en.wikipedia.org/wiki/Consumption_%28economics%29

http://en.wikipedia.org/wiki/Sales

programmes. Most economists believe that a Where: PrInv = Private sector Investment, Tx t t

blend of fiscal policy with monetary policy is = Tax Revenue, IR = Real Interest Rate,t

the most important means of regulating the rate CPI = Consumer Price Index, GXP t t

of inflation in an economy and preventing or = Government Expenditure, ì tcontrolling economic depression. A government = Error Correction Termcan use fiscal policy to reduce the demand for goods and services. It can prevent depressions Hypothesisby encouraging spending, while rate of inflation The study is based on the understated can be controlled by discouraging spending. Tax

Hypothesis:rates, which are determined by fiscal policy,

H : Fiscal policy does not have a significant ocontrol the level of expenses by influencing the effect on crowding out private sector investment amount of money people have for spending. A in Nigeriagovernment can also decrease or increase its

own spending to manage inflation and H :Fiscal policy does have a significant effect 1depression in the economy. This is the principle on crowding out private sector investment in of fiscal operations.Nigeria The hypothesis was tested at 5% and 10% levels of significance gauged by p-value.3.0 METHODOLOGY,

The methodology of the study employs the use 4.0 RESULTS AND DISCUSSION OF of multiple regression equation of a simple

FINDINGSmacro-econometric model to estimate the Phillips-Perron unit root test was used to test the parameters of the fiscal policy model. Annual order of integration and to solve the problem of data were collected for the period (2000-2012) non-stationary of variables (see Appendix). The from various sources including Central Bank of empirical model is developed in the light of Nigeria (various issues), National Bureau of recent developments in the methodology of Statistics (NBS), and Federal Inland Revenue econometric modeling and the analysis of time Service (FIRS).First and foremost, unit root test series with stochastic non-stationary was conducted to determine the order of components starting with an analysis of the unit integration for the variables. After that, stability root properties of the relevant series. The results test was done to test the stability of private clearly showed that the variables are indeed, sector investment in the presence or otherwise integrated of order one. The results are given in of its crowding out effects in Nigeria. The Table 1 indicating that almost all the variables following macro-econometric model was used are found to be stationary at first difference.for analysis.

PrInv = f (TX, IR, CPI, GXP) … (1)t

PrInv = â + â Log(TX) + â Log(IR) + â Log(CPI) + t 0 1 2 3

â Log(GXP) + ì … (2)4 t

Table 1: Phillips-Perron Unit Root Test Variables Level of stationarity Level of significance Private Investment I(2) - 4.46 -1.95 Company taxation I(1) - 6.47 -1.95 Interest rate I(1) -8.72 -1.95 Inflation rate I(1) - 5.81 -1.95 Government Expenditure I(1) -4.93 -1.95

Source: Researchers’ Computation

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Table 2: Regression Result after First Differencing Variables (differenced) (DPRINV) D(TAX) -0.0082 ( 0.5383) D(INTR) -1228.6 ( 0.0856) D(CPI) -100.46 ( 0.7391) D(GXP) -0.0159 ( 0.733) CONSTANT 11968.01 (0.3566) N 31 F* 0.23 P-Value ( 0.9166) Source: Researchers’ Computation

The first differenced regression result is investment, since the p-value is significant shown in table 2. The fiscal policy variables at 5% and 10% levels, hence the crowding in the regression equation showed a out effect. This implies that the null negative effect on private investment in hypothesis is rejected while alternate Nigeria, from 2000 to 2012. The result hypothesis is accepted; that fiscal policy indicated that increase in the level of does crowd out private sector investment in taxation by government on private Nigeria. The result also revealed that there companies bring about a reduction in the are no problems of auto-correlation and level of investment by the private sector in heteroscedasticity since a robust regression the country. Again, interest rate level affects equation known as Newey-West HAC the level of investment in Nigeria, as a unit Standard Errors and Covariance (HAC increase in the interest rate reduces procedure) was run during regression.A significantly the level of private sector stability test was conducted using a investment. As a result of these, inflation graphical representation to investigate the rate and the amount of government stability of the private investment in expenditure also showed a negative impact Nigeria since 2000 to 2012. It showed that on the level of private sector investment in the private sector investments in Nigeria Nigeria. Given the level of government have not been stable due to the effects of the expenditure from the regression result, the fiscal activities of the government as level of interest rate indicated a high and depicted graphically on the graph below.significant reduction in private sector

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5 . 0 C O N C L U S I O N A N D the regression result showed negative signs. RECOMMENDATION The empirical results indicated that fiscal The study has shown that the ability of policy is important for sustainable fiscal policy to affect output by affecting economic growth in Nigeria; to regulate aggregate demand makes it a potential tool economic activities of the private sector. for economic stabilisation. Based on the However, this could crowd out private findings, the most immediate effect of fiscal investments. A mix policy that could bring policy is to change the aggregate demand about a little control by the government for goods and services. A fiscal expansion, without seriously pushing up the rate of for example, raises aggregate demand interest resulting to the crowding out effects through one of two channels. First, if the is necessary. In the short-run, economic government increases its purchases but development can be stimulated by keeps taxes constant, it increases demand controlling interest rate and government directly. Second, if the government cuts expenditures at the cost of inflation. taxes or increases transfer payments, However, such a policy might affect the households' disposable income rises, and speed of growth process but a stable private they will spend more on consumption. This investment would positively impact on the rise in consumption will in turn raise economy.aggregate demand. It implies that fiscal policy changes the composition of The paper recommends that government aggregate demand. When the government expenditures should be tailored towards the runs a deficit, it meets some of its expenses provision of infrastructures, power, and by issuing bonds. In doing so, it competes regulatory support that could provide a with private borrowers for money loaned by level playing field for the private corporate savers. Holding other things constant, it is sector to thrive in Nigeria. This will reported in this study that a fiscal expansion facilitate capital accumulation and will raise interest rates and crowd out some investment that will accelerate the growth private investment, thus reducing the of income, employment and output rather fraction of output composed of private than limit the expansion of private investment. This finding is in consonance investments in the country. Since fiscal with the result obtained by Weil (2008). policy crowds out private investment in

Nigeria, government should focus more on Recall that the objective of this study was to monetary discipline in order to restore determine the effects of fiscal policy on the stability in the private sector and the private sector investment in Nigeria and to economy as a whole. This is in accord with ascertain the reality of the theory of the the suggestion given by Ajayi (1974), crowding-out effects on the Nigerian though a combination of both fiscal and economy since 2000 to 2012. The unit root monetary policies is recommended for test, stability test and the robust regression economic growth and stability in the analysis were made. The results indicated country. For the purpose of cyclical policy that fiscal policy affects the long run options, the government can run an economic development of the private sector expansionary fiscal policy during recession investment in Nigeria. All the variables in to help restore output to its normal level and

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Macroeconomic Issues 89-113to put unemployed workers back to work. Barro, R. (1990). Government spending in a In period of recession, discretionary fiscal

simple model of endogenous growth policy has become important to moderate Journal of Political Economy 98, business cycle swings. Discretionary fiscal 103-125policy implies calls for tax cuts or new

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Begg, D., Fischer, S. & Dornbusch, R. unemployment, the government can run a (1994). Economics. 4th edn budget surplus, helping to slow down the London. Bath Press, the

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