effect of fiscal policy on growth of …...effect of fiscal policy on growth of small - medium scale...

Sahel Analyst: ISSN 1117-4668 22

EFFECT OF FISCAL POLICY ON GROWTH OF SMALL - MEDIUM

SCALE ENTERPRISES IN NIGERIA

Gbande, Cephas1 [email protected]

Udoh, Francis Sylvanus1

[email protected]

Frank, Bassey Ime2

Abstract

The effect of fiscal policy on total demand for goods and services at any

particular income level depends on tax-transfer yields and purchases of goods

and services. These amounts in turn result from a movement along given tax-

transfer and expenditure schedules. Despite the emphasis placed on fiscal policy

in the management of the economy, the SMEs sector inclusive, Nigerian

economy is yet to come on the path of sound growth and development because of

high tax and poor government expenditure, which in turn affect low output and

productivity in the SMEs sector and its contribution to the economy (GDP). The

main objective of this study is to examine the effect of fiscal policy on the growth

of small and medium enterprises in Nigeria from 1999 to 2016. The research

design adopted for this study was the ex post facto research design, and the

Error Correction Model (ECM) was used to analyse the time series data,

whereas the Johansen co-integration approach was employed to test for the

long-run relationship among the series. The findings reveal that there is no

significant effect between tax rate (TAR) and growth of SMEs in Nigeria, but

there is a significant effect between government expenditure (GEXP) and

growth of SMEs in Nigeria. Therefore, the study recommends that government

has to be sensitive to the variables in the tax environment so as to enable the

SMEs sector cope with the ever-changing dynamics of the SMEs environment.

Also, government should maintain its capital expenditure, as this will continue

to have a multiplier effect on the growth of SMEs activities and enhance the

overall economic growth in Nigeria.

Keywords: Fiscal Policy, Tax Rate, Government Expenditure, and SMEs

1 Department of Business Administration, Nasarawa State University Keffi

2 Department of Insurance, University of Uyo [email protected]

mailto:[email protected]



Sahel Analyst: Journal of Management Sciences (Vol.16, No.4, 2018), University of Maiduguri

Sahel Analyst: ISSN 1117- 4668 Page 123

Introduction

Nigerian government over the years embarked on various macroeconomic

policy options to grow the economy in terms of growth and development. One

of the policy options employed is that of fiscal policy. Fiscal policy is the use of

government revenue collection (taxation) and expenditure (spending) to

influence the economy. The two main instruments of fiscal policy are

government taxation and government expenditure. It can also be seen as

government spending policies that influence macroeconomic conditions. These

policies affect tax rates, interest rates and government spending, in an effort to

control the economy (Peter & Simeon, 2011).

The implementation of fiscal policy is essentially routed through government's

budget. Budget as a fiscal policy tool could be conceived as a structure that

balances the changes in government revenue against expenditure over a period

of time. It is a comprehensive financial plan, setting forth the expected route for

achieving the financial and operational goals of a country (Meigs & Meigs,

2004). The intent of fiscal policy is to stimulate economic and social

development by pursuing a policy stance that ensures a sense of balance

between taxation, expenditure and borrowing that is consistent with sustainable

growth. Macroeconomic policies (fiscal and monetary) are indispensable tools

that can be used to lessen short-run fluctuations in output and employment (Oke,

2013). They have been recognised in policy debates by both developed and

developing economies as potent apparatus in the hands of policy makers for

handling macroeconomic issues like high unemployment, inadequate national

savings, excessive budget deficits, and large public debt burdens (Oke, 2013).

The role of fiscal policy on the productivity and capacity utilisation of the small

and medium enterprises sector cannot be overemphasised. Fiscal policy drives

the growth of Small and Medium Enterprise (SMEs) sector through the

purposeful manipulation of government revenue and expenditure. When

government is pursuing an expansionary policy, it reduces taxation and

increases expenditure and the purchasing power of the economic units, which in

turns expands the market for SMEs products. This in turn sends a signal to the

SMEs operators to increase their productive capacity to take opportunity of the

increase market demand. The reverse holds when a contractionary policy is

being pursued.

The basic fiscal policy instruments are public expenditure and tax. On the one

hand, government expenditure can provide an impulse for SMEs growth, while

on the other hand; it can be harmful if it results in budget deficits and leads to

competition for scarce financial resources from the banking sector as the

government seeks to finance the deficit (Ezeoha & Chibuike, 2005). The

question that comes to mind is what form of fiscal policy will perform better in

reducing tax rate and promote government expenditure (spending) or medium-

Effect of Fiscal Policy on Growth of Small - Medium Scale Enterprises in Nigeria

Sahel Analyst: ISSN 1117-4668 Page 124

term budget expenditure to stimulate SMEs growth. One of the most important

objectives of Nigeria’s fiscal policy is to reduce tax and increase government

spending. Unfortunately, in Nigeria, government fiscal policy in terms of tax

rate increases continuously in the past two decades (Obi & Abu, 2009).

From the 1980s, and in recognition of the role of small and medium scale

enterprises in the economic development process of nations, successive

governments in Nigeria have shifted their emphasis away from large-scale

capital-intensive industrialisation in favour of SMEs. The growth and

development of SMEs is therefore perceived as a cardinal and veritable tool in

the industrialisation process of Nigeria. But as observed by Ovat (2013) and

Afolabi (2013), the existence and survival of these small and medium scale

enterprises are to a large extent depends on both a robust economic policy and

financing.

The World Bank characterises developing nations like Nigeria as low-income

earners. However, such nations value small and medium scale enterprises

(SMEs) for several reasons, including employment generation, contribution to

GDP and productivity. The main argument here is that SMEs, on the balance,

achieve decent levels of productivity, especially of capital and factors taken

together that is the total productivity factor, while also generating relatively

large amounts of socio-economic development like its contribution to the

economic GDP. In dynamic terms, firms with considerable growth potentials

mostly populate the SMEs sector. To a great extent, SMEs in developing

countries achieve increased productivity simply by borrowing from the shelf of

technologies available in the world (Christopoulos & Tsionas, 2004).

Churchill and Lewis (2013) identify growth stage models as those attempts to

link growth with particular stages of development. However more examination

is needed about the SME's capability to adapt, deploy skills and focus assets and

of how such procedures lead to ultimate success. Clearly as firms and

particularly SMEs grow they face threats and opportunities and it is legitimate

that management researchers should seek to examine the influences.

There are lots of emphasis placed on fiscal policy in the management of the

economy, the SMEs sector inclusive, Nigerian economy particularly the SMEs

is yet to come on the path of sound growth and development because of high tax

and poor government expenditure, which in turn affect low output and

productivity in the SMEs sector and its contribution to the economy (GDP).

Also, giving several governments fiscal policies on the stability of Nigerian

economy and SMEs sectors, there have been a lot of challenges facing the

growth of SMEs in Nigerian. These challenges include: corruption and

ineffective fiscal policies, weak or lack of integration of macroeconomic plans

and the absence of unity and coordination of fiscal policy to SMEs and lack of



economic potential for rapid SMEs growth and development.

Previous studies such as Arikpo, Ogar and Ojong (2017) examined the impact of

fiscal policy on the performance of the manufacturing sector in Nigeria. The

study was specifically meant to assess the extent to which government revenue

and expenditure impacted on the manufacturing output in Nigeria. Osinowo

(2015) examined the effect of fiscal policy on sectoral output growth in Nigeria

for the period of 1970-2013. The study employed an Autoregressive Distributed

lag (ARDL) and Error Correction Model (ECM). Onyekachi and Ogiji (2013)

study examined the impact of fiscal policy on the manufacturing sector output in

Nigeria. Empirical evidence from the developed and developing economies has

shown that fiscal and monetary policies have the capacity to influence the entire

economy if it is well managed. Also, Onuorah and Akujuobi (2012) examined

the trend and empirical analysis of public expenditure (RGPE) and its impact on

the economic growth (RGDP) in Nigeria. The study employed Johansen Co-

integration and VEC and found that RGPE established long run relationship

with RGDP. However, none of these studies focused on fiscal policy and growth

of small and medium enterprises. Therefore, in the light of the above, this study

fills the research gap by empirically examining the effect of fiscal policy on the

growth of SMEs in Nigeria, from 1999 to 2016 using an Autoregressive

Distributed lag (ARDL) and Error Correction Mechanism (ECM).

The main objective of this study was to examine the effect of fiscal policy on

the growth of small and medium enterprise in Nigeria. Other specific objectives

include: to evaluate the effect of tax rate on the growth of SMEs in Nigeria and

to examine the effect of government expenditure on the growth of SMEs in

Nigeria.

In line with the objectives, the following hypotheses are formulated in a null

form, they are:

H01: There is no significant effect between tax rate (TAR) and the growth of

small and medium enterprises in Nigeria

H02: There is no significant effect between government expenditure (GEXP)

and the growth of small and medium enterprise in Nigeria

This study is restricted to fiscal policy and growth of small and medium

enterprises in Nigeria with reference to the entire registered SMEs in Nigeria,

which are 72,838 according to SMEDAN and National Bureau of Statistic

(2013). The study covers the period from 1999 to 2016. This period is chosen

because it assesses the period of the past and present government, since the

country’s attention is gradually shifting away from the dependency on crude oil

as the price has fallen and Nigeria is trying to improve the level and growth of

her SMEs so as to create many jobs within this period and finally trying to



increase the productivity of SMEs, capacity utilisation and employment

generation especially at this time of post-recession.

Concept of Fiscal Policy

In economics and political science, fiscal policy is the use of government

revenue collection (mainly taxes) and expenditure (spending) to influence the

economy. According to Keynesian economics, when the government changes

the levels of taxation and government spending, it influences aggregate demand

and the level of economic activity. Fiscal policy is often used to stabilise the

economy over the course of the business cycle (Sheffrin, 2003). Changes in the

level and composition of taxation and government spending can affect the

following macroeconomic variables, amongst others: aggregate demand and the

level of economic activity, savings and investment and income distribution.

Fiscal policy involves the decisions that a government makes regarding

collection of revenue, through taxation and about spending that revenue. It is

often contrasted with monetary policy, in which a central bank (like the Federal

Reserve in the United States) sets interest rates and determines the level of

money supply (Grimsley, 2017)

The term fiscal comes from the Latin word fiscalis, which in turn comes from

fiscus, i.e. a basket used for collecting money. In English the expression ―fiscal

policy‖ was apparently first used by Edwin R.A. Seligman, a prominent

professor of public finance at Columbia University in the early part of the 20th

Century. He used the expression to criticise Adolf Wagner, a German

economist, who had suggested that governments should engage in some

redistribution of income through their budgetary activities. This seems to be the

genesis of the ―redistribution branch‖ of the trilogy made popular by Richard

Musgrave (1959). The Keynesian revolution changed the meaning of fiscal

policy moving it away from the tax or revenue side of the budget to include both

revenue and spending. For the Keynesians, fiscal policy refers to the

manipulation of taxes and public spending to influence aggregate demand.

The effect of fiscal policy on total demand for goods and services at any

particular income level depends on tax-transfer yields and purchases of goods

and services. These amounts in turn result from a movement along given tax-

transfer and expenditure schedules (automatic policies) and shifts in such

schedules through legislation or other governmental action (discretionary

policies). The initial effect on total demand (the multiplicand) can be converted

into an induced change in income by applying the proper multiplier (Brown,

1956)



Fiscal Policy Framework

When policymakers seek to influence the economy, they have two main tools at

their disposal—monetary policy and fiscal policy. Central banks indirectly

target activity by influencing the money supply through adjustments of interest

rates, bank reserve requirements, and the sale of government securities and

foreign exchange; governments influence the economy by changing the level

and types of taxes, the extent and composition of spending, and the degree and

form of borrowing (Horton, & El-Ganainy, 2009). Governments directly and

indirectly influence the way resources are used in the economy. The basic

equation of national income accounting helps show how this happens:

GDP = C + I + G + NX.

On the left side is gross domestic product (GDP)—the value of all final goods

and services produced in the economy. On the right side are the sources of

aggregate spending or demand—private consumption (C), private investment

(I), purchases of goods and services by the government (G), and exports minus

imports (net exports, NX). This equation makes it evident that governments

affect economic activity (GDP), controlling G directly and influencing C, NX,

and I indirectly, through changes in taxes, transfers, and spending (Horton, &

El-Ganainy, 2009). Fiscal policy that increases aggregate demand directly

through an increase in government spending is typically called expansionary or

―loose.‖ By contrast, fiscal policy is often considered contractionary or ―tight‖ if

it reduces demand via lower spending.

Tax

Ariwodola (2001) described tax as a compulsory levy imposed by the

government authority through its agents on its subjects or his property to

achieve some goals. Arnold and Mclntyre, (2002) define tax as a compulsory

levy on income, consumption and production of goods and services as provided

by the relevant legislation. Tax is a charge imposed by government authority

upon property, individuals, or transactions to raise money for public purposes.

This definition is however debatable. The study of the teachings of Christianity,

Islamic and other prominent religions in the world shows that tax is a religious

duty based on social and civil responsibilities (Agbetunde, 2004).

A tax (from the Latin taxo) is a mandatory financial charge or some other type

of levy imposed upon a taxpayer (an individual or other legal entity) by a

government in order to fund various public expenditures. (McLure, Jr, 2015) A

failure to pay, along with evasion of or resistance to taxation, is punishable by

law. Taxes consist of direct or indirect taxes and may be paid in money or as its

labour equivalent. Most countries have a tax system in place to pay for

public/common/agreed national needs and government functions: some levy a

flat percentage rate of taxation on personal annual income, some on a scale

based on annual income amounts, and some countries impose almost no taxation

at all, or a very low tax rate for a certain area of taxation.



Iwuji (n.d.) defines tax as a statutory compulsory contribution imposed by

government exacted from a person’s or entity’s income, property or transaction

for the purpose of funding governance. To him, tax can either be of three basic

structures; proportional, regressive or progressive. Tax is said to be proportional

when the taxpayer is levied an amount that is an indirect proportion of his

income. A regressive tax is one that charges a higher rate to persons receiving

lower income, and finally a progressive tax levies a higher rate to higher income

earners. Nigeria runs a tripartite tax administration system where tax assessment

and collection is presently carried out through the revenue collection agencies of

the State and Federal Governments of Nigeria: the State Board of Internal

Revenue (SBIR) and the Federal Inland Revenue Service (FIRS) and the tax

administration in Nigeria is basically imposed through Acts of the National

Assembly Iwuji (n.d.)

Gabay, Remotin and Uy (n.d) define taxation as the process by which the

sovereign, through its law making body, raises revenues used to defray expenses

of government, a means of government in increasing its revenue under the

authority of the law, purposely used to promote welfare and protection of its

citizenry, and the collection of the share of individual and organisational income

by a government under the authority of the law.

Taxation is an integral part of countries’ development policies, interwoven with

numerous other areas, from good governance and formalising the economy, to

spurring growth through, for example, promoting small and medium sized

enterprises (SMEs) and stimulating export activities. Among other things,

taxations provides governments with the funding required to build the

infrastructure on which economic development and growth are based, creates an

environment in which business is conducted and wealth is created; shapes the

way government activities are undertaken; and plays a central role in domestic

resource mobilisation (NEPAD & OECD, 2009).

Tax policy is the choice by a government as to what taxes to levy, in what

amounts, and on whom. It has both microeconomic and macroeconomic aspects.

The macroeconomic aspects concern the overall quantity of taxes to collect,

which can inversely affect the level of economic activity; this is one component

of fiscal policy. The microeconomic aspects concern issues of fairness (who to

tax) and allocative efficiency (i.e., which taxes will have how much of a

distorting effect on the amounts of various types of economic activity)

Government Expenditure

Government spending affects nearly every sector of the economy. The federal

government spends money on such things as national defense, entitlement

programmes (such as Social Security and Medicare), interest on the national

debt and discretionary spending that ranges from purchasing paper clips and



funding scientific research to building infrastructure and subsidising farms. State

and local governments spend money on roads, schools and infrastructure. The

best way to look at the scope of government spending is to take a look at the

federal budget (Grimsley, 2017).

Government spending pumps tremendous amounts of money into the hands of

citizens through entitlement programmes where they can spend it on goods and

services that are purchased from regular businesses. The government also

pumps a tremendous amount of money into the hands of private businesses

when it purchases goods and services, ranging from pencils to multi-billion

dollar aircraft carriers (Grimsley, 2017). All this economic activity helps grow

the economy and create jobs and, ideally, it will improve the lives of citizens.

Government spending has also been considered a paramount tool during times

of economic hardships, such as during periods of high unemployment,

recessions and depressions. According to one school of thought, known as

Keynesian economics, government should spend money during times of

economic downturns to stave off recessions and depressions (Grimsley, 2017).

The idea is that government spending helps offset the drop in private sector

spending by consumers and businesses to stimulate growth. If the government is

buying, then businesses can sell and employees can work, which increases the

money available for both business and consumer spending. Eventually, the

private sector spending will pick up and government spending can decline.

Concept of Small and Medium Enterprises

The Monetary Policy Circular No. 22 of 1988 of the Central Bank of Nigeria

defined small-scale enterprises as enterprises whose annual turnover was not

more than N500, 000. In the 1990 budget, the Federal Government of Nigeria

defined small-scale enterprises for purposes of commercial bank loans as those

with an annual turnover not exceeds N500, 000, and for Merchant Bank Loans,

those enterprises with capital investments not exceeding 2 million naira

(excluding cost of land) or a maximum of N 5 million. The National Economic

Reconstruction

Fund (NERFUND) put the ceiling for small-scale industries at N10 million.

Section 37b (2) of the Companies and Allied Matters Decree of 1990 defines a

small company as one with an annual turnover of not more than N2 million and

net asset value of not more than 1 million naira (Ekpenyong & Nyong, 1992).

The Small and Medium Enterprise Equity Investment Scheme (SMEEIS) sees

the SMEs as ―any enterprise with a maximum asset base of N500 million

(excluding land and working capital), and with no lower or upper limit of staff‖.

In 1992, the National Council on Industry for the purposes of clarity as regards

the definition of SMEs in Nigeria came up with a definition which was to be



reviewed every four years, in essence taking care of the lack of uniformity that

arose due to the many different definitions as suited many different bodies

making them. This definition divided the small and medium enterprise sector

into micro, small and medium enterprises. These sub-categories was defined by

the National Council on Industry at their 13th Council meeting. However for tax

purposes, Section 40(6) of the Companies Income Tax Act Cap C21 LFN 2004

alludes to companies with a turnover of N1 million and below operating in the

manufacturing, agricultural production, solid mineral mining, and export trade

sectors as SMEs; While subsection 8 states that as from 1988 all companies

engaged in trade or business with a turnover of N500, 000.00 and below qualify

as small and medium enterprises (Iwuji, n.d).

In an attempt to separate small enterprises from medium enterprises, a Survey

Report on MSMEs in Nigeria (2012) defines small enterprises as those

enterprises whose total asset excluding land and building are above 5 million

Naira but not exceeding 50 million Naira with total workforce of above 10 but

not exceeding 49 employees. While the medium enterprises are those enterprises

whose total asset excluding land and building are above 50 million Naira but not

exceeding 500 Million Naira with a total workforce of between 50 and 199

employees (Julius, Agbolade, & Johnson, 2016). In regards to the number of

workers employed in an enterprise, various scholars and institutions have made

notable agitations. According to Small and Medium Enterprises Development

Agency of Nigeria (SMEDAN, 2012), a business is defined as small in the

manufacturing sector if it employs fewer than 100 employees, though there is no

official definition of what constitutes a medium-sized enterprise.

Empirical Studies

Arikpo, Ogar and Ojong (2017) examined the impact of fiscal policy on the

performance of the manufacturing sector in Nigeria. The study was specifically

meant to assess the extent to which government revenue and expenditure

impacted manufacturing output in Nigeria. To achieve these objectives, relevant

literatures were reviewed. An ex-post facto research design was adopted for the

study. Time series data were collected from the CBN statistical Bulletin using

the desk survey method from 1982 to 2014. The data were analysed using the

ordinary least square multiple regression statistical technique. Result from the

analyses revealed that increases in government revenue reduce manufacturing

sector output in Nigeria. Finally, Government should increase it expenditure on

infrastructural development and community services, as this will have a

multiplier effect on manufacturing activities and enhance economic growth in

Nigeria. The study is very current and used only government expenditure

fluctuations on performance of manufacturing in Nigeria. Government

expenditure was used as a measure of fiscal policy variable. The study did

indicate the years of study but not the population of the study, meaning it should

have stated the number of manufacturing firms in Nigeria and the source of



information, for example (MAN, 2017). The sample size of the study was not

indicated and should have made use of higher statistical econometric tools of

analysis such as e-views, stata, VEC etc. because this higher tool of analysis will

screen all possible errors in the data, given the data collated is for 33 years.

Osinowo (2015) examined the effect of fiscal policy on sectoral output growth

in Nigeria for the period of 1970-2013. The study employed an Autoregressive

Distributed lag (ARDL) and Error Correction Model (ECM). The results

showed that total fiscal expenditure (TEXP) positively contributed to all the

sectors output with an exception of agriculture sector. The findings established

that manufacturing sector has a positive relationship with all the determinant

variables, while inflation rate has negatively impacted output growth of the

various sectors with an exception of manufacturing sector. The study concluded

that the existence of disparity in the sectoral response to fiscal policy variables

underscored the difficulty of conducting uniform and economic wide fiscal

policy in Nigeria. Therefore, the best policy approach is to adopt sector specific

policy based on their relative strength and significance in each sector of the

economy within the overall fiscal policy mechanism framework. The study of

Osinowo (2015), is a bit confusing because fiscal policy measures does not

include inflation but the tools of analysis employed was good and the scope of

the study was long enough.

Ezejiofor, Adigwe and Nwaolisa (2015) study seek to assess whether tax as a

fiscal policy tool affect the performance of the selected manufacturing

companies in Nigeria. To achieve the aims of the study, descriptive method was

adopted and data were collected through the use of six years financial accounts

of the selected companies. The hypothesis formulated for the study was tested

with the ANOVA, using the Statistical Package for Social Sciences (SPSS)

version 20.0 software package. The study found that Taxation as a fiscal policy

instrument has a significant effect on the performance of Nigerian

manufacturing companies. The implication of the finding is that the amount of

tax to be paid depends on the companies’ performances. Based on the findings,

it was recommended among others that the government is required to be

sensitive to the variables in the tax environment and other macro-environmental

factors so as to enable the manufacturing sector cope with the ever changing

dynamics of the manufacturing environment. A very good study from Ezejiofor,

Adigwe and Nwaolisa in 2015, but the names of selected companies used in this

study were not mentioned and the scope of the study also was not stated.

Udoka and Anyingang, (2015) investigated the effect of public expenditure on

the growth and development of Nigerian economy (1980-2012). Three research

hypotheses were formulated to guide the study. The hypotheses thus

investigated the influence of aggregate expenditure, capital expenditure and

recurrent expenditure on economic growth and development in Nigeria. Ex-post



facto research design was adopted for this study. Data were obtained from

annual publications of Central Bank of Nigeria. Data gathered were analysed

using Ordinary least square multiple regression statistical technique. Result of

the findings revealed that aggregate expenditure had a positive impact on

economic growth and development of Nigeria economy and capital and

recurrent expenditure had a significant relationship on the growth and

development of the Nigerian economy. Well broken down study by Udoka and

Anyingang, (2015) who investigated the effect of public expenditure on the

growth and development of Nigerian economy 1980-2012? But the study failed

to explain the measure(s) that was adopted for Nigerian economy.

Onyekachi and Ogiji (2013) study examine the impact of fiscal policy on the

manufacturing sector output in Nigeria. Empirical evidence from the developed

and developing economies has shown that fiscal and monetary policies have the

capacity to influence the entire economy if it is well managed. An ex-post facto

design (quantitative research design) was used to carry out this study. The

results of the study indicate that government expenditure significantly affect

manufacturing sector output based on the magnitude and the level of

significance of the coefficient and p-value and there is a long-run relationship

between fiscal policy and manufacturing sector output. The implication of this

finding is that if government did not increase public expenditure and its

implementation, Nigerian manufacturing sector output will not generate a

corresponding increase in the growth of Nigerian economy. The arrangement of

this study by Onyekachi and Ogiji (2013) is very weak. The scope of the study

was not mentioned, the tools of analysis used and how it was derived was not

stated, but went straight to findings of the study and this makes the study a bit

confusing.

Onuorah and Akujuobi (2012) examined the trend and empirical analysis of

public expenditure and its impact on the economic growth in Nigeria. The study

employed Johansen Co-integration and VEC and found that RGPE established

long run relationship with RGDP. Finally, there is no statistical significance

between public expenditure variables and the economic growth in Nigeria. The

study recommended that government should embark on realistic policy

implementation with sincere fiscal and monetary policies in place that can

monitor to greater extend and help in the sustainability for remarkable growth to

be recorded in the Nigeria. The above study did not define the population and

scope of the study. The study used Johansen Co-integration and VEC to

ascertain the long run relationship between the dependent and independent

variable, which was very good, but failed to state how the findings of the result

was arrived at and this, makes the study to be very weak.

Ojeka (2011) tries to establish if any relationship exists between the growth of

SMEs and the tax policy environment in which they operate in Nigeria.



Questionnaires were distributed to SMEs in Zaria, North Central, Nigeria and

non-probability judgmental sampling method was employed. The hypothesis

was tested using Spearman's Rank Correlation. It was found out that from most

SMEs surveyed, they were faced with the problem of high tax rates, multiple

taxation, complex tax regulations and lack of proper enlightenment or education

about tax related issues. Although there was a general perception that tax is an

important source of fund for development of the economy and provision of

social services, the study revealed a significant negative relationship between

taxes and the business' ability to sustain itself and to expand. In order to obtain a

vibrant and flourishing SME sector, the tax policy needs to be appropriate such

that it will neither be an encumbrance to the SMEs nor discourage voluntary

compliance. The study of Ojeka (2011) tries to establish if any relationship

exists between the growth of SMEs and the tax policy environment in Nigeria.

In my own opinion, when SMEs operator(s) pays tax, there is always

documented evidence; therefore the use of questionnaires in this study was not

appropriate. Also, the scope of the study was not stated, that is from what year

to what year, the populations of SMEs in Zaria which is not in North Central

was also not stated.

Adenikinju and Olofin (2000) focus on the role of economic policy in the

growth performance of the manufacturing sectors in African countries. They

utilise panel data for seventeen African countries over the period 1976 to 1993.

Their econometric evidence indicates that government policies aimed at

encouraging foreign direct investment, enhancing the external competitiveness

of the economy, and maintaining macroeconomic balance have significant

effects on manufacturing growth performance in Africa. The study of

Adenikinju and Olofin (2000) would have been a fantastic study if they had

stated the measures employed for economic policy and the measure for

manufacturing sectors in African countries. Finally, the study did not mention

the scope, research design adopted and tools of analysis that was employed to

regress the study.

Aigbokhan (1996) examine expenditure and growth in Nigeria. In order to

complement the single equation model and account for the interdependency of

expenditure and growth in Nigeria, a vector autoregressive model of three

variables namely real output, federal government expenditure and state

government expenditure was employed. Based on the Ram type production

function, the empirical results show that while the externality of the alternative

expenditure (i.e. federal and state) is positive the overall impact of the

expenditure is growth retarding. The study is very weak as it lacks the

ingredients to make the study acceptable such as scope, research design

employed and tools of analysis used in the study.


Sahel Analyst: ISSN 1117-4668 4

From the empirical review above, all the empirical studies reviewed focused on

either the relationship between fiscal policy and fiscal policy variables and

manufacturing. None of these studies focus on the effect of fiscal policy on the

growth of SMEs in Nigeria. This study intends to fill this vacuum.

Theoretical Framework

The Savers-Spenders Theory Mankiw (2000) propounded the Savers-Spenders theory of fiscal policy. It has

three propositions that cover government revenue, expenditure and debt. The

first proposition states that temporary tax changes have large effects on the

demand for goods and services, meaning that alterations in tax rate charged on

tax payers reduces or increases their income and consumption. In other words,

higher tax rates reduce spenders’ take-home pay (income) while lower tax rate

or refunds increases spenders’ incomes. This in effect implies that the

purchasing power of spenders is affected by the rate of tax imposed on their

income at any particular point in time (Eze & Ogiji, 2013). The second

proposition believes that government expenditure crowds out capital in the long

run. By this, the theory implies that extra consumption reduces investment,

which in turn raises marginal product of capital and as well decrease the level of

employment and output. It is also of the opinion that higher interest rate margin,

induces savers to save more. The implication of this proposition is that extra

consumption and higher interest rate margin reduce investment, which in turn

reduces the level of output and employment (Eze & Ogiji, 2013).

The third proposition states that government debt increases steady-state

inequality. This means that a higher level of debt means a higher level of

taxation to pay interest on debt. The tax will fall on both the savers and the

spenders but the interest will only fall on savers (Eze & Ogiji, 2013). The

implication of this is that a higher level of debt raises the income and

consumption of the savers and lowers the income and consumption of the

spenders.

Methodology

The research design for this study is ex post facto, because the events the

researcher is studying had already taken place. This design can also be

applicable for studies geared toward ascertaining the cause–effect association

between the independent and dependent variables (Onwumere, Onodugo, & Ibe,

2013). Determining cause–effect relationships among the selected variables is

the major aim of this study; hence, the data are of secondary nature, collated

from SMEDAN, National Bureau of Statistics and the Central Bank of Nigeria

(CBN) statistical bulletins, covering the period 1999-2016. The annualised time

series data was analysed using the Autoregressive Distributed lag (ARDL) and

Error Correction Model (ECM), whereas the Johansen co-integration approach

is employed to test for the long-run effect among the series. In other words, the



underlying assumption is that all variables are integrated of order 1 or I (1). The

speed of adjustment was ascertained based on the ECM and was able to tell the

rate at which the previous period disequilibrium is adjusted toward equilibrium

path on an annual basis.

Model Specification

It is the aim of the researchers to derive the output effect of fiscal policy. To

achieve this, the researcher estimate for the growth of small and medium

enterprises in the linear regression equation:

0 1 2 (1)tGSME TAR GEXP

Where GSME is the real output (measured as annual percentage contribution of

the growth of SMEs sector to SMEs productivity), TAR is the tax rate (this is

the real tax rate) and GEXP is the spending on infrastructure by the government.

Equation 1 is the baseline long run model for determining the effect of fiscal

policy in Nigeria. It has been vastly emphasised in recent literature of financial

econometrics that upon the establishment of a long-run relationship, there is

need to integrate a model which fits in with short-run dynamic adjustment

process, which is the speed of adjustment (ECT) from short-run disequilibrium

to long-run equilibrium. Based on this, the researcher develops ECM by

modifying equation 1 as follows:

0 1 2 1

0 0

log log log (2)n o

i t j i t k t t

j k

GSME TAR GEXP ECT

Results and Analysis

Unit Root Test

Econometric studies have shown that most financial and macro-economic time

series variables are non-stationary and using non-stationary variables lead to

spurious regression (Engel & Granger, 1987). Thus, the variables were

investigated for their stochastic properties using ADF unit root test technique.

The result of unit root test is presented in Table 1

Table 1: Traditional Unit Root Test Result (Trend and Intercept)

Variables ADF -statistics Critical Values Order of integration

GSMEs -5.005201 -4.886426* I(1)

TAR -4.137198 -4.893950** I(1)

GEXP -7.579221 -5.719131* I(0)

Note: *, and ** indicate significant at 1% and 5% levels respectively

Source: Authors computations (2018), using Eviews-10

From Table 1, the traditional test of the ADF indicates that two of the variables

tend to be stationary at first difference and the two variables are GSMEs and



TAR which found to be integrated at order I(1). However, GEXP was found

stationary at levels {that is, integrated at order zero, I(0)}

Auto-regressive Distributed Lag (ARDL)

The ARDL approach developed by Pesaran and Shin (1999) and later extended

by Pesaran, Shin and Smith (2001) is relevant for a study of this nature. The

choice of the ARDL approach is that it has superiority over Johansen (1991) and

Engle and Granger (1987) approaches due to:

The endogeneity problems and inability to test hypotheses on the limited

coefficients in the long run associated with the Engle-Granger method are

avoided. In line with this and as demonstrated by Pesaran and Shin (1999), the

small sample properties of the bounds testing approach are superior to that of

the traditional Johansen cointegration approach, which typically requires a large

sample size for the results to be valid. That is, it has superior statistical

properties such as asymptotically unbiased and consistent (even) in small

samples as it is relatively more efficient in small sample data sizes found mostly

in studies on developing countries. In particular, Pesaran and Shin (1999)

showed that the ARDL approach also has better properties in both small and

large sample sizes; and even up to 150 observations.

Bound Test Approach to Co-integration

The next task of the study, having established the order of integration, is to

establish long run relationship among the variables. The result of the co-

integration test is presented in Table 2.

Table 2: Result of ARDL Bounds Test for Co-integration

F-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Significance I(0) I(1)

F-statistic 4.605378 10% 2.37 3.2

k 2 5% 2.79 3.67

1% 3.65 4.66


The co-integration test result shows that the F-statistic value of 4.63 is greater

than the lower (I(0)) and upper bound (I(1)) critical value at the 5% significance

level. Thus, the null hypothesis of no long-run relationship is rejected at the 5%

significance level. It can therefore be inferred that the variables are co-

integrated. Thus, there is a long-run co-integrating relationship between fiscal

policy and SMEs growth



Table 3: Result of ECM Dependent Variable: GSMES Method: ARDL Date: 06/21/18 Time: 08:50 Sample (adjusted): 2000 2016 Included observations: 17 after adjustments Maximum dependent lags: 2 (Automatic selection) Model selection method: Akaike info criterion (AIC) Dynamic regressors (3 lags, automatic): TAR GEXP Fixed regressors: C Number of models evalulated: 32 Selected Model: ARDL(1, 0, 0) Note: final equation sample is larger than selection sample

Variable Coefficient Std. Error t-value Prob.* GSMES(-1) 0.699204 0.195054 3.584673 0.0033

TAR -0.009676 0.007044 -1.373657 0.1928 GEXP 3.328568 1.546675 2.152079 0.0459

CointEq(-1)* -0.300796 0.063172 -4.761578 0.0004 C 1901.318 1593.376 1.193264 0.2541 R-squared 0.975351 Mean dependent var 31092.96

Adjusted R-squared 0.969663 S.D. dependent var 16008.74 S.E. of regression 2788.312 Akaike info criterion 18.90658 Sum squared resid 1.01E+08 Schwarz criterion 19.10264 Log likelihood -156.7060 Hannan-Quinn criter. 18.92607 F-statistic 11.14712 Durbin-Watson stat 1.795145 Prob(F-statistic) 0.000000

*Note: p-values and any subsequent tests do not account for model

selection.


The F-statistics, which is used to examine the overall significance of regression

model showed that the result is significant, as indicated by the value of the F-

statistic, 11.14 and it is significant at the 5.0 per cent level. That is, the F-

statistic P-value of 0.000 is less than 0.05. The 2R (R-square) value of 0.9753

shows that fiscal policy has a very good impact on SMEs growth in Nigeria. It

indicates that about 97.53 per cent of the variation in SMEs growth is explained

by fiscal policy, while the remaining unaccounted variation of 2.47 percent is

captured by the error term. The acceptable Durbin – Watson range is between

1.5 and 2.4 Koutsoyiannis (n.d.). The model also indicates that there is no

autocorrelation among the variables as indicated by Durbin Watson (DW)

statistic of 1.79. This shows that the estimates are unbiased and can be relied

upon for policy decisions.



Test of Hypotheses

Re-H01: There is no significant effect between tax rate (TAR) and the growth of

small and medium enterprises in Nigeria.

From the regression result in Table 3, it was observed that the calculated t-value

for TAR is -1.37 and whilst the tabulated (absolute) value is 1.96. Since the t-

calculated value is less than the t-tabulated (-1.37 < -1.96) it thus falls in the

acceptance region and hence, we accept the first null hypothesis (H01) and

conclude that There is no significant effect between tax rate (TAR) and the

growth of small and medium enterprises in Nigeria

Re-H02: There is no significant effect between government expenditure (GEXP)

and the growth of small and medium enterprise in Nigeria. Mores so, from the

regression result in Table 3 the calculated t-value for government expenditure

(GEXP) is 2.15 and the critical value is 1.96 under 95% confidence level. Since

the t-calculated value is greater than the critical value (2.15 > 1.96) it falls in the

rejection region and hence, we reject the second null hypothesis (H02). The

conclusion here is that there is a significant effect between government

expenditure (GEXP) and the growth of small and medium enterprise in Nigeria.

Discussion of Findings

Findings from the study showed that tax rate (TAR) has no significant effect on

the growth of small and medium enterprises in Nigeria, and this findings is in

conformity with the findings of Ojeka, (2011) who tries to establish if any

relationship exists between the growth of SMEs and the tax policy environment

in which they operate in Nigeria and found a significant negative relationship

between taxes and the business' ability to sustain itself and to expand. But

contrary to the study of Ezejiofor, Adigwe and Nwaolisa (2015), who found that

Taxation as a fiscal policy instrument has a significant effect on the performance

of Nigerian manufacturing companies. Also, the findings of the second null

hypotheses reveled that government expenditure (GEXP) has a significant effect

on the growth of small and medium enterprise in Nigeria, and this findings also

is in tandem with findings of Aigbokhan (1996) who examine interdependency

of expenditure and growth in Nigeria, in his empirical results show that while

the externality of the alternative expenditure (i.e. federal and state) is positive

the overall impact of the expenditure is growth retarding. Also, the study of

Onuorah and Akujuobi (2012) examined the trend and empirical analysis of

public expenditure and its impact on the economic growth in Nigeria shows a

negative impact of public expenditure on economic growth in Nigeria. The

theory that supports this study is the Savers-Spenders theory propounded by

Mankiw, (2000). The theory holds that three propositions cover government

revenue, expenditure and debt.



Conclusion and Recommendations

Having examined the effect of fiscal policy on the growth of small and medium

scale enterprises in Nigeria, the results have shown that major determinants of

SMEs growth are policies directed on tax rate reduction and stability, and

government expenditure (spending) on infrastructure targeting. The implication

is that the interplay of these variables is important to keep SMEs alive in

Nigeria. The policy insinuation therefore, is that fiscal policy should be set in

such a way that the objective it wants to achieve is clearly and transparently

defined in response to the dynamics of the domestic and global economic

developments. The study therefore recommends that because of the negative

implication or effect of tax rate to SMEs, government has to be sensitive to the

variables in the tax environment so as to enable the SMEs sector cope with the

ever-changing dynamics of the SMEs environment, and government should

maintain its expenditure on infrastructural developments, as this will have a

multiplier effect on the growth of SMEs activities and enhance the overall

economic growth in Nigeria.

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