Budget Deficit And Current Account Balance
The budget deficit and current account balance are two critical indicators in assessing a nation’s economic health. The budget deficit refers to the shortfall that occurs when government spending exceeds its revenue, often resulting in borrowing to cover the gap. On the other hand, the current account balance measures the difference between a country’s total exports and imports of goods, services, and financial transactions. A deficit in the current account suggests that a country is importing more than it’s exporting, while a surplus indicates the opposite scenario. These indicators are interconnected, as a budget deficit can lead to increased borrowing from abroad, potentially exacerbating a current account deficit. Conversely, a current account deficit may signal a reliance on foreign capital to finance domestic consumption and investment, contributing to a wider budget deficit. Therefore, policymakers must carefully monitor and manage these balances to ensure sustainable economic growth and stability, balancing the need for government spending with the imperative of maintaining a healthy balance of trade.
This work is based on the appraisal of budget deficit and current account balance in the Nigeria economy between the periods of 1986-2010. The broad objectives of the study isto examine the impact of budget deficit and current account balance in the Nigeria economy, trend of budget deficit and current account balance and also the impact of selected macroeconomic variables on the current account. The potency of budget deficit in improving current account balance in Nigeria need to be emphasized upon by policy makers with caution.The ordinary least square (OLS) technique was adopted for the evaluation of data obtained and the researcher used PC-GIVE 8.00 software package. The result of the study shows that government expenditure on education has a positive impact on budget deficit while unemployment and government expenditure on health has negative impact on budget deficit, based on this finding, recommendations were made to enhance proper policy intervention by government and policy makers.
Title Page
Approval page
Dedication
Acknowledgement
Abstract
Table of Contents
CHAPTER ONE:
1.0 INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objectives of the study
1.4 Research Hypothesis
1.5 Significance of the study
16. Scope/Limitation of Study
CHAPTER TWO:
2.0 LITERATURE REVIEW
2.1 Theoretical Framework
2.1.1 Current Account Transaction
2.2 Empirical Literature
2.3 Limitations of Previous Study
CHAPTER THREE:
3.0 RESEARCH METHODOLOGY
3.1 Methodology
3.2 Specification of the model
3.3 Analytical Techniques
3.4 Justification of the Model
3.5 Data Collection and Sources
3.6 Econometric Software Package
CHAPTER FOUR:
4.0 PRESENTATION AND ANALYSIS OF RESULTS
4.1 Presentation and Interpretationof Results
4.2 Economic Apriori Criteria
4.3 Statistical Criteria {First Order Tests}
4.3.1 Coefficient Of Multiple Determinants {R}
4.3.2 The Student’s T-test
4.3.3 F-Statistics
4.4 Economic Criteria
4.4.1 Test for Autocorrelation
4.4.2 Normality Test for Residual
4.4.3 Test for Heteroscedasticity
4.4.4 Test for Multicollinearity
CHAPTER FIVE:
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Policy Recommendation
Bibliography
Appendix
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Budgeting generally can be said to be a control device in an organisation designed to ensure that activities pursued within the budget period are such that contribute to the achievement of the organisation’s objectives. For government, its objectives are the provision of services and improvement of the living standard of the people.
Budget deficit is one of the most discussed economic issues in Nigeria. Baiter (1985) states that deficit are bad, always and everywhere, regardless of the country circumstance. There is a common believe among economist, that budget deficit priori harmful for the total function of economy.
The budget deficit arises when a government outlays exceed revenue for that fiscal year. In an attempt to reduce large budget deficit, government usually recourse to deficit financing namely;
i) internal and external borrowing ii) raising the level of taxation iii)increasing money supply iv)Draw down from government saving or what is called foreign reserve A deficit is financed from government borrowing which may result to
accumulated debt burden or a debt overhang situation. Inflation may result from increased money used to finance the deficit. There would be a decrease in disposable income of the consumers if the deficit is financed by raising the level of taxation,it could affect economic behaviour by changing the financial rewards to various activities. Budget deficit is a fiscal instrument used by government to affect increase in aggregate demand during depression. Budget deficit has its theoretical background from the proposition made by Keynes in the 1930s during the event of the great depression;Keynes’s advocate increased government spending as a panacea to the world economy.
Current account balance is the sum of net export goods and services, net income and net current transfers. Current account balance consists of transactions relation to trade in goods and services and unilateral transfers. Secondly, current account balance is the different between the total receipts from export ofgoods and services and grants of transfer payment abroad. Current account balance tells us if a country has a deficit or supplies budget.
The current account is in surplus when absorption is less than income and in deficit when absorption exceeds income. Government expenditure is an important component of aggregate demand. An increase in government
outlay that is not met the available revenue usually trigger a series of development in the economy due to the budget deficit. As in the case of budget deficit, there are also some negative effects on the current account balance; when a country experiences deficit, its deficit will cause increase in imports of goods and services and also affect adversely the domestic industry and this indirect effect on employment and income in the country. A striking feature of Nigeria’s fiscal operation since the second halve of the 1970s is persistent and rising budget deficits. Nigeria has recorded deficit and current account balance thereby experienced twin deficit. From the 2008 annual report of the Central bank of Nigeria (CBN), article 5.3 page71, it states that there was a notional deficit of 47.4 billion Naira or 0.2% of GDP compared with the deficit of 117.2 billion naira or 0.6 GDP in 2007. Evidences suggests that government deficit, notably in last 15 years has been financed largely through money creation by the central bank. Consequently, monetary policy has been vastly expansionary with direct implication for price inflation and exchange rate. Finding from various comprehensive studies have generally indicated that country withsuccessful trade reforms tend to pursue tight monetary and fiscal policies.
1.2 STATEMENT OF THE PROBLEM
The budget deficit and current account balance position in Nigeria has recorded more deficit in her budget over the years and also the current account balance has an unhealthy growth rate even to recording deficit in some of the years. Most importantly, the successive governments in Nigeria have devised many strategies and means to control the unhealthy rise in the budget deficit and improve current account balance such as in year 2009, there were initiative to spend less on salaries, the establishment of monitoring committee who would inspect project and further confirm proper utilization of funds before disbursement and strict orders that disbursement should be made based on proper utilization of previous ones and so on. Despite these measures, the budget deficit continue to be on the increase and current account balance keeps fluctuating. RESEARCH QUESTIONS
The following research question will guide the study.
1.) Is there any relationship between budget deficit and current account balance in Nigeria?
2.) What are the causes of budget deficit and fluctuating current balance in Nigeria?
3.) What is the contribution of budget deficit to current account in Nigeria following Keynesian argument that demand and productivity”?
4.) What are the measures to control budget deficit and improve current account balance in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to investigate the budget deficit and current account balance in Nigeria and how it affects the economy. Specifically the objectives are
i.) To empirically investigate the relationship between budget deficit and current account in Nigeria.
Ii.)To investigate the causes of budget deficit and fluctuating accounting balance in Nigeria.
Iii.)To identify the various measures necessary to control budget deficit and improve current account balance in Nigeria.
1.4 RESEARCH HYPOTHESIS
Research hypothesis is proposition stated in a testable form to predict particular relationships between two or more variables. Hypothesis of this research are stated in both null and alternative form.
The hypothesis formulated for the analysis of this study and from which to draw relevant conclusion are 1.) Ho: Current account balance has no effect on budget deficit in Nigeria
1.5 SIGNIFICANCE OF THE STUDY
This study is relevant since that it will inform the policy makers in Nigeria the nature of the relationship between government budget deficit and economic growth where in no small measure will aid in appropriate fiscal policy measure.
The research work will provide insight to the policy makers in making policies that is related to budget deficit and current account balance in the entire economy.`
Further more it will contribute immensely in developing the the analysis of budget deficit on macroeconomic variables and serve as useful platform tool in policy making.
The study will be useful to future researchers who might be working on the topic or other related topics.
1.6 SCOPE/LIMITATION OF THE STUDY
This research work will cover the period of 1987 to 2010 following the limited scope of this research work, data will be sourced from secondary data.
The limited scope of this research work is necessitated by the changes posed by the problem of limited time frame stipulated for this research work, shortage of fund and high cost involvement in sourcing data on some of the variables required as a result of problem of limited statistical materials. Effort will be made to find out the relationship of budget deficit and current account balance within this period. Despite all this impediments, this research work will be relevant in serving the purpose of which is intended.
Budget Deficit And Current Account Balance:
The budget deficit and the current account balance are two important economic concepts that reflect different aspects of a country’s financial health. They are often used to assess the overall economic stability and sustainability of a nation. Here’s an overview of each concept:
- Budget Deficit:
- A budget deficit occurs when a government spends more money than it collects in revenue over a specific period, typically a fiscal year.
- It is a measure of the imbalance between government expenditures (such as public services, infrastructure, and social programs) and government revenues (such as taxes and fees).
- When a budget deficit exists, the government typically borrows money to cover the shortfall, often by issuing bonds or taking on debt.
- A persistent and large budget deficit can lead to an increase in the national debt, which can have long-term consequences on a country’s fiscal health if not managed properly.
- Some factors contributing to a budget deficit include increased government spending, tax cuts, economic downturns, and recessionary periods.
- Current Account Balance:
- The current account is a component of a country’s balance of payments, which tracks all economic transactions between a country and the rest of the world over a specific period.
- The current account balance measures the net flow of goods, services, income, and transfers between a country and its trading partners.
- A surplus in the current account balance indicates that a country is exporting more than it is importing, meaning it is a net creditor to the rest of the world.
- Conversely, a deficit in the current account balance means that a country is importing more than it is exporting, and it is a net debtor to the rest of the world.
- The current account balance can be influenced by factors such as trade policies, exchange rates, economic growth, and the competitiveness of a country’s goods and services in international markets.
Here are some key points to consider:
- A budget deficit does not necessarily lead to a current account deficit, and vice versa. They are distinct concepts that focus on different aspects of an economy.
- A country can have both a budget deficit and a current account deficit simultaneously, or it can have one without the other.
- Large and persistent deficits in both the budget and current account can be unsustainable and may require corrective measures to maintain economic stability.
- Policymakers often monitor these balances to assess the overall economic health of a country and make necessary adjustments to fiscal and monetary policies.
It’s important to note that the relationship between these two balances can be complex and influenced by various economic factors, making them important indicators for economists and policymakers to consider when analyzing a nation’s economic performance.