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CHAPTER ONE

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.

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