The chapter is intended to be introductory in nature, shedding light on the effects of tiscal deficit on state government capital projects in Nigeria. This feat will be achieved through a brief description of fiscal deficits and capital projects.
The chapter will also contain statements on the purpose of study, objectives of study, the constraints in the course of the study as well as the organization of work as it will be encountered in this study.
1.1 GENERAL PERSPECTIVES
The concept of fiscal deficits will be described in the context of its meaning and implications in sub-section 1.1.1. while the trend of fiscal deficit will be the subject of attention in sub-section 1.2.2
1.1.1 The Concept of Fiscal Deficit
Fiscal deficits results from the budgetary operations of the government when the total expenditure exceed the revenue for a given period. The effect of a given overall deficit on aggregate demand de~endso n the way the deficit is financed. Financing can come from external and/or domestic borrowing whcn financing comes from external source and is tied to expenditure abroad, there will
be no immediate impact on domestic demand. But foreign borrowing used to finance domestic expenditure will have an expansionary impact on the domestic economy.
Domestic sources of deficit financing can be divided into three;
a) The Central Bank
b) The Commercial/Merchant Banks, and
c) Non-Bank Sources
Net borrowing from the Central Bank is usually expansionary as the increase in credit to the government is not necessarily compensated for by a reduction in credit to the private sector. Consequently, the increase to the government increases the monetary base and through the money multiplier, the
money supply, thus leading to an expansionary economy. If the con~mercial/merchant banks did not have available excess reserves that could be lent to government to finance the deficit, the government’s
borrowing would be at the expense of loans to other sectors. If the banks had the excess reserves or the Central Bank makes such available, there would be no offsetting impact on other sectors, so that the credit given to government will
expand aggregate demand and ultimately the money supply.
The impact of non-bank borrowing on private sector demand is not too certain. If this comes from voluntary purchases of government debt instruments, the liquidity of the private sector will fall, although it’s wealth is not affected.
This could however trigger off an increase in interest rates which could crowd out private sector investments. However, in a period of monetary ease, such crowding out will not take place.
1.1.2. Trend of Fiscal Deficit
In recent year, state government have been faced with a current fiscal
surplus and overall fiscal deficits in their operations. This can be attributed to increase expenditures occasioned by a host of factors including deteriorating infrastructures, growing population and difficulties or broadening the tax base to enhance government earnings.
1.1.3 Capital Projects
Capital projects are projects that require huge expenditures in the provision of instrun~ents and social amenities, and social goods.
1.2 PURPOSE OF STUDY
The purpose of this study is to determine empirically, the effects of fiscal deficits on state governments capital projects in Nigeria between the years 1985 and 1994, both years inclusive.
1.3 STATEMENT OF PROBLEMS
Fiscal policy, to a large extent, determines the level of fiscal deficit incurred in any period. The policy is aimed at influencing the consumption pattern in the economy in order that the broad macro-economic objectives of the economy can be achieved. In view of the above assertions, the problems of this study are itemized below;
1. Did the fiscal deficits of the Federal Capital Territory and the different states of the federation, between 1985 and 1994 lead to an increase in state governments capital projects?
2. If the fiscal deficits led to increases in state governments capital projects, to what extent was the increase in state governments capital projects attributable to fiscal deficits?
1.4 OBJECTIVES OF STUDY
The objectives of this study, which are derived from the problems of the study as enumerated in section 1.3 above, are statements of intentions with regards to how the problems of the study are to be solved.
1. To ascertain if there was a direct increase in state governments capital projects between 1985 and 1994 as a result of fiscal deficits recorded in the operations of the state governments.
2. To determine the extent to which changes in the level of state government capital projects are as a result of