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.
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’sad vocate 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 of goods 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 governmentoutlay 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 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.
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