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EFFECT OF FISCAL POLICY ON GROWTH OF SMALL -MEDIUM

SCALE ENTERPRISES IN NIGERIA

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 EFFECT OF FISCAL POLICY ON GROWTH OF SMALL - MEDIUM
SCALE ENTERPRISES IN NIGERIA

Gbande, Cephas1
cephasgbande@yahoo.co.uk

Udoh, Francis Sylvanus1

slyosly79@gmail.com

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 basseyfrank@uniuyo.edu.ng

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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-

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

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

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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

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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 20 th
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)

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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.

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

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

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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

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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

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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

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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.

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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.

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

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

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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:
GSME  0  1TAR  2GEXP  t                     (1)
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:
n o
log GSME  0   1i  log TARt  j   2i  log GEXPt k  ECTt 1   t    (2)
j 0 k 0

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

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

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

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

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

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 R2 (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.

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

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.

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

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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