Macroeconomic Policy Targets, GDP and Fiscal Policy

A company’s sales, costs and cost of finance are not set by the company alone. They depend on how fast the national economy is growing, how many people are in work, how fast prices are rising, what the government spends and taxes, and what it borrows. A finance manager who ignores these will be surprised by them.

This topic starts at the top: what governments are trying to achieve, how the size of the economy is measured by gross domestic product, how growth in money terms differs from real growth, and how fiscal policy (government spending, taxation and borrowing) works and reaches business, with the Nigerian sources of government borrowing. The next topic covers monetary policy, interest rates, inflation and the exchange rate.

The examiner treats this as applied knowledge. In November Diet, 2025, Question 6 asked for the major government activities that influence financial management and how they affect companies in achieving their financial objectives (10 marks). Read financial management in not-for-profit organisations first, then keep your own country in mind.

Macroeconomic policy targets

Macroeconomics is economics at the level of the whole national (or international) economy, as distinct from microeconomics, the economics of individual firms and markets. Macroeconomic policy is made by the government, and changes in policy and conditions affect corporate objectives and management decisions. In advanced economies there are normally five main objectives:

1. sustained real growth in the national economy;
2. full employment;
3. price level stability;
4. balance of payments equilibrium; and
5. income redistribution.

Success in achieving and keeping full employment depends largely on success in achieving sustained real growth.

Economic growth and GDP

Economic growth is the yearly rate of growth in a country’s economic activity. Gross domestic product (GDP) can be measured in three ways, which should give the same total:

• the output approach: the volume of goods and services produced in the year;
• the income approach: the income earned in the year, such as profits, wages and salaries; and
• the expenditure approach: the amount spent in the economy in the year, the most useful for analysis.

Using the expenditure approach: GDP = C + G + I + (X − M), where C is consumption spending (by companies as well as individuals, other than capital investment), G is government spending, I is investment spending (other than by government), X is exports and M is imports. (X − M) is the balance of trade.

GDP can grow through higher consumption, government spending or investment, or a better balance of trade, but only if the rise in one element is not matched by a fall in another. For example, if the government raises taxes to spend more, consumption or company investment may fall by a similar amount. Funds for investment come from savings, and higher savings leave less for consumption.

For example, in a year consumption is ₦62tn, government spending ₦12tn, investment ₦20tn, exports ₦18tn and imports ₦14tn. GDP = 62 + 12 + 20 + (18 − 14) = ₦98tn. The next year the figures are 65, 12.5, 21, 19 and 16: GDP = 65 + 12.5 + 21 + (19 − 16) = ₦101.5tn, growth of 3.5 ÷ 98 = 3.6% in money terms.

GDP and inflation

The GDP formula is a money measure. Real growth is growth after removing inflation. In the example, if general prices rise by 2% the real growth is 1.036 ÷ 1.02 − 1 = about 1.5%; if prices rise by 5% the economy has shrunk in real terms by about 1.4%. (Approximately, real growth is money growth less inflation, so 3% growth with 2% inflation is 1% real growth.) Governments want real growth, not just money growth, and try to prevent excessive inflation because:

• it transfers wealth unfairly: people on fixed incomes such as pensions lose purchasing power while owners of property gain;
• it creates cost pressure: employees demand higher pay rises, employers raise prices, cut staff or defer investment; and
• high inflation and high inflationary expectations eventually reduce real growth and may lead to recession.

Fiscal policy and its effect on business

A government uses economic policy to try to influence conditions, with the aim of sustained growth, full employment and restricted inflation. There are two main parts: fiscal policy and monetary policy. Fiscal policy relates to government spending, taxation and borrowing. Government spending is enormous, and higher spending increases GDP, but it has to be financed, from taxation and from borrowing.

Taxation

The main sources of tax are the taxation of individuals’ income, the taxation of company profits and indirect taxes on spending such as value added tax. In Nigeria, the tax reform laws that took effect on 1 January 2026, led by the Nigeria Tax Act 2025, consolidated most of the earlier tax statutes and retained the value added tax rate at 7.5%, with a new development levy on the assessable profits of large companies.

Borrowing

When the government spends more than it collects, it must borrow the difference. For example, spending of ₦18tn against tax revenue of ₦14tn requires borrowing of ₦4tn. In Nigeria the main sources are:

• Government bonds (sovereign bonds) issued through the Debt Management Office for long-term finance, which accounts for the bulk of the public debt;
• borrowing from multilateral sources (for example the World Bank and the African Development Bank) and bilateral sources (for example China) for long-term finance; and
• Treasury bills, short-term instruments that are repaid when redeemed, usually after 91 days, for short-term funding.

In the example, the ₦4tn might come as ₦2.5tn of bonds, ₦0.9tn from multilateral and bilateral lenders and ₦0.6tn of Treasury bills.

How fiscal policy reaches business

• Tax planning. Companies may try to minimise their tax, even by moving operations to lower-tax countries.
• Investment decisions. Tax reliefs and allowances for capital investment change the return on projects.
• Customer demand. A rise in the rate of value added tax tends to lower the volume of demand. For example, a product sells for ₦1,075 including 7.5% value added tax, so the company keeps ₦1,000.
  If the tax rose to 10% and the customer’s price stayed at ₦1,075, the company would keep only ₦1,075 ÷ 1.10 = ₦977.27, a fall of ₦22.73 a unit.
• The growth of the economy. Higher income tax on individuals reduces their spending power.
• The cost of finance. Government bonds are regarded as risk-free, especially when the debt is in the national currency, because the government is most unlikely to default. If the government borrows heavily, companies that also want to borrow by issuing bonds must offer higher interest to attract investors away from government securities. This is often called crowding out.

The ideas in more depth

Why the expenditure formula is useful

It shows where growth can come from and what limits it. A company can see, for example, that a rise in government spending financed by tax may be offset by lower consumption, so the net effect on its own customers may be smaller than the headline spending suggests.

Why real growth matters to a finance manager

Cash flows forecast in naira at today’s prices will look better than they are if inflation is ignored. When forecasting demand, a company should ask whether the economy is growing in real terms, not merely in money terms, and when discounting cash flows, it must be consistent about inflation, a point developed in the topic on inflation in discounted cash flow.

Sources and references

• Nigeria Tax Act 2025 (effective 1 January 2026) for the value added tax rate and development levy; the Debt Management Office for the instruments of government borrowing. The rates and thresholds should be checked when used.

These points are stated as at 5 November 2026.

Worked examples

1. Balance of trade.
   18 − 14 = 4.
2. GDP.
   62 + 12 + 20 + 4 = ₦98tn.

1. Money growth.
   101.5 ÷ 98 = 1.0357.
2. Real growth.
   1.0357 ÷ 1.02 − 1 = 1.5%.

1. Before.
   ₦1,075 ÷ 1.075 = ₦1,000.
2. After.
   ₦1,075 ÷ 1.10 = ₦977.27, a fall of ₦22.73.

How to answer in the exam

• Name the policy (fiscal or monetary) and the instrument before describing the effect.
• Illustrate each effect on a company with an example, as the question will ask you to “illustrate”.
• Link to the financial objective: say how the policy helps or hinders shareholder wealth.
• Calculate GDP and real growth when figures are given.

Common mistakes in the exam

• Listing government activities without saying how they affect companies.
• Confusing fiscal with monetary policy.
• Forgetting government spending and imports in the GDP formula, or adding imports.
• Quoting money growth as real growth.
• Leaving out the effect of government borrowing on company borrowing costs.
• Not giving a Nigerian example when the question is set in Nigeria.

Quick revision

• Five objectives: growth, full employment, stable prices, balance of payments, redistribution.
• GDP = C + G + I + (X − M); real growth = money growth after inflation.
• Fiscal policy = spending, taxation, borrowing.
• Government borrowing: bonds, multilateral and bilateral loans, Treasury bills.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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