An Examination of Fiscal Deficit - Economic Growth Nexus for Nigeria using the Bound Test Approach

Abstract

This study examined the impact of fiscal deficits on economic growth in Nigeria from 1981 to 2021 and the causality between them. The Autoregressive Distributed Lag (ARDL) model was employed to examine the nature of short-run and long-run relationships and the Granger causality test was conducted to ascertain the existence of a causal relationship between fiscal deficit (FD) and economic growth (RGDP) in Nigeria. The result showed that fiscal deficit (FD) has a positive impact on economic growth both in the short-run and the long run, in tandem with the Keynesian proposition. As for other variables included in the model, gross capital formation (GCF) and trade openness (TOP) had a positive and significant effect on economic growth (RGDP) both in the long-run and short-run. Unemployment rate (UNR), interest rate (INT) and inflation rate (INF) had a negative impact on economic growth both in the long-run and short-run. The exchange rate (EXR) exerted a positive impact, though insignificant on economic growth in the long run but in the short run, it had a negative effect. The Granger causality test result showed a unidirectional causality between real gross domestic product (RGDP) and fiscal deficit (FD); the causality flows from real GDP to fiscal deficit (FD). The study recommended that deficit spending should be properly managed and prudently utilized in the provision of critical economic and social overhead capital that would expand the productive capacity of the economy to enhance private investment and other productive activities. To minimize adverse consequences of fiscal deficit, none of the sources of deficit financing should be exploited excessively. There should be deliberate action on the part of the government to promote productivity in the country to curtail inflationary pressure.