Budget Deficit and Economic Growth in Nigeria: A Further Assessment

Abstract

As revenue under-performs while the debt profile keeps increasing, the government of Nigeria targets fiscal viability through appropriation. However, in response to various fiscal operations regarding the deficit and the growth in the country, several studies have examined the relationship and come up with divergent findings. On this premise, and while building on previous effort, the objective of this paper is to assess the effect of budget deficit on economic growth over the period 1981-2021 in Nigeria. On the assumption that the economic growth is influenced by other factors aside the main sources of budget deficit, the individual average effect of FDI, ODA, and the public investment was also examined. The pre-estimation diagnostics used the ADF, PP, KPSS method, as well as, Bai-Perron multiple structural break methodology. Moreover, following the unit-root results, the ARDL technique was employed for model estimation. Consequently, whereas a two-way causal relation was established between the economic growth and FDI, a one-way causality was rather found to run from each of budget deficit, ODA, and a public investment to economic growth. Furthermore, the analyses revealed that public investment positively affects the economic growth in both short- and long-run while the budget deficit positively affects in the short-run as against negatively in the long-run. Thus, the government is advised to intensify efforts at boosting public investment to help augment economic growth as the budget deficit is negatively effective in the long-run.