MACROECONOMIC EFFECTS OF BUDGET DEFICIT IN NIGERIA

Obiageli Gloria Akamobi,Ijeoma Blessing Unachukwu

doi:10.46827/ejefr.v4i4.1022

Obiageli Gloria Akamobi, Ijeoma Blessing Unachukwu

Open Access

https://doi.org/10.46827/ejefr.v4i4.1022

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Abstract

This study probed the macroeconomic effects of budget deficit in Nigeria. Specifically, it seeks to probe the effect of budget deficit on private investment and public investment in Nigeria by adopting the ADF unit root test and ARDL model, Granger Causality test and the short-run diagnostics and stability using annual time series data covering 37 years from 1981 to 2019. The variables employed include – Growth rate of real gross domestic product, private investment (Gross Fixed Capital Formation) as a percentage of GDP, public investment measured as ratio government capital expenditure to GDP, budget deficit, money supply measured as ratio of GDP, inflation rate measured by annual year-on-year inflation rate, interest rate, labour force participation rate. The research findings admitted that, budget deficit have positive and significant impact on economic growth in Nigeria. Therefore, government budget deficit has no crowding out effect on investment. The study also reveals that budget deficit has negative and insignificant impact on private investment in Nigeria. In addition, further investigation shows budget deficit have positive and significant impact on public investment in Nigeria. Also, the study asserts that there is unidirectional causality running from budget deficit to economic growth, private investment and public investment. Based on the research findings of this study, Government must ensure and maintain strong fiscal discipline without compromising the wellbeing of the citizenry by allocating budget spending to sectors that can translate the deficit into high economic growth both in the short and long runs. Furthermore, budget deficit financing in Nigeria should be focused on the productive sectors of the economy. This is because deficit financing has merely resulted in economic instability indicating that sound policies are needed to achieve economic stability in Nigeria.  JEL: E02, H61, E22  Article visualizations:<img src="/-counters-/edu_01/0778/a.php" alt="Hit counter" />

Highlights

The relationships between government budget deficits and macroeconomic performance have received tremendous attention amongst researchers and policy makers around the globe
money supply (MS) = Money supply, measured as ratio of Gross Domestic Product (GDP) INF = Inflation rate, measured by annual year-on-year inflation rate INT = Interest rate measured in percentage labour force (LF) = Labour force participation rate,total (% of total population ages 15+) β0 is the constant β1, β2, β3, β4andβ5, are matrices of coefficient to be estimated, and μ = Stochastic error term incorporated in any regression model based on the classical assumption of a linear regression model to account for variables omitted in the model
This study probed the macroeconomic effects of budget deficit in Nigeria by adopting the Augmented Dickey Fuller (ADF) unit root test and AutoRegressive Distributed Lag (ARDL) model using annual time series data covering from 1981 to 2019 using simple Keynesian model, which was modified to incorporate our variable of interest

Summary

Introduction

The relationships between government budget deficits and macroeconomic performance have received tremendous attention amongst researchers and policy makers around the globe. Persistent increases in budget deficits have assumed greater height in many emerging economies like Nigeria (Oladipo & Akingbola, 2011). The development of deficit financing is often traced to adoption of the Keynesian inspired public expenditure which Nigeria adopted to motivate economic performance. Keynes recommended deficit spending to moderate or end a recession. To him, when an economy is recording high unemployment, an increase in government purchases will help a market for business output thereby creating income which through multiplier effect encourages the demand for business output. The policy of deficit spending has posed challenges to the Nigeria economy with regard to its effectiveness and the accumulation of debt, the justification of growth notwithstanding (Anyanwu & Oaikhenan, 1995; Ogboru, 2006)

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