Macroeconomic Effects of Budget Deficit in Nigeria

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
 
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Effect 0f Deficit Budget Financing Sources on Inflation Rate in Nigeria

“…Lastly, the both inflation rate and the interest rate have a mixed effect on Sectorial Output. Akamobi and Unachukwu (2021) 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 shortrun diagnostics and stability using annual time series data covering 37 years from 1981 to 2019.…”

Does Budget Deficit Crowd Out Private Investment? Cote d’Ivoire As A Focus

“…Kalugalla et al (2020) study the case of Sri Lanka for the period 1990-2015 and find a positive relationship between budget deficit and private investment. Akamobi and Unachukwu (2021) investigate the macroeconomic effects of budget deficit in Nigeria during the period from 1981 to 2019. The results obtained from the ARDL model suggest that budget deficit has a positive and significant impact on economic growth whereas it shows a negative and insignificant impact on private investment.…”

“…However, empirical literature provides no conclusive findings in this regard as it documents favorable effects (Bahmani-Oskooee, 1999;Akber et al, 2020;Kalugalla et al, 2020) and adverse effects (Madni, 2013;Biza et al, 2015;Mose & Keino, 2017) associated with deficits. There are studies that have failed to find any significant effect of deficit on investment and economic growth (Edame & Okoi, 2015; Van & Sudhipongpracha, 2015;Akamobi & Unachukwu, 2021). Despite this mixed evidence, budget deficits are seen as responsible of various evils hitting developing countries (Easterly & Rebelo, 1993).…”