The impact of the recurring budget deficit on economic growth in Nigeria (2010 – 2020)
Akinboyo O Lawrence
Despite the progress made in the last four decades of economic planning; budget or fiscal deficit has remained a constant feature of the Nigerian budget plan. Fiscal balance as a measure of macroeconomic health must be planned with an objective of achieving acceptable rate of growth, low unemployment rate, reasonable and sustained foreign reserve as well as a rational degree of price stability. Nigeria is yet to experience any of these. However, economists agree that there seems to be a relationship between fiscal deficit and such macroeconomic variables like; growth, interest rate, trade deficit, money supply and exchange rate among others. The above notwithstanding, there is ongoing debate as to whether the relationship is positive, negative or neutral. In the light of the above, it may be pertinent to ask; “How does the size of budget deficit affect the rate of economic growth in Nigeria?” In considering this question and other related issues, this paper posits that the interplay of other variables such as; money supply, interest rate and exchange rate along with fiscal deficit may give a better understanding of the budget deficit situation in Nigeria. Consequently, the paper examines available data from 2010 till date using standard econometric methods to build an augmented neoclassical growth model that helps to examine and effectively study the growth-budget deficit problem. More specifically, a vector autoregressive model is fitted to the data. Also a graph of the GDP budget deficit is used to examine if there is limit to the extent budget deficit can grow GDP.The results show that; a one year lag in growth (D(logGDP(-1))), capital expenditure D(logCEX(-1)), lending rate D(LR(-1)) and two year lag of D(logNOR(-2)) are statistically significant at 10% and below. However, budget deficit is not statistically significant in the model, the positive influence notwithstanding. The model was found to be good for both long run and short run equilibrium relationship and hence good for policy formulation and implementation. The graph of GDP against budget deficit showed sign of possible threshold after 140B mark. The paper concludes that budget deficit do not significantly growth the economy. However, its positive sign suggested that we may not say that it does not contribute at all. When we combine it with the knowledge that it may have a limit to the extent it helps the economy grow, it can only be said that we strike a balance between it as a planning tool and the returns to the society.
Akinboyo O Lawrence. The impact of the recurring budget deficit on economic growth in Nigeria (2010 – 2020). International Journal of Advanced Science and Research, Volume 7, Issue 1, 2022, Pages 28-38