AN EVALUATION OF THE EFFECT OF BUDGET DEFICIT ON THE ECONOMIC GROWTH IN NIGERIA (1993-2023)

1.1 Background to the Study

Economic growth remains a fundamental objective for governments worldwide, particularly in developing economies like Nigeria, where macroeconomic stability is often threatened by persistent budget deficits. A budget deficit occurs when a government’s expenditure exceeds its revenue within a fiscal period, necessitating borrowing to finance the shortfall. While deficit spending can stimulate economic activity in the short run, excessive reliance on borrowing—both domestic and external—can have profound implications for economic stability, inflation, and long-term growth (Yusuf & Mohd, 2021; Ajayi & Edewusi, 2020).

Nigeria’s fiscal landscape has been characterized by recurrent budget deficits, primarily driven by fluctuations in oil revenue, rising government expenditure, and debt accumulation (Eregha & Mesagan, 2020). The country’s overdependence on oil revenue has led to budgetary imbalances, particularly during periods of declining global oil prices. In response, successive administrations have resorted to increased government spending and external borrowing to bridge fiscal gaps, raising concerns about debt sustainability and its impact on economic growth (Omodero & Alpheaus, 2019; Didia & Ayokunle, 2020).

The relationship between budget deficits and economic growth is complex and has been widely debated in economic literature. Some economists argue that deficit financing can stimulate aggregate demand and foster growth if funds are effectively allocated to productive sectors such as infrastructure, healthcare, and education (Olatunji & Hassan, 2022). Others contend that excessive deficits contribute to inflationary pressures, crowd out private investment, and increase the cost of debt servicing, ultimately stifling economic progress (Fasanya, Fajobi, & Adetokunbo, 2021).

Nigeria’s fiscal policies have also been shaped by global economic trends and domestic economic challenges, including inflation, exchange rate volatility, and declining foreign direct investment (Olorogun, Salami, & Bekun, 2022). Inflation, in particular, erodes the purchasing power of consumers and distorts investment decisions, thereby affecting overall economic growth (Adaramola & Dada, 2020; Idolor & Raphael, 2022). Government expenditure, another critical variable in this study, plays a dual role—acting as a catalyst for growth when efficiently utilized but becoming a burden when mismanaged, leading to fiscal imbalances (Samuel & Oruta, 2021).

Furthermore, Nigeria’s external and domestic debt portfolios have expanded significantly over the years, raising concerns about debt sustainability. While external borrowing provides access to foreign capital, excessive debt accumulation can lead to exchange rate instability and increased vulnerability to external shocks (Manasseh et al., 2022; Agyapong & Bedjabeng, 2020). Similarly, domestic debt, often financed through treasury bills and bonds, can crowd out private sector investment, thereby limiting the growth potential of the economy (Hilton, 2021; Ogunjimi, 2019).

Given these dynamics, evaluating the effect of budget deficits on Nigeria’s economic growth from 1993 to 2023 is crucial for understanding the broader implications of fiscal policy decisions. This study will analyze key macroeconomic indicators, including Gross Domestic Product (GDP), government expenditure, government deficit, inflation rate, external debt, and domestic debt, to provide empirical insights into the relationship between fiscal deficits and economic performance (Adebayo, Bolukale, & Anagun, 2025).

1.2 Statement of the Problem

Despite numerous fiscal policy reforms aimed at reducing Nigeria’s budget deficits, the country continues to grapple with persistent fiscal imbalances. The reliance on deficit financing, particularly through external and domestic borrowing, has raised concerns about the sustainability of Nigeria’s economic growth. While some scholars argue that deficit spending has a positive impact on growth by stimulating aggregate demand, others warn that excessive deficits lead to inflationary pressures, currency depreciation, and a rising debt burden (Dey & Tareque, 2020; Edo, Osadolor, & Dading, 2020).

The inconsistency in empirical findings on the impact of budget deficits on economic growth in Nigeria necessitates further investigation. Existing studies have focused on different aspects of fiscal policy, but there remains a gap in understanding how budget deficits, in conjunction with other macroeconomic variables such as inflation, external debt, and domestic debt, influence GDP growth in Nigeria (Ehigiamusoe, Lean, & Chan, 2020).

This study, therefore, seeks to provide a comprehensive evaluation of the effect of budget deficits on Nigeria’s economic growth over a 30-year period. By analyzing government expenditure trends, inflationary effects, and debt accumulation, this research aims to offer policy recommendations that could enhance fiscal discipline and promote sustainable economic growth.

1.3 Research Questions

1. What is the impact of budget deficits on Nigeria’s Gross Domestic Product (GDP) between 1993 and 2023?

2. How do inflation and government expenditure mediate the relationship between budget deficits and economic growth in Nigeria?

3. What are the implications of external and domestic debt on Nigeria’s long-term economic sustainability?

1.4 Objectives of the Study

The objectives of this study are:

1. To evaluate the impact of budget deficits on Nigeria’s economic growth from 1993 to 2023.

2. To examine the role of inflation and government expenditure in influencing the relationship between budget deficits and economic growth.

3. To assess the effect of external and domestic debt on Nigeria’s economic sustainability.

1.5 Research Hypotheses

The study will test the following null hypotheses:

H₀₁: Budget deficits have no significant impact on Nigeria’s economic growth.

H₀₂: Inflation and government expenditure do not significantly mediate the relationship between budget deficits and economic growth.

H₀₃: External and domestic debt have no significant effect on Nigeria’s economic sustainability.

1.6 Significance of the Study

The findings of this study will be valuable to policymakers, economists, and financial analysts in understanding the implications of fiscal deficits on Nigeria’s economic growth. It will provide empirical evidence on the effectiveness of deficit financing and offer insights into optimal fiscal policies that can enhance economic stability. Additionally, the research will contribute to the academic discourse on public finance management and macroeconomic policy by offering updated data and analysis on Nigeria’s fiscal trends (Ehigiamusoe & Samsurijan, 2021; Nosike, 2019).

For government institutions and policymakers, the study will highlight the importance of prudent fiscal management and sustainable debt policies to mitigate the adverse effects of excessive borrowing. It will also guide financial institutions and investors in assessing Nigeria’s macroeconomic environment for investment decisions (Nguyen & Darsono, 2022).

1.7 Scope and Delimitation of the Study

This study focuses on Nigeria’s budget deficits and their impact on economic growth from 1993 to 2023. The analysis will cover key macroeconomic indicators such as GDP, government expenditure, inflation rate, external debt, and domestic debt. The study is limited to Nigeria due to data availability and the country’s unique fiscal dynamics.

The research will primarily rely on secondary data from government reports, the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), and other relevant financial institutions. Given the reliance on existing data, potential limitations include data inconsistencies and the inability to capture informal economic activities that may influence Nigeria’s fiscal landscape.