Unpacking the Relationship Between Fiscal Deficit and Economic Growth in Nigeria

Abstract

This study examines the dynamic relationship between fiscal deficit and economic growth in Nigeria from 1981 to 2025, exploring the impact of these two macroeconomic variables within the broader debate on fiscal policy issues. Utilising a range of economic indicators, including GDP growth, fiscal deficit, gross fixed capital formation, labour force participation rate, and trade openness, the study determined the order of integration of the variables using Augmented Dickey–Fuller (ADF) and Phillips–Perron unit root tests and employed the Auto-Regressive Distributed Lag (ARDL) bounds test to investigate shortrun and long-run relationships. The study found that fiscal deficit has a significant positive long-run relationship with economic growth in Nigeria. However, in the short run, fiscal deficit exhibits a direct but insignificant relationship with economic growth. Based on these findings, the study concluded that fiscal deficits stimulate growth in the economy in both the short run and long run, but cautions that governments should manage deficit financing carefully to ensure sustainable economic growth without undermining long-term fiscal stability. This study underscores the complex and dynamic relationship between fiscal deficits and economic growth, highlighting the importance of nuanced analysis and strategic policymaking.