Budget Deficit and Economic Growth

Abstract

This study examined the effect of budget deficit on economic growth in Nigeria, from 1990 to 2023, using econometric techniques, the study investigated the effect of budget deficit on key economic indicators such as External Borrowing (EXBWGR), Domestic Borrowing (DBWGR)and Government Expenditure (GEXPGR) on GDP growth rate (GDPGR). Employing an ex-post facto research design and annual secondary time-series data, the study utilizes the Autoregressive Distributed Lag (ARDL) bounds testing technique to explore both the long-run and short-run dynamics among the variables. The empirical findings reveal that external borrowing and government expenditure exert a negative and statistically insignificant long-run effect on economic growth, indicating that borrowing from external bodies to offset budget deficit has not been an effective policy to balance the budget, leaving the economy to recurring inflationary pressures, and a chunk of which is channelled into debt servicing. Conversely, domestic borrowing rate exhibits a positive but statistically insignificant relationship with growth, indicating that domestic borrowing is used more effectively compared to external borrowing, which strengthens the economy, but not sufficient to bring constant growth due to leakages of funds. The study concludes that while domestic borrowing serves as an important driver to offset the budget deficit, both external borrowing and government expenditure remain weak instruments for influencing growth, due to corruption. It therefore recommends that, if these borrowing tools can have a good impact on the economy, they can do so if used on high impact, revenue-generating projects, with proper platforms that educate young individuals who intend to go into politics.