Budget Deficit and Economic Growth: An Empirical Analysis of Real Sectors’ Performance in Nigeria

Abstract

Globally, countries have adopted budget deficit as a means of improving the economy. However, the concern of many Nigerians as regard to budget deficit is on whether the upsurge of Budget deficit has contributed to the growth of Nigeria economy. This study examines budget deficit and economic growth: an empirical analysis of the real sectors’ performance in Nigeria. The objectives were to examine the effect of budget deficit on the agricultural sector, the industrial sector and the service sector contribution to economic growth. The study applied Generalised Method of Moment (GMM)model on secondary data from the period of 1981 to 2023 and the lags of the dependent variable were used as instruments. Augmented Dickey-Fuller unit root test was used to ensure the stationarity of the variables and bound test approach was used to ensure the existence of long run association among the variables in the model. The findings revealed that budget deficit crowds-out agricultural, industrial and service contributions to economic growth in the short run while in the long run, budget deficit crowds-out agricultural and service sectors contribution to economic growth. Also, the study shows that external debt crowds-in agricultural, industrial and service sectors contribution to economic growth in the long run. The institutional quality variable included shows that increase in corruption index increases industrial contribution to economic growth only in the long run. Exchange rate depreciation was found to favour industrial sector contribution to economic growth. The study therefore recommends that should endeavour to reduce budget deficit and whenever budget deficit occurs, measures should be adopted to cushion the short run effect of budget deficit on agricultural, industrial and service sector contribution to economic growth.