Nigerian Journal Sustainability Research

Publications

Vol. 2 No. 1 (2024): Advancing Sustainable Solutions

The Dynamics of Federal Government Budget Deficits and Their Impact on Long-Term Economic Stability and Growth in Nigeria

Submitted
November 17, 2024
Published
2024-12-28

Abstract

This study explores the Dynamics of Federal Government Budget Deficits and Their Impact on Long-Term Economic Stability and Growth in Nigeria over the period from 2003 to 2023. Using a Generalized Least Squares (GLS) model, the study assesses the effects of key economic factors such as domestic debt, external grants, external debt servicing, and government emergency spending on the country’s GDP growth. The theoretical framework is anchored in Keynesian economics, which highlights the importance of government intervention in boosting economic activity, especially during periods of economic downturn. According to Keynesian theory, strategic government spending, including through budget deficits, can stimulate aggregate demand, ultimately driving economic growth (Keynes, 1936). The findings of the study reveal that domestic debt has a significant positive effect on Nigeria’s economic growth, suggesting that well-managed borrowing can stimulate economic activity by financing investments in critical sectors. However, while external grants show a positive relationship with GDP growth, their effect is not statistically significant, indicating that the way these funds are allocated or used may limit their impact. Furthermore, the study finds that both external debt servicing and government spending on emergencies have a negative effect on economic growth. These expenditures appear to divert resources away from more productive uses, which could hinder long-term growth prospects. The results underscore the need for more efficient fiscal management in Nigeria, particularly in the areas of borrowing and public expenditure. The study suggests that while domestic borrowing can positively influence economic growth, careful attention must be paid to ensuring that such borrowing is used effectively for productive investments, without overwhelming the economy with unsustainable debt. Similarly, optimizing the allocation of external grants and improving the efficiency of emergency spending could help to enhance their positive impact on the economy. Ultimately, the study calls for policies that balance fiscal sustainability with strategies that promote long-term economic growth, in line with the principles of Keynesian economics.

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