Impact of Fiscal Deficits on Macroeconomic Variables in Nigeria

Abstract

There has been so much debate on issues in public finance in developing countries as they relate to fiscal deficits. Few issues in public finance of developing countries have generated so much debate on fiscal deficits. Critics have rejected the claims that any positive contribution have been made to the economy. This research work adopted Vector Auto-regression method in analyzing the impact of fiscal deficits on macroeconomic variables in Nigeria for the period of 1970 to 2013.The paper also analysed the trend of fiscal deficits by the use of graph. The empirical results of the model showed that all the equations of the models have good fit as indicated by the adjusted R².  There is also an indication that fiscal deficits have positive impact on inflation, and negative on money supply and exchange rate both are statistically significant.  It was therefore concluded that fiscal deficits have significant impact in Nigeria. The study therefore recommends among others the followings: in order to curtail deficits, public spending growth rate must be better managed. The fiscal responsibility Act 2007 should be effectively implemented in order to improve the management of the fiscal operations of the federal and sub-national governments. This will involve shift away from discretionary to rule-based fiscal operations. The implementation of the fiscal responsibility Act 2007 is expected to increase productivity of government expenditure and keep deficits within the statutory limits.

Keywords: Fiscal deficits, inflation, money supply, monetary policy rate, interest rate, Vector Auto-regression