The Crowding Out Effect of Budget Deficits on Private Investment in Nigeria

Abstract

It is an obvious fact that Budget Deficit has become a recurring decimal in the Nigeria’s economy.  Nigeria’s budget has recorded up to thirty - nine years of fiscal deficit without really considering the impact it will have in the rate of investment among the private sector. The bone of the contention is on where we can get the money to cover the difference between expenditure and revenue. Will it be borrowed from external forces or will it be raised internally through the increase in tax rate or the sale of fiscal instruments? It is in the light of this that this study emerged. Hence, the study shows the crowding out effect of budget deficits on private investments in Nigeria’s economy. It evaluates private investment and budget deficits by adopting an analytical framework that employs the ordinary least squares(OLS) and Granger Causality test. The analysis confirms that budget deficits crowds out private investments and that private investments granger cause budget deficit with feedback. Following the findings, it was recommended that stakeholders should reduce recurrent expenditure and increase its capital expenditure in order to encourage and make conducive environment for private investment to thrive which will ensure economic growth. The financing of budget deficits should be done through money creation, since over the years according to McConnell and Brue (2003), the expansionary effect of fiscal policy is greater when the budget deficit is financed through money creation rather than through borrowing.

Keywords: Crowding out, Budget, Deficits,  investments, Fiscal, Monetary.