The impact of fiscal deficits on economic performance in development of country a case study on Nigeria

This study examines the impact of fiscal imbalance on inflation and economic growth in Nigeria from 1981 to 2019. For this purpose, two different models have been established. The first model is an extension of the Solow growth model with the inclusion of fiscal imbalance. In other words, economic growth is the dependent variable, while capital, labor force, and fiscal imbalance are considered independent variables. After conducting preliminary tests, the OLS method was applied. The results of the OLS analysis show that both labor force (LB) and fiscal imbalance (FIM) have a significant influence on economic growth. The labor force is statistically significant at the 5% level, while fiscal imbalance is statistically significant at the 10% level. However, the labor force has a negative impact, while fiscal imbalance negatively affects economic growth in Nigeria during the specified period. The coefficient of the labor force indicates that a unit increase leads to a decline in economic growth by 2.543, suggesting that an increase in the labor force may reduce economic growth, possibly due to inefficiency or hidden employment. In the literature, some researchers have also reported a negative impact of the labor force on economic growth. On the other hand, the coefficient of fiscal imbalance indicates that 1% increase in fiscal imbalance causes 0.2373% increase in economic growth. Therefore, a policy of budget deficit during a recession and budget surplus during a boom could maintain macroeconomic stability. This implies that fiscal imbalance contributes positively to Nigeria's economic growth during the specified period. In the second model, which examines the determinants of inflation, the ARCH model is employed due to the issue of changing variances. The results show that, during the period from 1981 to 2021, only monetary expansion has a positive effect on inflation, indicating that inflation increases as monetary expansion increases.