Fiscal Deficits and Economic Growth in Nigeria: An Empirical Analysis of Policy Implications and Macroeconomic Stability

Cite this article as: Apalowowa, O. D., Omosebi, A., Owoseni, G. D. E., & Afuye, B. P. (2025). Fiscal Deficits and Economic Growth in Nigeria: An Empirical Analysis of Policy Implications and Macroeconomic Stability. Zamfara International Journal of Humanities, 4(1), 138-153. www.doi.org/10.36349/zamijoh.2025.v04i01.014.

FISCAL DEFICITS AND ECONOMIC GROWTH IN NIGERIA: AN EMPIRICAL ANALYSIS OF POLICY IMPLICATIONS AND MACROECONOMIC STABILITY

By

APALOWOWA, Olusola Daniel

Department of Accounting, Federal Usniversity Oye Ekiti, Ekiti State, Nigeria

And

OMOSEBI, Adeoye

Department of Accounting, Adekunle Ajasin University Akungba-Akoko, Ondo State, Nigeria

And

OWOSENI, Gbenga David, E

Department of Business Administration, Adekunle Ajasin University Akungba-Akoko, Ondo State, Nigeria

And

AFUYE, Babajide Patrick

Department of Economics, Ekiti State University, Ado Ekiti, Ekiti State, Nigeria

Abstract:

The sustained decline in government expenditures in social services and infrastructure, and in investment in other vital sectors, has further consolidated Nigeria's reliance on borrowing, which poses a major danger to long-run economic sustainability. This study discusses the impact of fiscal deficits and economic growth in Nigeria: An Empirical Analysis of policy implications and macroeconomic stability. The study employed an ex-post facto research design, the study relied on secondary data as data were derived from the Central Bank of Nigeria (CBN) Statistical Bulletin (June, 2025), and the World Bank for the period 1990 to 2024. Ordinary Least Squares (OLS) estimation technique was used in the analysis of the effect of fiscal deficits and economic growth in Nigeria. The results of the research showed that the revenue from tax (TAXREV) and budget deficit (BD) had a significant effect on economic growth in Nigeria. The inflation (INF) was also seen to have a high positive correlation with RGDP to complement economic growth without having any immediate adverse effects. However, the exchange rate (EXR) lacked statistical significance on economic growth in Nigeria. The study determined that Nigeria's economic performance is largely based on the honor of its fiscal and budgetary policy. The study advised strategic deficit financing in infrastructure and public service provision, improved tax administration to enhance revenue mobilization, enhanced coordination between fiscal and monetary authorities, and economy diversification to reduce vulnerability to external shocks. These policy actions are required for long-term macroeconomic stability and broad-based growth.

Keywords: Fiscal policy, budget deficit, economic growth, inflation, rate of exchange and tax revenue.

Introduction

Globally, promoting healthy economic growth remains a prime policy agenda as nations aim for inclusive development, fiscal sustainability, and sustainable investment. For most nations, structural reforms, innovation, and macro-stability are the priority issues to drive long-term growth. Nigeria is no different as it struggles with persistent challenges of inflation, unemployment, and infrastructure deficit (Amade & Oyigebe, 2024). Budget deficits should be sealed through improved revenue mobilization, expenditure efficiency, and fiscal transparency. Defeating fiscal imbalances will enhance investor confidence and macroeconomic stability, therefore a better economic trajectory. Hence, Nigeria's ability to effectively manage its budget deficits greatly determines its path of sustainable and inclusive economic growth (Johnson, 2024). The pace of economic growth is the rise in the amount of goods and services a country produces over time. Government fiscal policies are the ways that the government uses taxes and spending to affect economic activity (Makhanets, 2025).

Macroeconomic stability is keeping inflation, unemployment, and budget deficits in check. Sustainable economic development means growth that meets current requirements without using up resources that will be needed in the future (Yuan & Zhang, 2024). Fighting budget deficits helps keep the economy stable, boosts investor confidence, and improves the fiscal balance (Danboyi & Kyari, 2025). All of these things help Nigeria's economy grow in a healthy way. Nigeria is currently dealing with persistent fiscal deficits, which hurt its growth potential. At the same time, Deposit Money Banks (DMBs) are dealing with rising credit risk, limited public sector lending, and unstable macroeconomic signals. This makes fiscal discipline a key factor for better credit performance and long-term economic health.

Statement of the Problem

The Nigeria the persistent and episodic budget deficit on the process of economic growth slowdown of government spending on social services and infrastructure, and reduced investment in priority sectors which resulted in increased recourse to borrowing which is tantamount to long-run risk to economic stability. These budgetary deficits not only prevent the government from undertaking change policies at a macro level but also drain capacity in pursuit of stable and inclusive economic growth (Aladejana et al., 2024). In addition to all these budget challenges, Nigeria further experiences serious development issues such as persistent poverty, extensive infrastructure degradation, and persistent inflation and unemployment. Furthermore, the effect of the budget deficits permeates the monetary arena, bleeding into investor confidence, employment opportunity generation, and the nation's global competitiveness (Amade & Oyigebe, 2024). As Nigeria navigates the intricate nexus between budget dynamics and economic growth, this statement of the problem embodies the quality of the requirements in examining such effects. The following research questions were addressed as follows: What is the relationship between budget deficits and economic growth in Nigeria? How effective are government fiscal policies in reducing budget deficits in Nigeria? And in what ways does budget deficits contribute to macroeconomic stability and healthy economic growth in Nigeria? The broad objective of the study was to examine the impact of combating budget deficits on the promotion of healthy economic growth in Nigeria. The study specific objectives were to:

i.        Examine the relationship between budget deficits and rate of economic growth in Nigeria.

ii.       Assess the impact of government fiscal policies on reduction of budget deficits in Nigeria.

iii.    Evaluate how combating budget deficits influences macroeconomic stability and sustainable economic development in Nigeria.

2.0 LITERATURE REVIEW

2.1 Conceptual Review

2.1.1 Healthy Economic Growth

Healthy economic growth is defined as “the sustainable and stable expansion of the country productive capacity that results in rising living standards, increased employment, and even growth in income distribution while avoiding distortions in the economy (Amade & Oyigebe, 2024). A healthy economy was defined by Elmendorf et al. (2025) as one that exhibits continuous growth while achieving macroeconomic stability, social inclusion and environmental sustainability. Okoruwa and Imoke (2025) posit that a salient healthy economic growth translates to long term national development of an economy that expands not just in numbers but also in an inclusive, shock resistant, and structural transforming way. Healthy economic growth is characterised as the sustained and stable augmentation of a nation's productive potential, leading to improved living standards, heightened employment, and equitable income distribution, while circumventing economic inefficiencies (Muhammad, 2025; Chijuka & Izekor, 2025). Robust economic growth leads to sustained national development characterised by numerical expansion as well as inclusivity, resilience to shocks, and structural transformation (Alomani et al., 2025). Effective policies must be executed in the domains of education, infrastructure, and government, among others.

2.1.2 Combating Budget Deficits

Anti-deficit fighting is a fiscal policy of reducing the discrepancy between government spending and income. Continuing budget deficitsresult in untenable debt loads, inflation, and lack of confidence in the markets, ending these deficits through structural change and fiscal responsibility, thus becomes a requirement for macroeconomic stability, and for sound economic growth (Makhanets, 2025). Anti-deficit battling is a way for the government to spend less money than it makes (Alomani et al., 2025). To achieve macroeconomic stability and healthy economic growth, it is now necessary to end these deficits through structural transformation and fiscal discipline. Yusuff and Abolaji (2020) opine that anti-deficit battling is a fiscal policy aimed at diminishing the gap between government expenditure and revenue. Implement taxation, reduce expenditures, and use fiscal discipline to re-establish budgetary control. Persistent budget deficits lead to unsustainable debt burdens, inflation, and diminished market confidence. Addressing these imbalances through structural reform and fiscal prudence is essential for macroeconomic stability and sustainable economic growth (Ali et al., 2018).

2.1.3 Rate of Economic Growth

Economic growth is defined as the annual growth rate of a country’s goods and services or gross domestic product (GDP). Economic growth, generally defined as a high or increasing level of economic activity, is one important determinant of how well an economy is performing (Elmendorf et al., 2025). High growth rate is associated with more economic activity, growth in employment opportunities, and increased income; whereas low or negative growth rate would reflect stagnation or a recession (Okoruwa & Imoke, 2025). Chijuka and Izekor (2025) postulate that economic growth, typically characterised by elevated or rising levels of economic activity, is a significant indicator of an economy's performance which is influenced by investment, productivity, and government policy.

2.1.4 Inflation

Generally speaking, inflation is the overall increase in the prices of goods and services over time, which causes a reduction in purchasing power (Ufomadu & Ettah, 2025). Inflation means that currency is worth less, and depending on levels and causes of inflation that are detrimental to an economy. Moderate inflation is the response of healthy demand and economic activity while high and unstable inflation distorts investment, discourages saving and hits the poor hardest (Umaru et al., 2021). Inflation control is an important thing to get right for any economy. Inflation is when the overall prices of goods and services rise over a period of time, causing purchasing power to be reduced (Ferreira et al., 2025). Moderate inflation reflects strong demand and revenues connected with healthy economic behaviour, whereas high and unstable inflation distorts investment decisions, discourages savings, and hits the poor hardest but controlling inflation is a necessary condition for a stable economy (Alomani et al., 2025).

2.1.5 Tax Revenue

The term taxation could be defined as government revenue collected from individuals and businesses to support public services and infrastructure. Isenmila et al. (2021) articulate that taxation is both a source of public funds and a means of economic regulation and wealth redistribution. Tax revenue is income that is obtained by the government in form of application of taxes on individuals, businesses and any other entity that consists of direct taxes which include the personal income tax, the corporate tax, and the property tax, the indirect taxes are the value-added tax (VAT), excise duties and customs duties (Anyanwu & Chukwu, 2025). Tax revenue forms a very important aspect of the public finance since it gives the government the revenue that it requires to fund the government activities such as financing of government services, financing of infrastructure development, financing the social programs and the administrative sector (Chijuka & Izekor (2025). Tax revenue may become an input parameter applied in measuring fiscal capacity and efficiency in economical analysis. With proper application, an increase in tax revenue foster economic activity and improve equality and sustainable development has taxation form an essential part for fiscal sustainability and supports public investments but there must be a balance because taxation could impede productivity and compliance (Osunkwo, 2024). In facing budget deificits, maximize tax collection is one of the most important measures to enhance development in a sustainable manner because taxation is the primary source of public revenue and a means of economic regulation and wealth redistribution. In terms of fighting budget deficits “an efficient tax collection process is of crucial importance in promoting sustainable development”.

2.2 Theoretical Underpinning

2.2.1 Endogenous Growth Theory

Endogenous Growth Theory emerged in the 1980’s as an alternative to the neoclassical growth model by economists including Paul Romer (1986) and Robert Lucas (1988). Endogenous Growth Theory focuses on the internal processes of an economy as major contributors to economic growth rather than depending solely on external forces and diminishing returns to capital. The post-Keynesian economics emphasizes aggregate demand, uncertainty, and historical time in explaining economic outcomes because endogenous Growth of fiscal theory emphasizes on the importance of counter-cyclical fiscal policy, full employment, and public investment for stabilizing economies and sustainable growth (Yusuff & Abolaji, 2020). The theory assumes that R&D, education and technology investments have positive spillovers and increasing returns which allows for sustained economic long run growth rather than being constrained by diminishing marginal productivity (Danboyi & Kyari, 2025). The theory has been criticized for having little empirical clarity; exaggerating the link/correlation between government, policy, and growth by not sufficiently explaining external shocks, trade, or natural resources particularly in the case of developing countries (Yuan & Zhang, 2024). The strength of the theory is that it emphasizes root-causes of growth in the long run, such as innovation or development of human capital that are crucial both for development but also for policies (Hans, 2023). A clear weakness is the lack of applicability in contexts of low institutional capacity, where things like corruption, political instability and poor infrastructure do not allow for these internal mechanisms to work and generate growth (Osunkwo, 2024). The theory is relevant to Nigeria because it emphasizes the need for a sensible investment in education, technology and institutions that are capable of generating self-sustaining healthy economic growth while avoiding dependent growth based on external financing or resources.

2.2.2 Fiscal Sustainability Theory

The idea of Fiscal Sustainability was developed and formalized in the 1990’s by economists such as Blanchard, Chouraqui, Hagemann and Sartor (1990) within the OECD framework. This theory was subsequently expanded into the literature for purposes of projecting the long-term finances (Marín-Rodríguez et al., 2023). In short, according to Fiscal Sustainability Theory taxing, spending and borrowing should be undertaken so that the government can meet its current and future debt obligations without having to make economically disruptive corrections that changes the prove to be unsustainable (Eguchi & Hatano, 2023). The theory assumes that governments desire intertemporal budget constraints, according to the hypothesis. In other words, avoid a fiscal crisis the present value of the public debt must equal the present value of the future primary budget surpluses (Okoruwa & Imoke, 2025). Critics of the theory but, say its practice is inflexible and does not account for the needs of social development of impoverished nations (Makhanets 2025). Perhaps it is also ignoring the short-run advantages of fiscal stimulus especially when the economy is in recession, and it often takes for granted the perfection of the political and institutional set up. The theory is strength by encourages fiscal discipline and planning, and eschews debt overhang, which are the foundations for macroeconomic stability and confidence by investors (Ali et al., 2018). The big problem is that fiscal sustainability theory discourages people from heavily investing in public expenditure and social expenditure during times of fiscal restraint (Igbal et al., 2017). Fiscal sustainability theory affects and promotes economic growth that is non-inclusive as is the case with a developing country like Nigeria (Amade & Oyigebe, 2024). The significance of fiscal sustainability theory to Nigeria stems from the fact that chronic budget deficits and rising public debt destabilize the economy.

2.3 Empirical Review

Makhanets (2025) formulates the prediction of the budget deficit in Ukraine with the help of exponential advection and acceleration analysis techniques. The State Statistics Service of Ukraine and the Ministry of Finance of Ukraine provide statistics that should be used. His investigation indicated that this may be fatal to international economic activity as Ukraine is being overtaken with a budget deficit having acted in the wrong ways based on erroneous and unsystematic processes.

In a study done by OKoruwa and Imoke (2025), on the effects of budget reforms and budget deficits on economic growth in Nigeria over the period of 1981-2023.The study employs Vector error correction model as the method to analyze time series data. Findings from their Vector error correction model analysis revealed that budget deficit, budget reform has a significant impact on the economic growth of Nigeria.

Anyanwu and Chukwu (2025) examined how the Nigerian economy expanded between 1995 and 2022 in dealing with the effect of some relevant aspects of tax revenue on growth. The information used was obtained through Central Bank of Nigeria (CBN) statistical bulletin, the Federal Inland Revenue Service (FIRS) as well as the National Bureau of Statistics. In their research they have used the Auto Regressive Distributed Lag (ARDL) method in order to estimate their model. As their key discoveries of the study stipulate the value-added tax (VAT), and company income tax (CIT) have a considerable and positive effect on the rate of growth of the Nigerian economy (GDPGr) in the long run and short run respectively, whereas petroleum profit tax (PPT) made a positive and significant impact only in the long run. On the other hand, the capital gains discussing (CGT) positively influenced the GDPGr both in the short run and the long run respectively but the effect was not significant.

Muhammad (2025) investigated the dependency of the revenue components and growth of the economy in Nigeria using the annual data of 1994-2022. It examines how major factors like oil prices (OILP), inflation (INF), petroleum profit tax (PPT), value-added tax (VAT), other taxes (OTH) and total tax revenue (TTX) influence the growth of GDP, using an Autoregressive Distributed Lag (ARDL) model to study the short and the long-term effects. The results obtained indicate that there is a high positive correlation between the two variables after breaming oil prices and economic growth and its value is 0.110. Conversely, the coefficient on a total tax revenue (TTX) is -0.001 with a negative long-run impact on an increase of GDP.

Chijuka and Izekor (2025) analyzes the role played by tax revenue drivers Petroleum Profit Tax (PPT), Customs and Excise Duties (CED) and a composite value-added tax and Corporate Income Tax (CIT) in consideration of the economic growth in Nigeria between the years of 2015 and 2023. Secondary data were utilized using regression measures to investigate the correlation between the tax revenue and the Real GDP Growth using a quantitative research design. The outcomes indicate that each of the analyzed components of taxation has a positive and significant effect on economic growth, although the contribution that PPT made is the highest, then CED, and the VAT, CIT composite index.

Osunkwo (2025) analysis examined the influence of industrialization on Teconomic in Nigeria in the context of the contribution of industrial sector, foreign direct investment (FDI) as well as interest rates (INTR). The study used secondary data of central bank of Nigeria (CBN) and national bureau of statistics collected between 1981 to 2024 to analyze relationship between three key variables Real Gross Domestic Product (RGDP) with OLS model as econometric model to determine whether industrial output (INDS), FDI and INTR moderately stated to influence the economic growth.

Nwandu and Ubochi-Nwankwo (2024) investigated whether or not causal relationship exists between budget deficit and economic growth in Nigeria by adopting the ADF unit root test and ARDL model, Granger Causality test and the short-run diagnostics and stability using annual time series data covering 37 years from 1981 to 2022.Their findings admits that, budget deficit have positive and significant impact on economic growth in Nigeria. Therefore, the government budget deficit has no crowding out effect on investment. The study also discloses that budget deficit has negative and insignificant impact on private investment in Nigeria.

Aladejana et al. (2024) analyze the effects of budget deficits on sustainable economic growth on Nigeria. The analysis applied by using the Ordinary Least Squares (OLS) method of estimation, and the Johansen co-integration test based on the data between 1990 and 2022 retrieved in the World Bank Development indicators and Central Bank Nigeria Statistical bulletin to establish the findings that there is a long-term relationship between the variables at the significance level of 5 percent. They identified their findings to indicate that the growth of the economy is greatly inhibited by the increase in budget deficits. Furthermore, the exchange rate and RGDP are negatively correlated, and the relationship between inflation and RGDP is positive and significant enough leading to the conclusion that the highest inflation rates and higher rates of economic performance are linked.

Umaru, et al. (2021) studied the connection between the economy and budget deficit of Nigeria on the annual data in the period of 1981-2019 using linear and nonlinear methods. The results of the ARDL analysis indicated that budget deficit is a positive factor stimulating the output growth. The non-linear TAR model agreed with this and it expressed that the deficit will encourage growth as long as it does not exceed 2.02 percent of GDP.

Yusuff and Abolaji (2020) evaluated the economic growth in Nigeria throughout 1981-2016 and discovered that there exists a long-run cointegrating relationship among the budget deficit, the interest rates, and the home savings with the budget deficit and the home savings being positive short-run growth contributions.

 Ali et al. (2018) examined the impact of deficit financing on Nigeria's economic growth using annual data from 1981 to 2016. Their ARDL analysis found that domestic deficit financing significantly negatively affects national output (real GDP). Similarly, Iqbal et al. (2017) analyzed data from 1972 to 2014 to assess the relationship between fiscal deficit and economic growth in Pakistan using the ARDL/bound testing approach. They found a significant negative impact of fiscal deficits on output, linking it to a deficit-to-GDP ratio above the 5.57% threshold. They recommended keeping the ratio below this level. However, their analysis lacked post-estimation tests to confirm model robustness.

3.0 METHODOLOGY

The study employed an ex-post facto research design, which was to be the most appropriate due to its non-interventionist characteristic which allowed the researcher to analyze past data retrospectively without interfering with any of the independent variables because it is particularly well-suited design for macroeconomic research using secondary data, such as fiscal and monetary aggregates which cannot be experimentally controlled. However, one limitation of the ex-post facto design is that it can never establish causal relationships because confounding variables and cannot be fully accounted for despite statistical controls. Theoretical and empirical literature were applied to guide model specification, particularly drawing on the formulation set out by Aladejana et al. (2024), which defined economic growth as a function of budget deficit (BD), inflation (INF), and exchange rate (EXR). In line with macroeconomic theory, the current research added tax revenue (TAXREV) as another explanatory variable to extend the model. Rationale for the incorporation of tax revenue is due to the fact that fiscal mobilization is the central impetus in allocating government capacity for productive investment, debt sustainability, and budget deficit management. Including TAXREV expands the model's explanatory power and provides a more detailed picture of how deficit financing and tax revenues combine to influence real economic activity. This is mathematically written as:

RGDP = f (BD, EXR, INF) ....................... (i)

where;

RGDP = real gross domestic product;

BD=budget deficit;

EXR=exchange rate; INF=inflation rate.

The explicit estimable econometric, equation (i) is written as:

RGDP_t=β₀+β₁BD_t+ β₂EXR_t+β₃INF_t+ 𝜇_t .......... (ii)

However, this study incorporated tax revenue as an important variable and curbed budget deficit own to captured as a better variable to save government from overspending. The model was remodified thus:

RGDP= f (BD, REX, INF, ....................... (iii)

Where:

BD = Budget Deficit;

REX= Rate of Exchange

INF= Inflation Rate.

TAXREV = Tax Revenue

The explicit estimable econometric, equation (i) is written as:

RGDP_t = β₀+β₁BD_t+ β₂REX_t+β₃INF_t+ β₄ TAXREV_{t +} 𝜇_t  .............. (iv)

𝜇 = error term. Other variables remained as earlier defined.

β₀ is the is the intercept.

β_1-β₄ are coefficients to be estimated.

The a priori expectations are: It’s expected that β₁>0: and β₂<0, β₃<0, β₄<0.

Table 1: Measurement of Variables

Variables	Mnemonic	Type of Variable	Description	Measurement	Source
Real Gross Domestic Product	RGDP	Dependent	Real GDP measures the total value of all goods and services produced within a country, adjusted for inflation. It reflects the true growth of an economy over time	GDP Deflator divided by Nominal GDP​×100	Saleh (2025); Aladejana et al. (2024).
Budget Deficits	BD	Independent	A budget deficit occurs when a government's total expenditures exceed its total revenue (excluding borrowings) within a fiscal year.	Total Government Expenditure minus total government income.	Okoruwa and Imoke (2025); Umaru et al. (2021).
Rate of Exchange	REX		The rate of exchange, the value at which one currency can be exllchanged for another.	Domestic Currency over Foreign currency	Yusuff and Abolaji (2020).
Inflation	INF		Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power.	CPIcurrent minus CPIprevous divided by CPIprevious	Alomani et al. (2025); Ferreira et al. (2025).
Tax Revenue	TAXREV		Taxation refers to the compulsory financial charge or levy imposed by a government on individuals, businesses, or goods to fund public services and infrastructure	Tax Rate x Tax Base	Isenmila et al. (2021); Yusuff and Abolaji. (2020).

Source: Authors Computation (2025).

While Ordinary Least Squares (OLS) estimation is a standard technique in econometrics, its use may be doubtful when variables have different orders of integration, particularly where there are some variables that are I(1) (non-stationary) and some are I(0) (stationary). Under such circumstances, OLS may provide spurious regression results. To this end, the study applied the Autoregressive Distributed Lag (ARDL) bounds testing approach, which is more suitable when dealing with a mixture of I(0) and I(1) series and does not strictly require variables to be at the same stationarity level. Moreover, ARDL accounts for both short-run and long-run dynamics, as well as offers a more realistic perspective on the temporal relationship between budget variables and economic growth. selecting 1990 to 2024 as the time period ensures both longitudinal depth and contemporaneity. Provisional 2024 data were appended where available, taken from reliable sources (CBN and World Bank), to ensure the analysis has access to the most up-to-date fiscal trends. A flowchart and schematic diagram of methodology is recommended in future presentations of the study to enhance conceptual clarity and adhere to the order of logic of the model from theoretical framework to data sourcing, model estimation, and results interpretation.

4.0 DATA ANALYSIS

4.1Descriptive Statistics

Table 1 represents the descriptive statistics. The mean and the standard deviation of Real GDP (RGDP) are 4326.44/billion and 20029.24/billion, respectively: thus, quite variable growth in the level of economic activity. BD indicates a negative mean value of -5,217.69 billion and is negatively skewed (1.3431), which indicates constant fiscal imbalances and high deficit cases. High skewness levels (1.8242 and 1.3351 respectively) of Exchange Rate (EXR) and Inflation (INF) suggests skewed (right curve) distribution, which has extreme values every now and then. Tax Revenue (TAXREV) is also skewed positively and levels of variability are moderate (std. dev. = 29.40). The result of the Jarque-Bera test shows that on the basis of the based on p-value except RGDP (p = 0.0630), all the other variables are significantly not normally distributed (p < 0.05). The non-normality can lead to issues of non-normality on regressions. In general, the values point to a high level of dispersion and asymmetry, which requires the application of powerful econometric methods in the further investigation.

Table 1: Descriptive Statistics

Statistics		RGDP	BD	EXR	INF	TAXREV
Mean		4326.44	-5217.69	109.31	105.24	86.32
Median		41703.51	-813.82	100.50	66.44	76.46
Maximum		84452.47	13646.71	273.01	430.09	360.31
Minimum		24361.65	-7404.65	49.78	3.41	3.521
Std.Dev.		20029.24	5244.65	48.82	109.02	29.40
Skewness		0.1420	1.3431	1.8242	1.3351	1.4613
Kurtosis		1.4398	4.3256	6.3362	3.9854	4.5232
Jarque-Bera		30.7453	12.6325	33.4906	11.0321	35.1579
Prob		0.0630	0.0000	0.0000	0.0021	0.0043
Sum		1351125.	-12364.52	3607.37	3465.53	4614.32
Sum Sq. Dev		1.364	6.512	6421.80	37051.20	4851.14
	Obs	35	35	35	35	35

Source: Authors’ Computation (2025)

4.2 Combating budget deficits and promoting healthy economic growth in Nigeria

Table 2 provides regression results of determining the effects of the identified macroeconomic factors on the Real Gross Domestic Product (RGDP) in Nigeria. The R-squared value is 0.96, which implies that those independent variables explained 96 percent of the variability in RGDP. Budget Deficit (BD) is significantly and positively related by coefficient of 1.6930 (p = 0.00) indicating that more deficit spending could boost economic growth, perhaps because the government has more to invest in. Another notable positive value is inflation (INF) with 0.8326 (p = 0.00) indicate that the moderately high inflation is a part of an economic process. There is a positive and substantial connection between TAXREV and RGDP (1.7562, p = 0.00), indicating that fiscal mobilization plays an imperative part in stimulating growth. On the other hand, exchange rate fluctuation, which is denoted by EXR, is not statistically significant due to (p-value= 0.20), which means that there is no relationship between jumps in the exchange rates and the growth of a nation in the short period. According to the Durbin-Watson Critical Statistic (1.2421) indicated that the residuals have slight positive autocorrelation surveillance and the results corroborate to this effect that the budgetary and fiscal measures are very critical in terms of propelling healthy economic growth within the Nigeria economy.

Table 2: Regression Analysis on combating budget deficits and promoting healthy economic growth in Nigeria

Dependent Variable: Real Gross Domestic Product (RGDP)

Variable                        Coefficient                 Std. Error                 Prob.**

C                                     2.4604                           1.4241                        0.00

BD                                  1.6930                           0.1324                        0.00**

EXR                               0.6842                           1.3715                      0.20

INF                                0.8326                           2.2521                        0.00**

TAXREV                       1.7562                           0.5421                        0.00

R-squared:0.96

Durbin-Watson stat: 1.2421 Significant at 5% (**) levels.

Source: Authors’ Compilation (2025)

4.3 Co-Integration Test

In the table 3 below, the result indicates that there are 1 or more co-integrating equations (with RGDP first (Trace= 84.34 > 47.86, p = 0.00)) hence significant long-term relationship. There is also high likelihood of co-integration of BD (Trace = 37.88, p = 0.00) implies the permanency regarding fiscal imbalances effects on economic performance. In the same manner, when comparing the communities of the selected cities and the overall average, EXR, INF, and TAXREV are statistically significant at 5 parameter level, having their values of Trace surpassing the critical values and values of p-values being less than 0.05. The implication of these findings is that the variables move in the same direction of one another even though they are susceptible to short-run variations and this is why, there must be consistency and co-ordination of macroeconomic policies. The co-integration confirms additional modeling that involves error correction modeling in an attempt to portray the short-term dynamics and the long-term stability.

Table 3: Johansen Co-Integration Test Result

Variables	Trace Statistic	0.05 Critical Value	Hypothesized No of CE(S)	Prob*
RGDP	84.34	47.86	None *	0.00
BD	37.88	29.79	At most 1 **	0.00
EXR	20.08	15.49	At most 2 **	0.01
INF	8.58	3.84	At most 3 **	0.00
TAXREV	9.62	4.39	At most 4 **	0.00

** indicates statistically significant at 0.05 level of significance

Source: Authors’ Computation (2025)

4.4 Unit Root Test

Table 4 provides the outcome of the unit root test verification to obtain the stationarity of the variables of the study. The test was performed at level and first difference and it read 5 % critical value. In the case of Real GDP (RGDP), the variable is non-stationary at level (Test stat = 0.06 < -2.95) but turns out to be stationary after first difference (Test stat = -2.92), making it be integrated of order one, I(1). Budget Deficit (BD) and Exchange Rate (EXR) exhibited a similar trend as well, since they are non-stationary in level but stationary in the first normal difference, which means that they are I(1) processes. Inflation (INF) is however found to be stationary at level (Test stat = -4.45 < -2.96) or I(0) which implies the same, but the results are contradicting in the case of Tax Revenue (TAX). At level, TAXREV, though having a positive test statistic (0. 91) which is above the critical value, the notion of a reporting error is seen to hold. In sum, the combination of both I(0) and I(1) variables makes it reasonable to apply Johansen co-integration model and error correction to the study of the long-run and short-run relationship between the variables.

Table 4: Results of Unit Root Test at level and 1^st and 2^Nd deference

Variable	Test Statistic	5% critical Value	Remark	S/N	Test Statistic	5% critical value	Remark	S/N
RGDP	0.06	-2.95	I(0)	NS	-2.92	-2.32	I(1)	S
BD	0.82	-2.96	I(0)	NS	-5.15	-2.96	I(1)	S
EXR	-2.58	-2.94	I(0)	NS	-5.33	-2.96	I(1)	S
INF	-4.45	-2.96	I(0)	NS	1.50	2.94	I(0)	S
TAX	0.91	-2.95	I(0)	S	1.49	2.96	I(0)	NS

Source: Authors’ Computation (2025)

4.5 Correlation Analysis

The coefficients of correlation between the four chosen macroeconomic variables are shown in Table 5. The Inflation (INF) and Tax Revenue (TAXREV) show a strong positive correlation with Real GDP (RGDP) at 0.89 and 0.75 respectively and thus economic growth is perceived to rise with increasing inflation and mobilization through taxes. Budget Deficit (BD) has a little bit of correlation (0.46) with RGDP and (0.67) with INF, which means that there is some fiscal impact on the growth and prices. The relationship between Exchange Rate (EXR) and RGDP fluor is weak (0.09) and is not associated to each other. There are also moderate positive correlations between TAXREV and BD (0.53) as well as EXR (0.45) suggesting that there are fiscal and external sector interactions. On the whole, the outcomes demonstrate interdependence of the variables in general and among RGDP, INF, and TAXREV in particular.

Table 5: Correlation Analysis

	RGDP	BD	EXR	INF	TAXREV
RGDP	1
BD	0.46	1
EXR	0.09	0.25	1
INF	0.89	0.67	0.20	1
TAXREV	0.75	0.53	0.45	0.53	1

Source: Authors’ Compilation (2025)

4.6 Normality test for Residual

Figure 1 displays the histogram that was used to examine the normality of residuals of regression model. The histogram shape, combined with the normal distribution superimposed curve, gives a visual impression of how normal the distribution of residuals is. The residuals, in the given case, seem to be symmetrically distributed about the mean, and a bell-shaped curve can be formed that indicates that the assumption of normality can be considered satisfied reasonably well. It also means that the regression model that has been specified is good and the likelihood of the estimation being efficient and unbiased is high. The result is a normal distribution of residuals that increases the confidence of hypothesis tests and confidence intervals found in the model.

Fig. 1: Histogram Normality Test for Residual

Source: Authors’ Compilation (2025)

Discussion of Findings

The result of the regression analysis indicates that budgetary and fiscal policies also play a bigger role in shaping economic growth of Nigeria. Budget deficit has significant effect on real GDP and it is significant which implies that when government spends more the economy may open up at least through infrastructure creation and State investments. It is also shown that there is a significant positive correlation between inflation and economic development and this perhaps is an indication of the causality of low-level inflation as a by-product of an output with good economic growth. Also, tax revenue is a powerful, important driver of growth, and hence there is a need to an effective fiscal mobilization and use. Nevertheless, there is no significant change in the exchange rate which implies that the change of exchange rates might not affect the domestic output as such in the period under consideration. This study findings concur with the findings made in study of OKoruwa and Imoke (2025) on the relationship between budget reforms, budget deficit and economic growth in the context of Nigeria, their study showed that budget deficit, budget reform influences the economic growth of Nigeria bigtime. The study done by Chijuka and Izekor (2025) discusses how Petroleum Profit Tax (PPT), Customs and Excise Duties (CED), and Value Added Tax (VAT) and Corporate Income Tax (CIT) composite indexes affect economic growth in Nigeria, their study findings have a positive and significant effect on economic growth, where the greatest effect is observed in the case of the PPT. Furthermore, the study by Osunkwo (2025) examined the role of industrialization on Teconomic growth in Nigeria, and their findings are as follows; industrial output has a major positive effect on economic growth, the coefficient is found to be 8.33, which implies that Teconomic growth increases by every single increase in industrial output. And differed with the findings made in the study of Nwandu and Ubochi-Nwankwo (2024) investigated whether or not causal relationship exists between budget deficit and economic growth in Nigeria, their findings admit that government budget deficit has no crowding out effect on investment. Their study also discloses that budget deficit has negative and insignificant impact on private investment in Nigeria. The rationale of the results of the study is based on the economic and policy environment prevailing in Nigeria over the period involved and also on the theoretical and empirical insight of the interaction of fiscal and monetary variables with the economic growth.

The evidence of this study is that while budget deficits stimulate growth through public expenditure and infrastructure along the lines of Nigeria's 2020 COVID-19 stimulus indeed, inflation positively correlated with growth, perhaps indicating demand-led growth, although inflation rising too high is always a risk such deficits must be applied within a sustainable debt framework to incur long-term fiscal strains. Good tax collection performance highlights the requirement for domestic resource mobilization. However, the negligible pass-through of changes in exchange rate suggests that there is limited transmission to real output in the study period, possibly because of structural rigidities in Nigeria's economy.

Conclusion

The study comes to the conclusion that the budgetary and fiscal policies are significant in determining the economic growth of Nigeria. In particular, the real GDP level is greatly enhanced by more government spending via budget deficits, which makes the concept of enhancing the economic activity via federal investment a feasible one. Moderate inflation has positive implications on the growth of the economy implying that it is linked with the growth of output. Moreover, tax income becomes an essential and a powerful mechanism to increase the growth implying the priority of good mobilization fiscal strategies. Nonetheless, the effect of change in exchange rate on the real GDP seems ineffective implying that exchange rate changes may have no direct connection to the domestic economy output during the time frame under consideration.

Recommendations

The government is advised to sustain a strategic and well focus deficit financing whereby the borrowed funds could be put in productive investments like infrastructural sector, health sector and education so as to facilitate sustainable economic growth; There should be an improvement of tax administration that will help in boosting the generation of tax and proper utilization of collected taxes in developmental activities; The government should ensure proper coordination of fiscal and monetary policies so as to create consistency in attainment of macroeconomic stability and growth objectives; and the government should move towards diversification of the Nigeria economy and stop over dependence on imported items because this would enhancing the effectiveness of exchange rate policies in influencing domestic output.

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