Government Budget Deficit and Economic Performance in Nigeria

Abstract: This study examined the influence of government budget deficit on economic performance in Nigeria. The study captures government budget deficit with budget deficit ratio (Bdr) and economic performance with real domestic product (RGDP). Budget deficit ratio measures the ratio of Nigeria’s national debt to its gross domestic product while real GDP measures the value of economic output adjusted for price changes. To estimates the influence of government budget deficit on economic performance, the study employed simple Keynesian model which was modified to capture variables of interest using annual data that span the periods 1970 to 2013. The study further investigates if there is any causal relation and significant correlation between government’s budget deficit and economic performance. From the investigations on the influence of government budget deficit on economic performance in Nigeria, we observed that government budget deficit (Bdr) has significant and positive impact on economic performance (RGDP), indicating that increase government deficit financing result to increase in economic performance instead of a fall in output, which may have resulted from crowding-out investment. Furthermore, the results on the causality test reveal a unidirectional causality running from government budget deficit to economic performance, which implies that government deficit financing granger causes Nigerian economic performance. In like manner, further investigation also show a positive and significant correlation between government budget deficit and economic performance in Nigeria. Hence, from the findings, deficit financing is not a bad policy option. If appropriately adopted, it will boast the economic activities and output growth and as well create more job opportunities. With these findings, the study supports the postulate of Keynesian theory of budget deficit which contradicts Ricardian understanding of budget deficit.

Table of Contents

Title Page ------------------------------------------------------------------------------------------- i

Certification Page --------------------------------------------------------------------------------- ii

Approval Page ------------------------------------------------------------------------------------- iii

Dedication ----------------------------------------------------------------------------------------- iv

Acknowledgement ------------------------------------------------------------------------------- v

Table of Content ---------------------------------------------------------------------------------- vi

Abstract -------------------------------------------------------------------------------------------- ix

CHAPTER ONE: INTRODUCTION

1.1 Background ----------------------------------------------------------------------------------- 1

1.2 Statement of Problem ----------------------------------------------------------------------- 3

1.3 Research Question -------------------------------------------------------------------------- 6

1.4 Statement of Research Objection -------------------------------------------------------- 6

1.5 Research Hypothesis ----------------------------------------------------------------------- 6

1.6 Significant of the Study -------------------------------------------------------------------- 7

1.7 Scope of the Study ------------------------------------------------------------------------- 7

 CHAPTER TWO: REVIEW OF LITERATURE:

2.1 Conceptual Framework ----------------------------------------------------------------- -- 8

2.2 Theoretical Literature ------------------------------------------------------------------- 10

 The Ricardian View of Budget Deficits ---------------------------------------------- 11

 The Neoclassical View of Budget Deficits ------------------------------------------ 11

 The Keynesian View of Budget Deficits --------------------------------------------- 12

2.2.1 Budget Deficits, Crowding-in and Crowding-Out Effect -------------------------- 12

2.2.2 Budget Deficit and Trade Deficit ----------------------------------------------------- 15

2.2.3 Budget Deficit, Wealth and Long-run Effect --------------------------------------- 18

2.3 Method of Financing Budget Deficit -------------------------------------------------- 21

2.4 Empirical Literature ----------------------------------------------------------------------- 29

2.4.1 Foreign Studies -------------------------------------------------------------------------- 29

2.4.2 Nigerian Studies -------------------------------------------------------------------------- 35

2.5 Limitation of the Previous Studies and Value Added in Nigeria ----------------------- 42

vii

CHAPTER THREE: METHODOLOGY

3.1 Theoretical Framework ---------------------------------------------------------------------- 43

3.2 Model Specification -------------------------------------------------------------------------- 43

2.2.1 Modified Simple Keynesian model ---------------------------------------------------- 48

2.2.2 The Functional Form Equation --------------------------------------------------------- 48

2.2.3 The Econometric Model ---------------------------------------------------------------- 49

3.3 Granger Causality --------------------------------------------------------------------- 53

3.4 Correlation ---------------------------------------------------------------------------- 53

3.5 Estimation procedure ----------------------------------------------------------------- 54

3.5.1 Pre-estimation tests ------------------------------------------------------------------- 54

3.5.2 Post-estimation Tests ----------------------------------------------------------------- 59

3.6 Sources of Data Employed -------------------------------------------------------------- 60

 CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULTS

4.1 Diagnostic Tests on Budget Deficits and Economic Performance ---------------------- 61

 Table 4.1: Stationarity Tests Report Statistics -------------------------------------------- 61

4.1.1 Testing for Cointegration --------------------------------------------------------------- 62

Table 4.1.1: Cointegration Test Result ------------------------------------------------ 62

4.1.2 Multicollinearity Test ------------------------------------------------------------------- 62

Table 4.1.2: Multicollinearity Test Result ----------------------------------------------- 63

4.1.3 Heteroskedasticity Test ----------------------------------------------------------------- 63

 Table 4.1.3a: Cameron & Trivedi's decomposition of IM-test ------------------------- 64

 Table 4.1.3b: Breusch-Pagan/Cook-Weisberg test for heteroschedasticity ------------ 64

4.1.4 Autocorrelation Test --------------------------------------------------------------------- 65

 Table 4.1.4: Autocorrelation Test Results ------------------------------------------------ 65

 Table 4.1.4a: Comparison of Durbin-Watson Computed and Tabulated at 5%

 Level of Significance -------------------------------------------------------- 65

4.1.5 Specification Test ---------------------------------------------------------------------- 66

 Table 4.1.5: Ramsey RESET Specification test Result ----------------------------------- 66

4.1.6 Normality test --------------------------------------------------------------------------- 66

 Table 4.1.6: Jarque-Bera Skewness/Kurtosis and Shapiro-Wilk Normality Test ---------67

viii

4.2 Estimate of Budget Deficits and Economic Performance in Nigeria ----------------- 67

 Table 4.2.1: Estimated Results on the Impact of Budget Deficit on Economic

 Performance in Nigeria ---------------------------------------------------- 68

 Figure 4.2.1: Real Money Supply (LRM2) and Economic Performance --------------- 70

4.3 Correlation between Budget Deficits and Economic Performance in Nigeria ------ 72

 Table 4.3.1: Estimated Results on Correlation between Budget Deficits and Economic

 Growth in Nigeria --------------------------------------------------------------------- 73

4.4 Causal Relationship between Government Budget Deficits and Economic Performance

in Nigeria ----------------------------------------------------------------------------------- 74

 Table 4.4.1: Granger causality Wald tests -------------------------------------------------- 75

4.5 Hypotheses and Regression Results ----------------------------------------------------- 75

 CHAPTER FIVE: SUMMARY OF THE FINDINGS AND CONCLUSION

5.1 Summary of the findings -------------------------------------------------------------------------- 77

5.2 Policy Implication of findings and Recommendation ----------------------------------------- 77

5.3 Research Recommendation for Further Studies ------------------------------------------------ 79

5.4 Conclusion ------------------------------------------------------------------------------------------- 79

References ---------------------------------------------------------------------------------------- 81