Effect of fiscal policy on economic growth in Nigeria

Abstract

Economic growth remains a central concern in Nigeria due to its implications for poverty reduction, employment generation, fiscal sustainability, and overall socio-economic development. Fiscal policy, through government expenditure, public debt management, and taxation, constitutes a major instrument for influencing economic growth, especially in a developing economy like Nigeria where structural challenges persist. This study examined the effect of fiscal policy on economic growth in Nigeria, with specific emphasis on public debt, public expenditure, and tax policy. The study covered the period 1993-2024, utilizing annual time-series data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin. Real Gross Domestic Product (RGDP) was adopted as a proxy for economic growth, while public expenditure, public debt, and tax revenue represented fiscal policy variables. The study employed descriptive statistics, correlation analysis, Augmented Dickey-Fuller (ADF) unit root test, and the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration to analyze both short-run and long-run relationships among the variables. The findings revealed the existence of a long-run relationship between fiscal policy variables and economic growth in Nigeria. Public expenditure was found to exert a positive but weak influence on economic growth, suggesting inefficiencies in spending composition and implementation. Public debt exhibited a mixed effect, with excessive debt accumulation exerting a negative long-run impact on economic growth, reflecting Nigeria’s debt sustainability challenges. Tax policy showed an insignificant effect on economic growth, indicating structural weaknesses in the tax system and narrow tax base. The study concluded that fiscal policy remains a critical driver of economic growth in Nigeria, but its effectiveness is constrained by governance, efficiency, and structural issues. It therefore recommended improved public expenditure efficiency, prudent debt management, and comprehensive tax reforms to enhance fiscal policy effectiveness and promote sustainable economic growth in Nigeria.