ASSESSING THE EFFECTS OF GOVERNMENT DEFICIT SPENDING ON THE

NIGERIAN ECONOMY
SECTION 1.0

1.00. INTRODUCTION

A government deficit spending is when the government spends more than its

revenue-usually this occurs during the fiscal year. From the colonial era until during

Shehu Shagari Presidency (1979-83), the fiscal year was 1st April to 31st March. It was

then changed to 1st January to 31st December. Government units budget can be

balanced when planned expenditure equal planned revenue. When planned revenue is

more than planed expenditure it is surplus. It is deficit when planned revenue is less

than planned expenditure. When it is surplus, the surplus is held as revenue reserve.

When it is deficit the government has to source for other ways of raising funds to make

up the deficit. Burda and Wyplosz (1995) caution that annual “deficits differs from debt

which is an accumulation of yearly deficits”.

1.01. TYPES OF DEFICIT SPENDING

When a government spends more than its revenue, deficit spending results.

There are a number of types of deficits spending such as:

1.01.1 REVENUE DEFICIT: A revenue deficit occurs when the amount of revenue

received falls short of amount of expected revenue. For example, is the projected

revenue for 2012 is N500 billion and, the actual revenue raised is N490 billion, there is

revenue deficit of N10 billion.

1.01.2 FISCAL DEFICIT: A fiscal deficit comes about as a result of revenue deficit.

The government projects for its income and expenditure for the fiscal year and the

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expectation is to get certain net amount of funds for its operations. At the end of the

fiscal year, if actual expenditure exceeds the projected revenue, the government has a

fiscal deficit. Sometimes unexpected expenditures such the occurrence of a natural

disaster cause the government to undertake extra budgetary allocation. When this

happens, deficit spending occurs or if already there, it can be exacerbated. Fiscal deficit

is sometimes referred to as total deficits (Burda and Wyplosz (1995).

1.01.3 PRIMARY DEFICIT: Burda and Wyplosz (1995) define primary deficit as “the

difference between current government spending on goods and services and total

current revenue from all types of taxes net of transfer payment”. As the government

has a fiscal deficit, it needs to borrow from CBN and other lending institutions to cover

its expenditure. Interest on the borrowing has to be paid. Interest on borrowing has to

be paid and it is subtracted from the fiscal deficit which is also called the primary

deficit.

1.01.4 CYCLICAL DEFICIT AND STRUCTURAL DEFICITS:

Market economies are subject to fluctuations in the level of economic activities.

These fluctuations form what has been known as business cycle which has phases. The

first phase is when the economy is expanding with economic activities with increase in

output of goods and services and growths in employment. The period is called the

upswing and the reaches the peak. On reaching the peak it starts to go down called the

period of downswing and reaches the lowest point called the Trough when it starts on

upswing again. The diagrammatic illustration is shown under theoretical foundations.

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 At the lowest point in the cycle, there is high level of unemployment resulting in

reduction in tax revenue for government while the expenditure while the expenditure

remains high. Conversely, at the peak (boom) of the cycle, unemployment is low with

increasing tax revenue and decreasing social spending. The borrowing required at the

lowest point is called cyclical deficit. It is believed that cyclical deficit will be off-set by a

cyclical surplus that will occur at the peak of the cycle.

The Structural Deficit is the deficit that remains after the business cycle because

the general level of government spending exceeds the prevailing tax levels.

1.02. ECONOMIC EFFECTS OF DEFICIT SPENDING

Some economic effects associated with government’s deficit spending are:-

1.02.1. INCREASED BORROWING: The government has to borrow mainly from the

Central Bank and sometimes from other sources. In Nigeria, the Central Bank of Nigeria

(CBN) may issue money market instruments such as Treasury Bills and Treasury

Certificates (the issuing of Treasury Certificates was discontinued in 1996). Long term

Bonds are also issued by Debts Management Office (DMO). The CBN also finances

government deficit spending by ‘ways and means’ which is raising loan for government

by way of issuing currency notes. Government borrowing is from Domestic and external

sources.

1.02.2. HIGHER DEBT INTEREST PAYMENTS

Issuing of Treasury Bills and Bonds carries with it the problem of repayment of

principal and interest payments. This is because all borrowings have to be repaid with

interest.

3
1.02.3. HIGHER TAXES AND LOWER SPENDING: As deficit spending increases the

government may be constrained to increase tax and reduce spending in order to reduce

deficit. Sometime this action may bring about discontent and restiveness among the

citizens and also cause disincentive to economic efforts.

1.02.4. INFLATION: When the government finances its deficit spending through the

Central Bank creating money especially by ‘ways and means’ inflation results. We recall

the monetarists’ view that inflation is always and everywhere caused by government

and that inflation is a monetary phenomenon. Ways and means in particular increases

Money Supply without any production of goods and services.

1.02.5. CROWDING OUT EFFECT: Increased government spending is met by

increased borrowing. The more the government borrows, the less that is left for the

productive sector to borrow. This results in crowding out of the private sector.

1.03. STATEMENT OF PROBLEM

The relationship between government deficits spending and macroeconomic

variables such as GDP, Money Supply, Exchange Rate, Inflation represents one of the

most widely discussed issues among macroeconomists. Some argue that deficit

spending may be necessary especially in times of economic downturn when the

government needs to raise the level of Aggregate Demand. Some express the view that

deficit spending can create major economic problems for the nation and the

government. Literature is replete with these discordant views. This study is thus

undertaken to examine the effects of government deficit spending on the Nigerian

economy. Most studies in the literature have looked at deficit spending on different

4
aspects of the economy such as effects on Interest Rate, on inflation and on GDP. This

study is trying to expand the variables to include effects on GDP, Inflation, Money

Supply, Exchange Rate and Interest (lending) rate.

1.04. OBJECTIVES OF STUDY

For past decades the government spending in Nigeria has been that of deficit.

The main objective is then to find out the effects of the persistent deficit spending on

the economy. The study will try to x-ray the effects of the persistent spending some

macroeconomic variables such as GDP, Inflation, Money Supply, Interest (Lending) Rate

and Exchange Rate.

1.05. SIGNIFICANCE OF STUDY

The study will try to bridge the discordant views seen in the literature by using

variables in the study more than the number taken in any other single study. The

results of the study will hopefully enlighten the government on possible ways of finding

its way out of the unending deficit financing quagmire. For example, Karel (no date)

said that findings of a study in Czech Republic repressed the view that deficit spending

are unambiguously bad for economic growth. Researchers will also find the study

rewarding and enlightening.

1.06. STATEMENT OF HYPOTHESES

Two hypotheses are proposed:

Ho (Null) Hypothesis Government Deficits Spending has no significant effects on

macroeconomic variables of GDP, Inflation, Money Supply, Exchange Rates and Lending

Rates.

5
H1 (Alternative) Hypothesis: Government deficits spending has significant effects on

macroeconomic variables of GDP, Inflation, Money Supply, Exchange Rates and Lending

Rates. Ordinary Least Squares (OLS) analysis will be applied to isolate the effects on

each of these variables but this has not necessitated proposing separate hypothesis on

each variable.

1.07. SCOPE OF STUDY

The study is limited to the effects of government deficit spending on five

macroeconomic variables namely GDP, Inflation, Money Supply, Exchange Rates,

Lending Rates. The list is not exhaustive but the researcher is of the view that they are

very important variables that can assist make informed opinion on the effects of

government persistent deficit spending on the Nigerian economy. The study also limits

itself to the period when Structural Adjustment Programme (SAP) was introduced in

1986 to 2010. Secondary data of time series for the variables are collected as in

chapters 3 with Government Deficit spending as dependant variables and GDP,

Inflation, Money Supply, Exchange Rates and Lending Rates as independent variables.

1.08 PLAN OF STUDY

The study is arranged in chapters. Section 1 deals with the introduction and all

the points discussed so far. Section 2 is on Review of literature and theoretical issues,

Section 3 deals with methodology of study and model specification. Section 4 is on data

presentation, analysis of data, interpretation and discussion while Section 5 concludes

the study with recommendation(s).

6
 SECTION 2

2.0 REVIEW OF LITERATURE AND THEORETICAL ISSUES

Karel (no date) writing on the Czech Republic economy, said that many

developing (and some possibly transitional) economies experience high deficit spending

on the part of governments, which spending has caused many macroeconomic

problems. Among the problems are high level of inflation, highly indebted economies

(high domestic and external debts), Current Account deficits (disequilibrium in external

balance of foreign trade) and retarded economic growth. He however opined that

macroeconomic problems and instability ‘per se’ but on how the deficit are financed.

Deficit spending can be financed by selling of instruments such as Treasury Bills and

Bonds. The more the government wants to finance its deficits, the less will remain for

the private sector. This gives rise to the crowding out of the private sector which is the

real sector. The government may finance its deficits from external borrowing which

over time will worsen the balance of payments position, increase foreign debt with

repayment problems. It will also lead to depletion of external reserves and often results

in foreign currency crisis leading to World Bank and IMF coming in to force down

unwanted policies on the nation. Nigeria experienced this for decades up to 2005 when

it exited the debt holes of Paris Club and London Club.

Printing of Paper money called “ways and means” in Nigeria has caused high

level of inflation. Privatization and commercialization to some extent has been applied

with questionable results.

7
 2.01 GOVERNMENT DEFICIT SPENDING AND ECONOMIC GROWTH IN NIGERIA

Kustepeli (no date) studied the effect of nominal government deficits on

economic growth (GDP) in Turkey. He made extensive study of literature such as

Cebula (1995), Ludvigson (1996), Ahking and Miller (1985) among others whose studies

showed that “when government deficits are financed by monetary expansion, the result

is usually inflation”. The reason is because government “deficits lead to increase in

inflation”. He added that high inflation rate has adverse effect on the economy and

results in steady fall in G.N.P. Having accepted the results of the literature he reviewed,

he carried out his own tests using co-integration and causality tests. He came to the

same conclusion that when sustained governments deficit spending are financed by

increase in the monetary base, inflation becomes an undeniable outcome which for

prolonged periods adversely affect economic activities and therefore GNP. His study

emphasized on deficits financed by increased monetization (ways and means) and did

talk about other factors.

Back here in Nigeria, a number of studies have been done to determine the

effects of prolonged government deficit spending on the economic growth. Dalyop

(2010) did his study to determine the effects of fiscal deficits and the growth of

domestic output in Nigeria. His study is preceeded by extensive review of literature. For

example, he referred to Akor (2001) who observed that government expenditures grew

large as bureaucracy grew. But when there was glut in the crude oil market, revenues

declined “but government was reluctant in reducing the bloated expenditures that had

resulted during the oil boom. Government then resorted to fiscal deficits as to continue

8
its deficit spending. Dalyop (2010) explains that fiscal deficits occur when government

expenditures exceed revenues and “have become a recurring feature of public sector

financing in Nigeria”. However, Keynesian demand side economics justifies deficit

financing by governments to reflate and economy that is in a recession or depression

(Anyanwu and Oaikhenan (1995) and Ogboru (2006). Dalyop (2010) recounting Asfaha

(2007) and Neaime (2008) noted that fiscal deficits may be caused by inadequate

collection of taxes and heavy government expenditures in infrastructure. Dalyop’s study

stated that most government’s deficit spending is financed by monetization. Using time

series data for the period 1982-2008, he ran a linear regression analysis to show that

government’s deficit spending has a negative though insignificant impact on economic

growth. According to them deficit spending has resulted in heavy borrowing which in

turn has given rise to debt burden and its attendant problems. Aliyu and Elijah (2008)

add that the excessive government deficit spending has been exacerbated “by

corruption as corruption tends to inflate public expenditure”.

2.02 GOVERNMENT DEFICIT SPENDING, MONEY SUPPLY AND INFLATION IN NIGERIA

Omoke and Orunta (2010) studied Budget Deficits, Money Supply and Inflation in

Nigeria. Using inflation as independent variable and budget deficit and Money supply as

dependent variables and with the application of ADF and P-P techniques to test for unit

root, they concluded that there is long term relationship between fiscal deficits, money

supply and inflation.

Onwiodukit (no date) studied fiscal deficits and inflationary dynamics in Nigeria.

Using time series data from 1970-1994, he wanted to ascertain the impact of fiscal

deficits (deficit spending of government) on inflation as well as impact of inflation on

9
deficits spending. In other words he wanted to establish whether it is deficit spending

that causes inflation or the other way round. Using Granger Causality test, his study

says that fiscal deficits cause inflation. He recommended that government should not

only control deficit spending but also the mode of financing the deficits.

Olusoji and Oderinde (2011) in their study of fiscal deficit and inflation Trend in

Nigeria, like Onwioduokit wanted to find out whether deficit spending cause inflation or

is it inflation that cause deficit spending. They used what they called more robust Toda-

Yamama to Granger non-causality test. Their study did not establish any “clear evidence

of causality relationship between fiscal deficit and inflation in Nigeria for the period of

study 1970-2006. Their finding is somewhat close to the finding of Onwiodnokit. The

finding indicate a causality link between deficit spending and inflation but not from

inflation to deficit spending. Olusoji and Oderinde also reported the work of Folorunso

and Abiola (2000) whose study also established a significant relationship between fiscal

deficits and inflation in Nigeria. Ezeabasili et al (2012) made empirical study of fiscal

deficits and inflation in Nigeria, using Co-integration and ordinary least squares (OLS)

techniques. Their results “reveal a positive but insignificant relationship between

inflation and fiscal deficits in Nigeria”. They also reported “a positive long run

relationship between money supply and inflation suggesting that money supply is

procyclical and tends to grow at a faster rate than inflation rate”.

2.03. GOVERNMENT DEFICIT SPENDING AND INTEREST (LENDING) RATE IN NIGERIA

Aisen and Hauner (2008) in IMF working Paper studied the effects of fiscal

deficits and interest rates in both developed and developing countries. They drew three

main conclusions from their study. First, they opined that “there is a highly significant

10
positive effect of deficit spending on interest rate”; secondly the effect varies from

country to country “the effects are large and more robust in the emerging markets than

in advanced economic”. Thirdly the effect of fiscal deficits on interest rates “depends on

interaction terms and is significant only under several conditions: when deficit spending

is high, when they are financed domestically; when they interact with domestic debt

and when financed openness is low. Moreover, the effect is large when interest rates

are more liberalized and when the domestic financial sector is less developed”.

Obi and Nurudeen (2009) did a study to establish if fiscal deficits raise interest

rate in Nigeria. They used Vector Auto Regression (VAR) to carryout their analysis.

Their results indicate that fiscal deficits and government debt have positive impact on

interest rates. They opined that “deficits financing leads to huge debt stock and tends

to crowd-out private sector investment” and raise interest rates. The outcome is fall in

productivity and GDP.

Ezeabasili and Mojekwu (2011) carried out a study of fiscal deficits and interest

rates in Nigeria. They used co-integration techniques and structural analysis for the

study. The results are that fiscal deficits and interest rates are positive and statistically

significant. The indications are that large deficits cause high interest rates. Also Money

Supply has an inverse relationship with interests in Nigeria and there exists a positive

and significant relationship between inflation and interest rates.

2.04 GOVERNMENT DEFICIT SPENDING AND EXCHANGE RATES IN NIGERIA

Egwaikhide et al (1994) did a research on exchange rate depreciation, fiscal

deficits and inflation in Nigeria. They used two stage models in their work. First, they

11
used a structural model of co-integration and Error Correction model. Secondly they

conducted a simulation experiment. Both models were to establish the impact of

exchange rate movements on general price level (inflation) and fiscal deficits. Their

study which spanned the period 1970-1989, showed that domestic money supply, real

GDP, and exchange rate are important in dealing with causes of inflation in Nigeria.

More specifically on the simulation experiment, they discovered that exchange rate

depreciation significantly affects both revenue and expenditure sides of both revenues

and expenditures in Nigeria and tends to enlarge the deficit spending over time.

Odusola and Akinlo (2001) also carried out a study of inflation and exchange on

output in developing countries with Nigeria as a case study. The results of their study

were mixed. According to them “the impulse response functions exerted an

expansionary impact on exchange rate depreciation on output in medium and long

term”. Contractionary impact was the case in the short run. Evidence from VAR models

suggests the impacts of interest rate and inflation on output are negative.

2.05. THEORETICAL ISSUES

Government deficit spending dates back for ages but modern theories to explain

them are fairly recent.

2.05.1. THEORY OF BUSINESS CYCLE

Economies of capitalist system are said to fluctuate up and down in cycles.

According to Dwivedi (2008) “the upward and downward movements show different

phases of business cycles”. The cycles are illustrated in figure 1 below.

12
 FIG. 1 BUSINESS CYCLES

Peak
Growth Rates A
Downswing
Steady Growth Line
Upswing
Expansion
Recovery
Recession
B
Trough
0
Time

NOTES:

Expansion is also called upswing when the economy is coming out of a Trough

which is the lowest point of a Recession. If the economy stays too long in a Trough it is

called Depression. At the peak of an upswing is Boom from where downswing starts

leading to recession. The cycle continues in the order described above. From the time

of Keynes it is now held that government should engage in large scale spending even

large deficit spending to stimulate aggregate demand in time of recession and

depression. This is not surprising because Keynes theory came at the World’s worst

depression called the Great Depression. His Deficit Spending theory helped pull the

world out of the Great Depression. Ever since Keynes put up his theory, government

deficit financing is not seen as evil ‘per se’ provided the economic situation warrants it.

2.05.2. THEORY OF INFLATIONARY GAP AND DEFLATIONARY GAP

A corollary of the Business cycle is the Theory of Inflationary Gap and Deflationary

Gap of Keynes also used to explain government deficit spending.

13
 Y=E (Aggregate
Supply) C+I+G+X-M
C+I+G+X-M
(Aggregate Demand)

Deflationary Gap

Inflation Gap
450

0
Ye Y1 National Income

Ye = Equilibrium Level of Expenditure Income

C = Consumption Expenditure of Households

I = Investment of the Business Sector

G = Government Expenditure

X-M = Exports and Imports respectively

C+I+G+I+X-M = Aggregate Demand

Y = E Line is the 450 line and equal to

Aggregate Supply

The economy is operating at Y0 but with unemployed resources that can

enable it operate within the deflationary Gap, say at Y1. The government can increase

the level of aggregate demand by engaging in massive deficit spending to inflate the

economy. Such deficit spending is justified by Keynesian economists because it will

grow the economy.

14
2.05.3. THE MONETRISTS THEORY

Another theory as a foundation for government deficit spending is the

Monetarist Theory. Monetarists argue that government deficits spending financed by

domestic debt constitute mere transfer of resources from private sector to public sector

with little or no effect on output financed by monetary creation (ways and means) has a

strong stimulative effect on the economy and as such raise aggregate demand

(Okpanachi and Abimku (2007) in Dalyop (2010).

15
 SECTION 3

3.0 DATA AND METHODOLOGY OF STUDY

The methodology deals with data and their sources and model specification.

The model comprises a number of possible variables that can influence government

deficits spending. The Ordinary Least Squares (OLS) technique is used to analysis data

raised.

3.01. DATA: secondary data are collected for the study and relate to the variable

under study. They are Gross Domestic Product (GDP), Exchange Rate (EXR), Inflation

(Infl) Government Deficit Spending (G.D.S), Money Supply (MS) and Lending Interest

Rate (LIR). The Table below is time series data taken from CBN statistical Bulletin for

the period 1986-2010.

TABLE I: DATA ON MACROECONOMIC VARIABLES USED FOR THE STUDY

Years GDP at Market Nominal Inflation Government (MS) Money Lending Int.
Price N Million Exchange Rate (Infl) Deficit Spending Supply (LIR) Rate%
Rate (EXR) N Million
1986 69,147.00 2.0206 5.4 -8,254.30 27,389.80 10.5
1987 105,222.80 4.0179 10.2 -5,889.70 33,667.40 17.5
1988 139,085.30 4.5367 56.0 -12,160.90 45,446.90 16.5
1989 216,797.50 7.3916 50.5 -15,134.70 47,055.00 26.8
1990 267,550.00 8.0378 7.5 -22,116.10 68,662.50 25.5
1991 312,139.70 9.9095 12.7 -35,755.20 87,499.80 20.01
1992 532,613.80 17.2984 44.8 -39,532.50 129,085.50 29.8
1993 683,896.80 22.0511 57.2 -107,735.30 198,479.20 18.32
1994 899,863.20 21.8861 57.0 -70,270.60 266.944.90 21
1995 1,933,211.60 21.8861 72.8 -1000.00 318,763.50 20.18
1996 2,702,719.60 21.8861 29.3 -32,049.40 370,333.50 19.74
1997 2,801,972.60 21.8861 10.7 -5,000.00 429,731.30 13.54
1998 2,708,430.90 21.8861 7.9 -133,389.30 525,637.80 18.29
1999 3,194,015.00 92.6934 6.6 -285,104.70 699,733.70 21.32
2001 4,582,127.30 102,1052 6.9 -103,777.30 1,315,869.10 18.29

16
2002 6,912,381.30 120.9702 12.9 -301,401.70 1,599,494.60 24.4
2003 8,487,031.60 129.3565 14.0 -202,724.70 1,985,191.80 20.48
2004 11,411,066.90 133.5004 15.0 -172,601.30 2,263,587.90 19.15
2005 14,572,239.10 132.1470 17.8 -161,406.30 2,814,846.10 17.85
2006 18,564,594.70 128.6516 8.2 -101,397.50 4,027,901.70 17.3
2007 20,657,317.70 125.8331 5.4 -11,723.50 5,809,826.70 16.94
2008 24,296,329.30 118.5669 11.6 -47,378.50 9,166,835.30 15.14
2009 24,794,238.70 148.9017 12.4 -810,008.46 10,767,377.80 18.36
2010 29,205,783.00 150.2980 10.9 -1,105,439.78 11,034,940.93 17.36

SOURCE: CBN STATISTICAL BULLETIN, 2010

3.02 MODEL SPECIFICATION

In view of the objective, two hypotheses are proposed: as Null (H0)

Hypothesis. That Government Deficit Spending (GDS) has no significant effects on

macroeconomic variables of GDP Nominal Exchange Rate (EXR), Inflation (Infl), Money

Supply (MS) and Lending Interest Rate LIR).

Alternative (H1) Hypothesis- that Government Deficit Spending has significant effect on

macroeconomic variables of GDP, EXR, Infl, MS and LIR. A simple linear function is

proposed as follows:

GDS = F (GDP, EXR, Infl, MS and LIR) where

GDP = Government Deficit Spending

GDP = Gross Domestic Product

EXR = Nominal Exchange Rate

Infl = Inflation Rate

MS = Money Supply

LIR = Lending Interest Rate

17
Put in Econometric Model, we put in this form: GDS = a0 + a1GDPt-1 + a2EXRt + a3INFLt

+ a4LnMSt + a5LIRt e. a1, a2, a3, a4 and a5 are coefficients of the explanatory variables

while a0 is the constant and e is the stochastic error term while Ln is natural log used to

express the variables in ratio form.

18
 SECTION 4

4.0 EMPIRICAL RESULTS

The Results of the analysis of data in the table give the results summarized in

table 2 and 3 below:

TABLE 2: DESCRIPTIVE STATISTICS

VARIABLE N MEAN STD.DVE

Ln GDP 25 14.648 1.885
LnMS 25 13.159 1.912
LnGDS 25 11.072 1/607
EXR 25 67.20 57.70
INFL 25 22.50 20.51
LIR 25 19.330 4.109

TABLE 3 REGRESSION RESULTS

PREDICTOR COEF STD.DEV T P
Constant 11.076 3.694 3.00 0.007
LnGDP -1.8980 0.8411 -2.26 0.036
EXR 0.01348 0.01116 1.21 0.242
INFL -0.0286 0.01252 -1.67 0.112
LnMS 1.9529 0.9776 2.0 0.060
LIR 0.08597 0.05848 1.47 0.158

S = 1.035

R-Sq = 67.1%

R-Sq (adj) = 58.5%

F-Stat 7.7% 0.000

Durbin-Watson Statistic = 2.25

Results in Table 2 show that the means of the variable are higher than their standard

deviation. This suggests that the variables do not vary widely from each other.

Table 3 gives the analysis of the variables used in the Hypothesis. F-Stat

(7.76) has probability less than 5% which implies that government Deficit Spending has

19
significant effect on the economy. The coefficient of determination (R2) which is 67.1%

shows that, about 67% of variations of government deficit spending are caused by the

macro variables understudy. That means that about 33% of the effects of government

deficit spending are caused by other factors outside the study.

20
 SECTION 5

5.00 DISCUSSION CONCLUSION AND RECOMMENDATION

As stated earlier, the Null Hypothesis that Government Deficit Spending (GDS)

has no significant effect on the macroeconomic variables of (EXR, MS. INFL and LIR)

are tested and analyzed. With F-stats (7.76) having a probability less that 5%, one can

then say that Government Deficit Spending has significant effect on the economy. That

means rejection of Null (H0) Hypothesis and accepting Alternative (H1) hypothesis.

These results are consistent with the studies of Cebula (1995), Ludvigson (1996) and

Ahking and Miller (1985) as Government Deficits Spending in Turkey and concluded that

government sustained deficits especially by monetary creation cause inflation and has

adverse effect on GNP in Turkey.

The results are also to some extent inconsistent with the works of Dalyop

(2010) whose study shows that persistent government deficits in Nigeria have negative

effects in GDP and also have effect on level of economic activity.

This study also is consistent with Keynesian theory of encouraging government

heavy (and if need be deficits) spending to reflate an economy. These observations

were also made by Anyanmu and Oaikhenan (1995).

When we consider the effects of Government Deficits on Money Supply (MS)

and Inflation in Nigeria this study opined that Government Deficit Spending is consistent

with a priori view on inflation because it tends to increase Money Supply. This finding is

however not consistent with Omoke and Oruta (2010) whose work reported that

Government deficits do not cause inflation. Again Onwioduokit (no date) confirms that

21
government deficits cause inflation. The work of Olusoji Oderinde (2011) however is

inconclusive since it cannot determine whether it is fiscal deficits that cause inflation or

vice verse.

On the issue of government deficit spending and interest rate, this study

opined adverse impact of government deficits on interest (lending) rate. Obi and

Nurudeen (2009) found similar results. Ezeabasili and Mojekwu (2001) in their study

came out with a similar conclusion.

On the issue of Government Deficit Spending and Exchange Rate this study

came out with significant relationship between government deficits and Exchange rate.

This is consistent with the study of Egwaikhide et al (1994) whose results show that

domestic Money Supply, real GDP and Exchange Rate are relevant in dealing with

causes of inflation in Nigeria.

Further analysis of the Regression Results state that about 33% of reasons for

government deficit spending are not explained by the variables used in this study. This

is not surprising. Other variables not captured in the study may include the issue of

endemic corruption. Aliyu and Elijah (2008) in their study mentioned this. Another

factor may be relating to balance of payments disequilibrium that has been on for close

to past three decades.

5.01. CONCLUSION

Persistent Deficits Spending has been the unenviable hallmark of subsequent

governments in Nigeria. They are believed to adversely affect the macroeconomy of the

nation in various ways. The situation is not assuaging and one has to conclude that the

22
government has to reduce persistent deficits spending. There is need to reduce cost of

running government. The present situation constitutes cause for alarm.

5.02. RECOMMENDATION

A further study is recommended to find out other explanatory variables that

may account for 33% not captured in the present study. More studies may also need to

be carried out to try to resolve the controversy of whether deficits spending causes

inflation or inflation causes deficits spending.

23
REFERENCES

Atking F.W and Miller S.M (1985) “The Relationship Between Government Deficit,
Money Growth and Inflation”, Journal of Macroeconomics 7(4) pp 447-467

Aisen Ari and Hawner David (2008) “Budget Deficits and Interest Rates: A Fresh
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