THE EFFECTS OF BUDGET DEFICITS ON SELECTED MACROECONOMIC VARIABLES

ABSTRACT

This study investigates the effects of budget deficits on selected macroeconomic variables in Nigeria and Ghana using annual time-series data of both economies covering from 1970 to 2013; and taking previous empirical studies as its point of departure. The specific objectives of the study include: to examine the effects of budget deficits on interest rates, inflation, and economic growth in Nigeria and Ghana within the methodological framework of Seemingly Unrelated Regression (SUR) model and Two-Stage Least Squares (2SLS). The study employs Eagle-Granger Cointegration test, Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests in estimating the systems equations. Data sourced from World Bank, IMF – World Economic Outlook, Central Bank of Nigeria, Bank of Ghana and others, were analyzed using SUR model with several diagnostic and specification tests to examine the objectives of the study. From the perspective of this study, the empirical findings demonstrated that budget deficit has statistically negative effects on interest rate, inflation, and economic growth for both economies thereby supporting the neoclassical argument in the literature that budget deficit slows growth of the economy through resources crowding-out. Based on the empirical findings, many recommendations were made for both Nigeria and Ghana economies one of which stated that the government of Nigeria and Ghana should be mindful of the sources of financing the budget deficits so as to effectively manage the economic fluctuations and increase activities in the real sector. Also, it was recommended that both economies should pursue policies that will boost production of goods for both domestic consumption and exports in the long run through a combination of import substitution and export promotion strategies.

CHAPTER ONE

INTRODUCTION

1.1             Background of the Study

Budget deficit and its effects on macroeconomic variables is one of the most discussed issues amongst economists and policy makers in both developed and developing countries (Saleh, 2003; Aisen & Hauner, 2008; Georgantopoulos & Tsamis, 2011). Intuitively, it is a commonplace to construe that huge budget deficits have adverse macroeconomic effects such as high interest rates, current account deficits, inflation, exchange rates volatility, with implications on growth and development (Bernheim, 1989).

The budget deficit effects could either be negative, positive or a no positive or negative relationship on macroeconomic variables. Budget deficit and its effects on any given economy could be attributable to different methodologies countries employed and the nature of data used by different researchers as most of the studies regress the macroeconomic variable(s) on the fiscal deficit or the deficit on the macroeconomic variable(s)(Anyanwu, 1997).

Budget deficit refers to government expenditure exceeding government revenue over a period of time (Anyanwu, 1997). When a deficit occurs in a country, it becomesimperative to find remedy for financing such deficits so as to eradicate its negative implications. Nigeria and Ghana as a developing economies have blamed prolonged economic crisis as one of the major causes of budget deficit(s) in both economies as it has resulted in over indebtedness and debt crisis, high inflation, poor investment performance and growth (Ezeabasili, Mojekwu & Herbert, 2012). In Nigeria, public expenditure has led to increase in the fiscal imbalances that siphon funds from the private sector investment, retarding growth and reducing standard of living (Mpia & Ogrike, 2014).