TRANSMISSION CHANNEL BETWEEN BUDGET DEFICITS AND UNEMPLOYMENT THROUGH ECONOMIC GROWTH IN NIGERIA

Abstract

Many economies worldwide, including both developed and emerging ones, employ deficit budgeting and deficit financing as a strategy for fiscal policy, in line with Keynesian principles. Nigeria is among the countries that follow this approach. This study investigates the potential linkage between budget deficits and unemployment through economic growth in Nigeria, using data from 1981 to 2022. Employing endogenous lag models, the study utilizes both an unrestricted vector autoregressive (VAR) model and a restricted autoregressive (vector error correction - VEC) model to determine if there is a transmission channel between budget deficits and unemployment through economic growth in Nigeria. Wald statistics significance and the error correction term coefficients were utilised to assess short-term and long-term causality respectively. The findings indicate that budget deficits stimulate economic growth in Nigeria. However, subsequent economic growth does not lead to a reduction in unemployment. This suggests the absence of a transmission channel between budget deficits and unemployment through economic growth in Nigeria. Given the findings of this study, policymakers should reassess the primary objectives of fiscal policy. The study recommends that instead of solely focusing on using deficit spending to stimulate economic growth, policymakers should consider alternative strategies to address unemployment directly. This could involve targeted interventions such as job creation programs, vocational training initiatives, or incentives for private sector employment generation. By adopting a more comprehensive approach to fiscal policy, policymakers can better address the issue of unemployment and promote inclusive economic growth.