Fiscal Deficit and Inclusive Economic Growth in Nigeria

This study aimed to investigate the impact of fiscal deficit on inclusive economic growth in Nigeria, spanning from 1981 to 2024. Auto-regressive Distributed Lag (ARDL) and the principal component analysis were used to construct the inclusive growth index (IGI) while incorporating economic, social, institutional and environmental factors. The unit root test using the ADF and Philips-Perron tests revealed that all variables were stationary at first difference. The findings revealed that fiscal deficit exhibited a positive relationship with inclusive economic growth in the long-run, indicating that fiscal policy can play a significant role in fostering inclusive growth. However, the negative short-run relationship between fiscal deficit (FB) and inclusive growth index (IGI) suggests that fiscal policymakers must strike a balance between deficit spending and long-term economic growth. This is to ensure that short term gains do not result in long-term negative effects on inclusive growth. The positive long run relationship between broad money supply growth rate (BMS) and IGI highlights the importance of monetary policy in promoting inclusive growth. On the other hand, the negative short-run relationship between inflation and IGI indicates that maintaining price stability is crucial to support inclusive growth. The study highlights the importance of coordination between fiscal and monetary policy, as excessive deficit spending can lead to inflationary pressures that undermine inclusive growth.