Revisiting the fiscal deficit and infrastructure nexus: insights from Nigeria’s economic development

Fiscal deficits remain a persistent challenge in Nigeria, primarily driven by weak revenue mobilisation, over-dependence on oil, and high recurrent expenditure, which limits investment in critical infrastructure. This research revisits the fiscal deficits and infrastructure nexus in Nigeria, utilising annual data from 1990 to 2022. The analysis employs the ARDL bounds testing approach, complemented by FMOLS, CCR, and Granger Causality tests. The results reveal that, in the short term, physical infrastructure exerts a delayed negative and significant effect on fiscal deficits (−0.36, p < 0.01, lagged), inflation with mixed impacts (0.03 contemporaneous, + 0.03 lagged, both significant), and oil revenue strongly reduces fiscal deficits (-1.46, p < 0.01), a reflection of Nigeria’s fiscal vulnerability to commodity cycles. In the long run, physical infrastructure increases fiscal deficits (+0.36, p < 0.05, lagged), social infrastructure (health and education) has a positive but insignificant effect (+0.15), while inflation reduces deficit (−0.03, p < 0.01). GDP growth remains positive but insignificant. Granger causality tests indicate that inflation unidirectionally causes fiscal deficits, emphasising the central role of macroeconomic stability. These findings resonate with Keynesian, endogenous growth, and Hirschman’s unbalanced growth theories, which support the idea that targeted infrastructure spending, though initially deficit-inducing, may catalyse growth in the long term. The study recommends stabilising inflation through fiscal-monetary coordination, diversifying revenue beyond oil, and prioritising borrowing for high-return projects. Policymakers should strengthen human capital and expand public-private partnerships (PPPs) to bridge the infrastructure gap while mitigating fiscal vulnerability, thereby ensuring that Nigeria’s infrastructural needs are met through sustainable fiscal management.