Full Project – THE EFFECTS OF BUDGET DEFICITS ON SELECTED MACROECONOMIC VARIABLES

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).