INFLUENCE OF GOVERNMENT BUDGET DEFICIT ON DOMESTIC INVESTMENT IN NIGERIA

ABSTRACT The study examined Influence of Government Budget Deficit on Domestic Investment in Nigeria. The specific objectives were to; to determine the impact has government budget deficit has on a domestic investment in Nigeria and to ascertain if a long run relationship between government budget deficit and domestic investment in Nigeria. The study adopts an econometric approach to estimate the relationship between government budget deficit and domestic investment in Nigeria. The estimation technique involved the use of the Autoregressive Distributed Lag (ARDL) model to assess both short-run and long-run relationships between the variables. Before estimation, unit root tests, such as the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests, are conducted to determine the stationarity of the variables. Additionally, the study applies the Johansen co-integration test to confirm the existence of a long-run equilibrium relationship between government budget deficit and domestic investment. The results from both the long-run and short-run estimates of the ARDL model indicate that the government budget deficit, interest rate, and inflation rate negatively affect domestic investment in Nigeria, while GDP positively influences it. The study revealed a statistically significant negative relationship between budget deficit and domestic investment in both the long and short run. This confirms the crowding-out hypothesis, where increased government borrowing competes with the private sector for funds. The study also revealed a significant negative relationship between interest rate and domestic investment, aligning with the conventional view that higher interest rates increase the cost of borrowing and reduce capital formation. The study concluded with robust empirical evidence on the adverse impact of government budget deficits on domestic investment in Nigeria. The findings demonstrate that persistent fiscal imbalances, especially when financed through borrowing, tend to crowd out private sector investment. This crowding-out effect operates through higher interest rates and inflationary pressures, which distort the investment climate and erode investor confidence. The study recommended fiscal responsibility and discipline, productive utilization of borrowed funds, interest rate management among others among others.