ECONOMIC AND POLITICAL DETERMINANTS OF PUBLIC SECTOR BUDGET DEFICITS: THE CASE OF NIGERIA

Abstract

The main focus of the paper is to analyze the effects of both economic and political variables on public sector budget deficits. The econometric results show that the main determinants of budget deficits include international capital inflow, international interest rate, debt service costs, public expenditure, political instability and economic growth. The author makes the following recommendations. Firstly, international capital should be used to finance projects that contribute meaningfully to the economy. Secondly, since international interest rate is outside the control of Nigeria’s government and monetary authorities, emphasis on foreign loans should be reduced. Thirdly, government should avoid external debt where necessary. Fourthly, government should increase her spending on infrastructural development. Furthermore, government should strengthen the political institutions including the judiciary, as well as create a level playing ground for all its citizens, so as to promote political stability. Moreover, government should give more incentives and subsidies such as low corporate profit tax, improvement in power and energy generation, etc., in order to encourage producers as well as promote economic growth. Lastly, government should sustain the on-going war against corruption so that public funds are not misappropriated or embezzled by government officials.