Introduction
In Nigeria, budget deficit has been blamed for causing much economic crises, high inflation, poor investment performance and growth (Appah and Chigbu, 2013). One of the most important objectives of fiscal policy is to reduce national debt and to check the interest payment on such debt from rising so as to prevent high deficit in the future. However, Nigerian government budget deficit witnessed an increase in the past decades. For instance, from 1981, deficits increased from N3.9billion to N8.2billion in 1986 and it further increased to N15.1billion in 1989. From 1990, the rising trend of budget deficit continued except in 1995 when the budget witnessed or registered a surplus of N1billion. In 1998, an overall deficit jumped to N133.3billion and in 2002, it increased up to N301.4billion. Starting from 2003, government budget deficit declined from N202.7billiom to N188.2billion, N150.6billion and N101.3billion in 2003, 2004, 2005 and 2006 respectively. Another increase was witnessed from 2007 at N107billion to N1.5trillion in 2013 (CBN, 2014).
Meanwhile, the value of deficits as a percentage of Gross Domestic Product (GDP) declined to -0.1 percent in 1999. The share of deficits in total GDP has been declining from -2.0 percent in 2003 to -1.1 percent in 2005 and -0.6 percent in 2006. Nigeria recorded budget deficit equal to 1.80 percent of the country€™s GDP in 2013 (Nigerian Budget Office, 2014). The Nigerian government budget averaged 2.10 percent of the GDP from 2006 up till 2013, reaching an all-high 4.60 percent of GDP in 2008 and also recorded low of -6.6 percent of GDP in 2009 (Nigerian Budget Office, 2014).
Furthermore, the implication of deficit financing on economic stability through growth, stable inflation and unemployment rate has been one of the subjects of a long standing debate in macroeconomics. Three views emerged from the literature revealing the relationship between budget deficit and macroeconomic variables. Keynesian economics supports the ideas that budget deficit has, by the working of the multiplier, a positive effect on the macroeconomic activities (Appah and Chigbu, 2013). Neoclassical economist argues that budget deficit has negative effects on economic stability as much as Ricardian equivalence approach supports the view of neoclassical economist (Appah and Chigbu, 2013). These three contrasting views show that a large budget deficit is a source of economic instability. Ojong and Hycent (2013) further observed that deficit financing in Nigeria is characterized by poor policy implementation, inconsistence of government macroeconomic policies, low growth of private investment, decline growth in real sector and high level of indiscipline in public sector.
Based on the forgoing relationship between deficit financing and economic stability, a study such as this is necessary. This study, therefore, is designed to investigate the implications of deficit financing on economic stability in Nigeria.
Statement of the Problem
The issue of deficit financing certainly is not new but the level of economic stability of the last decades has brought about more interest in fiscal policy issues that will encourage growth. The government expenditure has been increasing each year because of government spending activities. An increase in government revenue is not sufficient to finance increased government expenditure which leads to deficit. Government revenue has not been ever efficient and it causes large difference between expenditure and revenue. Government always borrows from both internal and external sources to finance such large difference.
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