Governments in most developing economies, including Nigeria, have often had to contend with issues of
weak economic and social indicators vis-à-vis poor fiscal performance. In Nigeria for instance, there is
evidence that between 1981 and 2014 fiscal operations have been dominated by fiscal deficits while
major indicators of economic health have remained at sub-optimal levels. There has been considerable
disagreement on the relationship between fiscal deficits and economic performance. As our contribution
towards the resolution of this contentious issue, this study examines the relationship between the
performance of key macroeconomic indicators (exchange rate, inflation rate, gross fixed capital formation
and unemployment) and fiscal deficits. Data on the research variables covering the period 1981-2014
were sourced from the publications of the Central Bank of Nigeria (CBN) and the National Bureau of
Statistics (NBS). Employing the econometric methodology of the vector error correction model (VECM),
the study shows significant positive effect of gross fixed capital formation as well as significant negative
impact of inflation rate and unemployment on fiscal deficits in Nigeria. Though, there is evidence of
negative effect of exchange rate, the study shows it is not significant. These results imply that policies
aimed at enhancing the infrastructure base of the economy promote the practice of deficit budgeting,
Similarly, economic policies that tend to reduce inflation (such as raising domestic output levels) and
unemployment reflect in higher fiscal deficits. The causality tests show evidence of causal impact of
government fiscal deficits on exchange rate, inflation rate and unemployment but failed to show evidence
of causation between fiscal deficits and gross fixed capital formation. It is recommended that government
should ensure prudent utilization of the proceeds of debt finance in promoting domestic production in
order to strengthen the economic fundamentals required to support improved fiscal performance in the
long-ru
