Global Journal of Human Social Science, E: Economics, Volume 22 Issue 7

logical. Accumulated surpluses could be used during periods of economic recessions or war (Boyce, 2020). However, fiscal deficit is not necessarily an economic problem because government can use deficit financing as a technical tool to solve other macroeconomic problems within the economy. Fiscal deficit incurred as a result of consumption expenditures may be harmful to an economy, while fiscal deficit due to investment expenditures may be beneficial to an economy. For example, public capital expenditure on acquisition of infrastructure such as construction of roads, raillines, building of dams for the generation of electricity and water supply will yield returns not only in the present. Future generations will benefit from such investment expenditures if properly maintained. This leads to the concept of sustainability. The concept of sustainability deals with the fact that current production and consumption activities should be done in such a way that the resources will still be available for future generations. Fiscal deficit financing leads to government decision to increase taxes, borrow or increase spending. These decisions have multiplier effects in the economy, which may be undesirable to the citizens. In the short-term, these government decisions may seem to be the way-out but the long-term effect may be detrimental to the economy. For example, increased government spending aimed at stimulating output may prove sticky. Government capital spending in building schools or health centres may necessitate further recurrent expenditure in the maintenance of such. Also, public response to cyclical fluctuations, for instance increase in government spending on unemployment benefits during economic contraction may continue after economic recovery if citizens are unwilling to take up paid jobs. Besides, interest payment on debt due to continuous deficit financing may be burdensome. Keynes (1936) opined that increase in government spending stimulates aggregate demand and consequently spurs economic growth. Therefore, Keynes advocates for fiscal deficit financing. According to him, fiscal deficit financing will stimulate aggregate demand and domestic production; thereby crowding in investment and reducing unemployment. However, fiscal deficit can be harmful when spending is not directed towards productive activities which would lead to expansion in output (Adegboyo, Efuntade & Efuntade, 2020). So, deficit financing should be a short-run phenomenon. On the other hand, Akanmobi and Unachukwu (2021) argued from the Ricardian perspective that fiscal deficit financing has no effect on economic growth. The authors are of the view that increases in government spending leads to decrease in public savings, which will in turn lead to increase in desired private savings. Hence, desired national savings and investment remains the same in a closed economy. In an open economy, if the desired private savings increases so much that there would be no need for external borrowing; fiscal deficit will also have no effect on the economy (Akanmobi & Unachukwu, 2021). The neoclassical view is that increase in fiscal deficit will spur the overall consumption level in an economy; leading to a fall in national savings. This will give rise to a higher interest rate in a closed economy. Investment is adversely affected and economic activities reduce. In an open economy, increase in fiscal deficit will amount to increase in capital inflow; leading to exchange rate appreciation, reduction in net exports and crowding out of investment. Thus, fiscal deficit adversely impacts on the economy (Musa, 2021). The dual-gap theory argues that the development of an economy depends on the level of investment; which in turn requires domestic savings. In a situation where domestic saving is insufficient to meet the investment needs in an economy, external borrowing will be necessary. Hence, the size of external debt will be equal to the domestic resource gap. Many studies have examined the effect of fiscal deficit on economic growth but there is dearth of literature on the link between fiscal deficit and external debt. The empirical review therefore presents studies showing the effect of fiscal deficit on economic growth. Akanmobi & Unachukwu (2021) estimated three models to examine the macroeconomic effects of fiscal deficit in Nigeria. The study used the autoregressive distributed lag (ARDL) approach which revealed that fiscal deficit significantly and positively impacted economic growth in Nigeria. Increase in government deficit spending does not harm economic growth. Also, interest rate significantly and positively influenced economic growth while inflation significantly but negatively impacted economic growth in Nigeria. Similarly, Musa (2021) analyzed dataset for the period 1980-2019 and found that fiscal deficit significantly and positively influenced economic growth in Nigeria. In addition, inflation significantly but negatively impacted economic growth. Therefore, the study concluded that fiscal deficit financing is ineffective in achieving sustainable growth. The rationale behind this is that despite huge government spending over the years, economic growth has been very low and sluggish, while inflation rate has been rising. The growth recorded in the Nigerian economy seems to be reflective of rising prices (inflation). The poor outcome of fiscal deficit financing has been blamed on poor policy implementation, wasteful spending, and high level of corruption among others. Chukwu, Otiwu and Okere (2020) investigated the impact of fiscal deficit on macroeconomic variables in Nigeria; from 1980 to 2012. Using two-stage least square technique, the study found that fiscal deficit negatively and significantly impacted GDP growth rate, real private investment,inflation rate, real exchange rate © 2022 Global Journals Volume XXII Issue VII Version I 37 ( ) Global Journal of Human Social Science - Year 2022 E Implication of Fiscal Deficit Financing on External Debt Sustainability in Nigeria