Public Debt, Government Spending and Inflationary Pressure in Nigeria: Ascertaining the Threshold Level

Since the primary macroeconomic goal of every nation is to maintain high economic growth with low inflation, government spending is crucial in determining the level of national income as well as meeting the needs for potential output and maintaining the welfare of every economy. Hence, this paper examined the influence of public debt and government expenditure on inflation as well as their threshold levels that is sustainable for inflation in Nigeria, for the period between 1981 to 2022. Ex-post factor design was used in this study, data used were obtained from secondary sources, which were the CBN statistical bulletin and the database of WDI, which were time series in nature. The variables used in the study were subjected to pre-diagnostic test, of which unit root test as one of them, to ascertain the levels of stationarities. The paper employed the autoregressive distributed lag model and the threshold regression analysis techniques as the methods of data analysis. Findings from the study indicated that both public debt and government expenditure had a negative and significant short run effect on inflation while the effect is negative but insignificant in the long run. The disaggregated model indicated that domestic debt exerted a negative and significant short run effect on inflation in Nigeria while external debt exerts a positive and significant effect. Similarly, government capital expenditure exerted a negative and significant short run effect on inflation while recurrent expenditure put forth a positive and significant effect. The threshold analysis indicated that the optimal threshold level of public debt and government expenditure that are sustainable for inflation are 17.35% and 15.81% respectively. The study recommended amongst others that government, through its budget, must resort to increasing its capital expenditure component while ensuring that the recurrent expenditure component is not rapidly increased and also be cautious of its borrowing pattern by not exceeding 17.35% of aggregate output, its expenditure should not exceed 15.81% in order to ensure price stability.