EFFECT OF FISCAL POLICY ON PRIVATE INVESTMENT IN NIGERIA

Abstract

Private investment remains a critical driver of economic growth and sustainable development in Nigeria, yet it has persistently underperformed relative to the African Union's 35% gross capital formation threshold. This study examines the effect of fiscal policy, proxied by public debt, government expenditure, and tax revenue, on private investment in Nigeria from 1985 to 2025. Employing the Vector Error Correction Model (VECM) technique, the study investigates both long-run equilibrium relationships and short-run dynamic adjustments among the variables. The long-run results reveal that government expenditure exerts a positive and statistically significant effect on private investment (coefficient = 0.0246, p = 0.0008), whereas public debt (coefficient = –0.1493, p = 0.5882) and tax revenue (coefficient = 0.0361, p = 0.0665) are statistically insignificant. The short-run error correction model shows a highly significant and negative error correction term (–0.6119, p = 0.0000), indicating that approximately 61.2% of disequilibrium is corrected within one period, with private investment serving as the primary adjusting variable. Post-estimation diagnostics confirm the model's reliability, with no heteroskedasticity, no serial correlation, and normally distributed residuals. The study concludes that fiscal policy effectiveness in Nigeria is channel-specific: government expenditure enhances private investment only in the long run, while public debt and tax revenue remain ineffective levers. It is recommended that the government prioritizes capital infrastructure spending, pursues debt restructuring to reduce the debt service burden, and implements comprehensive tax reforms to broaden the revenue base and establish a credible tax-investment nexus.