The Moderating Role of Institutional Quality in the Fiscal Deficit – Poverty Reduction Nexus in Nigeria (1984-2023)

Abstract

Despite sustained fiscal deficit spending since the early 1980s, poverty in Nigeria has continued to rise, raising questions about the conditions under which deficit financing reduces poverty. Grounded in North’s institutional theory, this study examines whether institutional quality moderates the relationship between fiscal deficit and poverty reduction in Nigeria from 1984 to 2023. Real consumption per capita served as the proxy for poverty reduction, with fiscal deficit, a composite institutional quality index, and their interaction as the principal explanatory variables, and inflation, economic growth, and financial development as controls. Annual secondary data from the World Development Indicators and the Central Bank of Nigeria Statistical Bulletin were analyzed using the autoregressive distributed lag (ARDL) bounds testing approach. Unit root tests indicated a mixed order of integration, and the bounds test confirmed a long-run relationship among the variables (F = 5.2372). In the long run, fiscal deficit, institutional quality, and their interaction had no statistically significant effect on real consumption per capita, whereas economic growth had a positive and significant effect. In the short run, lagged fiscal deficit exerted positive and significant effects, suggesting delayed policy transmission, and the error correction term (-0.4030) indicated that roughly 40% of disequilibrium is corrected annually. Granger causality ran from fiscal deficit and the interaction term to real consumption per capita. The findings suggest that fiscal expansion alone cannot sustainably reduce poverty without stronger institutions; policy should prioritize transparency, accountability, and efficient public financial management.