IIARD International Institute of Academic Research and Development

IIARD International Journal of Economics and Business Management (IJEBM )

E-ISSN 2489-0065
P-ISSN 2695-186X
VOL. 11 NO. 1 2025
DOI: 10.56201/ijebm.vol.11.no1.2025.pg196.217

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Impact of Fiscal policy on Income Inequality: Evidence from Nigeria

Nyeche, E., Amadi, S.N and Kalagbor, M.C

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Abstract

This study investigated the relationship between fiscal policy and income inequality in Nigeria from 1985 to 2022. The specific objectives were to examine the impact of capital expenditure, recurrent expenditure, deficit financing, and value-added tax revenue on income inequality. Data for each variable were obtained from existing secondary sources, including the Central Bank of Nigeria (CBN) Statistical Bulletin and the World Bank. The autoregressive distributed lag (ARDL) method, along with pre-estimation tests for unit roots and bounds cointegration, formed the basis for data analysis. The results of the unit root test show that the variables are mixed-integrated, with the Gini coefficient being stationary at levels, while the other variables were stationary after first differencing. The bounds cointegration test results indicate a long-term relationship between the Gini coefficient and the independent variables. The ARDL results show that capital expenditure has a positive and insignificant impact on income inequality in Nigeria, implying that an increase in capital expenditure will, in the long run, increase income inequality. Evidence of a negative insignificant impact of deficit financing on income inequality was found in the long run. The results further show that recurrent expenditure and value-added tax have a negative insignificant influence on income inequality in the long run. Additionally, the error correction coefficient (-0.021084) is negative and significant at the 5% level, indicating that about 2.10% of distortions from long-run equilibrium will be adjusted each year. Based on these findings, the study concludes that capital expenditure plays a pivotal role in income inequality in the Nigerian economy. Thus, it is recommended that the government prioritize investments in sectors that directly reduce inequality, such as education, healthcare, and rural infrastructure.

keywords:

Capital Expenditure, Recurrent Expenditure, Deficit Financing, Value-Added

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