Budget deficits, deficit financing, inflation, taxation, Nigeria

As the level of economic activity depends basically upon the level of aggregate monetary demand, a government may influence the level of activity by varying its own expenditure. In conditions of high unemployment, the government may run a deficit budget since it will spend more than it takes in taxation in an effort to get more people working. This study is therefore an attempt to ascertain the extent to which budget deficit causes inflation in Nigeria. It covers a period of eleven (11) years from 1998 to 2009 and all the data used in the study were collected from secondary sources, which include: the Central Bank of Nigeria, the Federal Office Statistics and the Nigerian Stock Exchange. The data were duly analyzed using correlation techniques. The result of our analysis revealed an adjusted R-Square value of 0.821, which means that budget deficit is responsible for about 82% of the level of inflation in the economy. It is therefore recommend for the Nigerian economy, that the Government should; consider minimizing budget deficit to an optimal level such that it can increase aggregate demand to promote investment and employment. More so, a structural approach should be adopted such as investment in tourism and expansion of agricultural production by creating more incentives for these sectors.