Analysing the Impact of Fiscal Policy on Unemployment in Nigeria

Fiscal policy has been a tool for economic stabilisation in developing economies for decades. Ever since the Great Depression, fiscal policy has been in the frontline of policy actions. This study investigates the impact of fiscal policy tools on unemployment rate in Nigeria between 1991 and 2021 using the autoregressive distributed lag model. The study has found the presence of cointegration among the variables. Additionally, taxation was found in the long-run to have no impact on unemployment rate while government spending in the long-run worsens unemployment largely due to unproductive and wasteful spending. In the short run, both taxation and government spending worsen the unemployment situation in Nigeria. It, therefore, indicates that the tax system in Nigeria may not be very effective over time. It is thus recommended that the government should consider cutting down expenses and accomplish an expenditure switch from more recurrent spending to more capital and infrastructural spending which will encourage job creation. Furthermore, the government should consider selective taxation on those lucrative sectors with less job-creation capacity in order to give to those sectors with more job creation potential. Additionally, taxation should be logically applied to imported goods to discourage consumption whilst encouraging local production and incentivising local producers through fiscal policy.

JEL classification:H2, H5, J6.