Exploring asymmetric causality between fiscal deficit and poverty reduction in Nigeria

This study extends existing research and knowledge by explaining the causal relationship between fiscal deficits and poverty while accounting for the real-world fundamentals of asymmetric structures and nonlinearities inherent in this relationship. Accounting for asymmetric causality in the nexus yields more real-world-consistent causal estimates. It provides more practical, comprehensive and flexible policy options, with deeper insights into how to resolve theoretical and empirical puzzles, especially in developing and emerging economies that face fundamental issues surrounding the simultaneous presence of persistent fiscal deficits and chronic extreme poverty.

Widespread extreme poverty and persistent fiscal deficits are common in developing and emerging economies (Khah and Ahmad, 2025; Olaoye et al., 2025; Olaniyi, 2020). These problems are only getting worse in some countries, leaving stakeholders and scholars with challenging choices. Whether fiscal deficits drive down poverty, or whether extreme poverty forces the government into chronic deficits to provide minimal income and basic needs for people in poverty, is a key policy issue. To assist policymakers in selecting the most promising policies to combat extreme poverty while maintaining fiscal equilibrium, it is necessary to investigate the causal relationship between fiscal deficits and poverty reduction. Suppose a link exists between the fiscal deficit side of government operations and poverty reduction. In that case, failure to address underlying issues in economies with poor institutional quality and poor allocation might lead to perennial fiscal deficits that exacerbate poverty in the country. These issues include the potential to implement policies that exacerbate poverty while inadvertently funding budget deficits, the inefficient administration of government expenditures that fail to adequately support people experiencing poverty and the presence of administrative bottlenecks and institutional defects in resource allocation and management. First, when the government uses internal borrowing to fund fiscal deficits, public investment may displace private investment due to rising interest rates, which could hinder growth, limit employment prospects, lower incomes and exacerbate poverty (Udeaja and Akanni, 2024). Second, fiscal deficits tend to exacerbate poverty by eroding the real value of incomes. This issue often occurs when proceeds from fiscal deficits fuel inflation (Olaniyi, 2020). This phenomenon leads to more money in the economy without a corresponding increase in real-sector productivity, thereby causing the impoverished to lose more economic power. Third, opportunistic behaviours and corrupt practices thrive in the administration of fiscal deficit proceeds in an economy with inefficient institutions. This institutional flaw may reduce the ability of fiscal deficits to fund initiatives that help reduce the severity of poverty. Thus, robust institutions and well-functioning regulatory frameworks are critical to the efficiency of fiscal deficit management in promoting poverty alleviation.

Additionally, Keynesian economics views fiscal deficits as a means of fiscal policy to stimulate aggregate demand and economic growth. The theory posits that channelling resources from deficits to welfare-promoting projects and other essential socioeconomic facilities – such as education, healthcare and infrastructure – can spur economic growth (Olaoye et al., 2025). This growth, enabled by the fiscal deficit process, promotes investment and job creation (Olaniyi et al., 2023), allowing people on low incomes to earn more and meet their basic consumption needs. This strand of the literature emphasises fiscal deficits as a macroeconomic tool for combating poverty. On the contrary, the theoretical proposition of a vicious cycle of poverty indicates that chronic extreme poverty may also compel the government to accumulate debt to finance initiatives that can help alleviate poverty (Nurkse, 1953; Whitehead, 1996). This standpoint posits that a vicious cycle of extreme poverty pushes the government to run persistent fiscal deficits as a conscious countercyclical measure to combat poverty. One, economic conditions of massive poverty could lead a government to resort to direct debt financing of expenditures beyond its income. Such a policy will enable the system to maintain social welfare schemes, health facilities and education programmes, thereby empowering individuals with low incomes and improving their living standards, which poverty compromises. Two, endemic poverty may lower income tax collections, which, in turn, reduce government revenues to fund essential services. It could ensnare the government in a position where it tries to borrow more and becomes deeper in debt through deficit financing. The fact that extreme poverty remains the crucial underlying cause of persistent structural fiscal deficits is, therefore, supported. This chronic poverty may compel the government to reduce revenue by lowering income tax while increasing expenditure to raise living standards and ease the burden of poverty. In this respect, extreme poverty and persistent fiscal deficits intertwine in most developing countries.

The two strands of argument described above imply that fiscal deficits and poverty reduction could be bidirectional, thereby creating the possibility of feedback when analysing their effects on each other. Analyses that overlook this possibility may introduce simultaneity bias and endogeneity, as noted by Wintoki et al. (2012) and Olaniyi and Odhiambo (2025), thereby distorting the effectiveness of expansionary fiscal policy measures necessary for countercyclical interventions to alleviate poverty. Hence, fiscal deficit and poverty reduction, as endogenous variables within a simultaneous framework, further improve the estimates and, by extension, policy suggestions (Olaniyi et al., 2023). This approach provides a means of examining how fiscal deficits contribute to poverty alleviation and, conversely, whether the severity of poverty is a cause of fiscal deficits. Accordingly, this study examines the causal relationship between fiscal deficits and poverty reduction. Despite the possibility of a feedback effect, the causal relationship between fiscal deficits and poverty reduction has not been sufficiently examined in the literature. The majority of earlier research focuses on how fiscal deficits affect economic growth (Kryeziu and Hoxha, 2021), with little attention paid to the causal mechanisms underlying the relationship between fiscal deficits and poverty alleviation. Forming effective strategies to use fiscal deficits as countercyclical measures to reduce poverty requires this causal understanding.

Additionally, this research makes a significant contribution to our understanding by incorporating asymmetric structures into the relationship between fiscal deficits and poverty reduction. Recent developments in econometrics have challenged the fundamental principles of symmetry and linearity (Hatemi-J, 2012). Traditional methods for determining causality cannot fully capture the fundamental socioeconomic dynamics that create asymmetries in the data regarding fiscal deficits and poverty reduction (Olaniyi, 2020; Olaniyi and Odhiambo, 2024). The asymmetric causal approach overcomes the limits of standard symmetric methods, offering more flexibility in data analysis and policy choices. This method breaks down data on poverty reduction and fiscal deficit indicators into positive and negative parts. As a result, it can uncover hidden causal links and present flexible policy options that symmetric methods might miss (Hatemi-J, 2012; Olaniyi and Olayeni, 2020). Asymmetric methods provide better insights and more adaptable policy choices regarding the connection between poverty reduction and fiscal deficits. This research builds on the asymmetric causality analysis developed by Hatemi-J (2012) and uses bootstrap simulation with leverage adjustment. By using leverage-adjusted bootstrap simulations and data decomposition procedures, this approach does account for shocks, structural breaks, policy changes, volatility and non-normality in financial data and time series (Hatemi-J, 2012; Soon and Baharumshah, 2021; Olaniyi, 2020; Hacker and Hatemi-J, 2008).

This approach provides a distinctive and insightful way to explain the connection between fiscal deficits and poverty reduction. First, in an economy with weak governance and poor institutional structures, much information remains hidden. This situation, combined with rent-seeking behaviour and opportunism, increases fiscal deficits. Unethical practices and high levels of corruption can misdirect resources gained through deficit financing. Instead of aiding development, the government diverts these funds to unproductive activities that influential stakeholders often appropriate for themselves. This mismatch undermines the ability of fiscal deficits to help reduce poverty. As a result, understanding the hidden aspects of fiscal deficits and their connection to poverty reduction requires a fresh approach to uncovering underlying causes and policy choices (Hatemi-J, 2012). Second, this approach clarifies the previously confusing views on fiscal deficits and poverty reduction by separating the data into negative- and positive-shock components, enabling deeper analysis and more informed policy recommendations. This method offers a more nuanced understanding of the relationship between poverty and fiscal deficits. Third, it generates a broader range of clear causal implications and policy choices. By examining both positive and negative changes, we can gain a deeper understanding of how fiscal policy shifts – whether aimed at promoting growth or contraction – respond to changes in poverty levels. This study examines all combinations of positive and negative change components to investigate causality and develop diverse policy options. These more transparent processes demonstrate the practical use of fiscal deficits in effectively fighting poverty. Fourth, prevalent oversimplifications and restrictions about linearity and symmetry may yield suboptimal results in the crucial analysis of the causal relationship between poverty reduction and fiscal deficits. These assumptions fail to capture the proper fundamentals and socioeconomic dynamics underlying macroeconomic variables, as well as the complexities of fiscal policy management.

Fifth, these nonlinear characteristics and glaring asymmetries are common in the analysis and distribution of the fiscal deficit and poverty indicators. Therefore, disregarding those may result in less-than-ideal outcomes, obscure some of the causal conclusions and distort the options available in policy. Furthermore, there is sufficient evidence of asymmetric and nonlinear characteristics in the Nigerian data on fiscal deficits and poverty indicators, as illustrated in Figure 1, which supports extending causal conclusions to the domains of nonlinearity and asymmetry. Sixth, there are numerous asymmetric information phenomena surrounding government activities, fiscal policy asymmetries (including fiscal deficit) and finance (Hatemi-J, 2012; Pragidis et al., 2015). Asymmetric information is one of the reasons for testing for asymmetric causality (Hatemi-J, 2012). High levels of information asymmetries and hidden bureaucratic practices greatly influence the management and allocation of fiscal deficits (Olaniyi, 2020). This sharp practice could lead to the misappropriation of fiscal deficit proceeds, exacerbating extreme poverty in countries with weak institutions and widespread corruption, such as Nigeria. This paper improves understanding by incorporating asymmetries and nonlinearities. The procedures align with the explanations of asymmetric fundamentals in the causal relationship between fiscal deficits and poverty reduction, thereby providing more efficient policy options.

This study uses data from Nigeria covering the years 1981–2023. The choice of Nigeria's data is intentional for several reasons. The country has complex issues related to fiscal deficits and poverty. Statistics from Nigeria's Central Bank indicate that the government has experienced ongoing fiscal deficits from 1981 to 2023, except in 1995 and 1996. At the same time, poverty has been rising steadily, indicating that Nigeria's fiscal policy has not been effective in reducing poverty. It is also challenging to substantiate the claim that the severity of poverty prompts Nigerian governments to incur debt through deficit financing to meet the basic needs of people experiencing poverty. These conditions raise questions that necessitate a more in-depth examination of the relationship between fiscal deficits and poverty reduction. Persistent fiscal deficits should lead to poverty reduction in Nigeria if the government invests in infrastructure, healthcare, education and other projects that directly help the poor. However, Nigeria's poverty crisis remains severe and multifaceted, despite ongoing fiscal deficits. According to the World Bank’s (2025a, b) report, “Africa's Pulse,” 15% of the world's poor population lives in Nigeria. The report states that 139 million Nigerians live in extreme poverty, despite various government reforms and persistent fiscal deficits. This statistic amounts to an extreme poverty rate of 60% among Nigerians, with a massive 75.5% of rural residents being affected. According to The World Bank (2025a, b) and Blaise Udunze (2025), the statistics indicate that the persistence of fiscal deficits in Nigeria might have worsened poverty rather than reducing it. The analysis of the relationship between fiscal deficit and poverty reduction presents complex challenges that require a detailed investigation of asymmetric causality. In this light, this study is considered the first attempt to examine the possible asymmetric causality between fiscal deficit and poverty, using Nigeria's dataset in the existing literature.

Except for the introduction in this section, the study comprises other key aspects, including the theoretical and empirical literature in Section 2, the data description and methodological procedures in Section 3 and the results and discussion in Section 4. Section 5 presents a summary, conclusion and policy recommendations, while the final section addresses the study's limitations and offers suggestions for future research.

This study rationalises the relationship between fiscal deficit and poverty within the frameworks of Keynesian economics and the vicious cycle of poverty. According to Keynesian theory, the root causes of poverty are economic downturns and unemployment, and it advocates government interventions in such circumstances. Keynesian theory holds that government interventions through deficit financing are the primary remedy for empowering the poor, stimulating aggregate demand and providing job opportunities and higher incomes that enable the impoverished to meet their basic needs (The World Bank, 2021; Davis and Martinez, 2015). Besides creating jobs, such interventions can also benefit the economy by increasing public spending on infrastructure, education and social services. Fiscal deficits can also be utilised strategically by governments to implement policies that promote sustainable growth and reduce poverty through multiplier effects (Olaoye et al., 2025). Keynes (1936) presented a persuasive case for government interventions in his influential book entitled “The General Theory of Employment, Interest, and Money.” The suggestion is that the government can utilise fiscal deficits as an anti-cyclical policy to stimulate the economy during downturns, empowering the impoverished and enhancing their purchasing power.

Following this argument, governments should increase expenditures by expanding the fiscal deficit to stimulate aggregate demand, aiming to boost output, reduce unemployment, increase income and thereby reduce poverty (Mehmood and Sadiq, 2010). In line with this theoretical disposition, governments in developing countries have continued to use fiscal deficits to cater to the poor. Similarly, the theory of the vicious cycle of poverty holds that worsening conditions for people in poverty can compel the government to accumulate debt through deficit financing. These debts could be used to finance initiatives and welfare-engaging programmes aimed at reducing poverty. Consistent with these theories, this present study examines the causal relationship between fiscal deficit and poverty reduction in Nigeria. This empirical investigation examines the complexities surrounding the rise in extreme poverty and the ongoing fiscal deficits over the years. Therefore, this paper aims to clarify whether extreme poverty leads to persistent structural fiscal deficits or whether fiscal deficits exacerbate or alleviate poverty. The relationship between fiscal deficit and poverty is a topic of significant debate and uncertainty, both in theory and in practice. While this connection may operate in both directions, most existing research primarily focuses on how fiscal deficits or fiscal policies contribute to poverty alleviation. Conversely, studies that investigate how poverty may compel governments to incur persistent fiscal deficits are notably underexplored. The causal relationship between fiscal deficits and poverty reduction has received little attention in the existing literature. Hence, this study opens a fresh line of thought on the potential causal nexus between the two macroeconomic variables.

This study utilises Nigeria's annual dataset from 1981 to 2023. The scope aligns with a period of persistent fiscal deficits and coincides with the ongoing reports and records of increasing extreme poverty in the country. We source data on fiscal deficits as a percentage of GDP from the Central Bank of Nigeria's Statistical Bulletin. At the same time, the World Bank's Databank (World Development Indicators, WDI) provides information on households' and NPISHs' final consumption expenditure per capita (in constant 2015 US dollars). Additionally, we obtain data on the poverty headcount ratio from the National Bureau of Statistics and the World Bank, WDI. To ensure robust analysis, we use two measures of poverty: real consumption per capita and the poverty headcount ratio. This study uses consumption per capita as an alternative measure of poverty. This choice is consistent with the World Bank's definition of poverty, which is “inability to attain a minimal standard of living”. Hence, we define poverty as the poor's inability to meet their basic needs and enhance their welfare. Consumption per capita better reveals the welfare and living standards of people in extreme poverty than income-based metrics (World Bank, 2001; Koomson et al., 2020; Olaniyi and Odhiambo, 2024). A plethora of studies have used this metric to measure poverty in the existing literature (Olaniyi and Odhiambo, 2024; Sehrawat and Giri, 2016; Solarin et al., 2021; Olaniyi et al., 2023; Das et al., 2021; Akinlo and Dada, 2021; Appiah et al., 2020; Olaniyi and Ologundudu, 2022). Following this strand in the existing literature, consumption per capita is a measure of poverty. There exists a strong link between consumption, welfare and poverty level. A rise in consumption per capita indicates an improvement in welfare, which in turn signifies a better ability to meet basic needs, and a poverty reduction, vice versa. The two indicators of poverty adopted in this study are closely related. Consumption per capita measures people's welfare by their ability to meet basic needs. The adoption of consumption per capita as a metric of poverty follows the World Bank's definition, which defines poverty as “the inability to attain a minimal standard of living” (Olaniyi and Odhiambo, 2024). Thus, an increase in per capita consumption indicates a greater ability to fulfil the necessities of life and, by implication, a reduction in poverty. The poverty headcount ratio, on the other hand, is the proportion of the population living below the poverty line as defined by national and international bodies. Thus, the poverty headcount ratio represents the proportion of people unable to meet basic needs. By implication, both the poverty headcount ratio and consumption per capita emphasise the ability to meet basic needs. The two metrics address poverty from closely related perspectives.

This study decomposes data on fiscal deficit and poverty reduction indicators into positive and negative shock components, following the procedures outlined by Hatemi-J (2014) and (2012). Studies by Olaniyi and Odhiambo (2025), Olaniyi (2020) and Olaniyi and Odhiambo (2024) also employ these principles. This study infers asymmetric causality because we expect negative shocks and positive shocks to have different causal impacts on the underlying variable (Hatemi-J, 2012). This study assumes that the stationarity properties of the fiscal deficit $(fis)$ and the poverty reduction indicator $(pov)$ are integrated of order one. Similarly, the decomposed components of the two variables, by definition, follow an order-one integration. These variables' $(fistandpovt)$ behaviour follows random walk processes.

and

where the initial values of fiscal deficit and poverty reduction indicator are defined as $fis0$ and $pov0$⁠, respectively; $t=1,…,T$⁠; the stochastic error terms are defined as $ε1i$ and $ε2i$⁠, respectively. Following the proposition of Hatemi-J (2012), we construct negative and positive shock parts as follows: $ε1i−=min(ε1i,0),ε2i−=min(ε2i,0)$ and $ε1i+=max(ε1i,0),ε2i+=max(ε2i,0)$⁠, respectively. Therefore, this study defines these components as follows: $ε2i=ε2i++ε2i−andε1i=ε1i++ε1i−$⁠. We define the two variables' partial cumulative sums as follows:

and also

Consistent with these explanations, we define the constructed components as follows:

We define these constructed components as follows: $fis1t−$ is the unanticipated cumulative fall in fiscal deficits, while $fis1t+$ is the unanticipated cumulative increase in fiscal deficits. The definitions of the constructed components of the poverty reduction indicator are presented in two phases, depending on the poverty measures considered. For the poverty headcount ratio: $pov1t−$ is the unanticipated cumulative reduction in poverty, while $pov1t+$ is the unanticipated cumulative increase in poverty. For real consumption per capita: $pov1t−$ represents unanticipated cumulative increases in poverty, while $pov1t+$ denotes an unanticipated cumulative reduction in poverty. Following the construction of these components and their underlying definitions, this study builds upon Hatemi-J's (2012) study to examine asymmetric causality by pairing the negative and positive components of fiscal deficit and poverty indicators in turn. While all possible pairs of these variables are considered for potential causality, the study models only positive pairs for simplicity and ease of understanding. We follow the Hatemi-J's (2012) procedures by presenting the order $ρ$⁠, VAR (p), of the vector autoregressive model. This model relies on the null hypothesis that there is no asymmetric structure in the potential causality.

Following the suggestion of Toda and Yamamoto (1995) and Hatemi-J (2012), we include an unrestricted extra lag in Equation (5) to take care of the unit root process in the series. To select an optimal lag structure, we use the inventive lag-based Hatemi-J information criterion. This lag-length method endogenously determines the optimal lag order based on the data's unique features. The procedures are explained in Equation (6):

where $|Bˆr|$ represents the factors in the VAR model presented in Equation (5) of the estimated variance-covariance matrix of the error terms with lag order $r$⁠, $n$ is the number of equations and $T$ is the study's timeframe. Equations (7) and (8) present research hypotheses as $fis1t+$ does not cause $pov2t+$ and that $pov2t+$ does not cause $fis1t+$⁠, respectively, as follows:

and

where $r$ is the lag length, which ranges between $1$ and $ρ$⁠. The research hypotheses in Equations (7) and (8) are tested using the modified Wald test, in line with the studies by Hatemi-J (2012) and Hatemi-J and El-Khatib (2016). We reject the null hypothesis when the Wald test statistic exceeds the bootstrap critical value at conventional significance levels. We utilise the GAUSS algorithm, as developed by Hatemi-J (2014), to decompose the data on fiscal deficit and poverty into negative and positive shock components. This study does not perform a cointegration test. We follow the position of Hatemi-J (2012) and Toda and Yamamoto (1995), which elucidates that once unrestricted extra lags are incorporated into the Vector Autoregression (VAR) framework, examining long-run relationships is not mandatory before performing causality tests among integrated variables.

This study conceptualises the symmetric and asymmetric causal relationships between fiscal deficit and poverty within the framework of bivariate analysis. Our focus on a bivariate context does not undermine the importance of control variables. Additionally, asymmetric causality requires pairing shock components (positive and negative) of both fiscal deficit and poverty indicators, which validate the appropriateness of bivariate causal analysis as used by Hatemi-J (2012). Thus, we provide the following rationales to support our choice of bivariate causality. First, Hatemi-J (2012) originally developed the idea of asymmetric causality primarily within the bivariate causality framework. This approach does not allow for the inclusion of control variables, as the shock components are paired in turns to reveal potential hidden causality. Studies such as Hatemi-J (2020), Ikhsan et al. (2022), Olaniyi (2020), Olaniyi and Ologundudu (2022), Osinubi et al. (2021), Hatemi-J and El-Khatib (2016, 2020), Olaniyi and Olayeni (2020), Khanday et al. (2024), Hatemi-J et al. (2017, 2019), Dar and Nain (2024) and Olaniyi and Odhiambo (2025) have adopted this approach in the existing literature. Second, since the components (negative and positive shocks) of the variables are paired according to the principles of asymmetric causality, the addition of control variables cannot alter the results or policy alternatives. Thus, asymmetric causality is better suited for bivariate analysis. Third, the GAUSS software codes developed by Hacker and Hatemi-J (2008) and Hatemi-J (2012), which we use to run the asymmetric analysis, do not accommodate control variables. The approach performs optimally within the context of bivariate causality. Fourth, this approach addresses pitfalls such as simultaneity bias, endogeneity and omitted variable bias in causal analysis (Dedeoglu and Ogut, 2018; Hatemi-J, 2012; Olaniyi and Odhiambo, 2024). Therefore, omitting control variables does not undermine the causal analysis or the policy options derived from the findings. Fifth, this approach aligns with other variants of bootstrap causality tests within the bivariate causality approach. Examples of such baseline studies include Dumitrescu and Hurlin (2012) Kónya (2006), Hatemi-J (2022) and Emirmahmutoglu and Kose (2011).

We first examine the descriptive statistics to identify the distribution of the data and the basic characteristics of fiscal deficits and poverty indicators, which inform the selection of the estimator. Table 1 presents the detailed descriptive statistics. A close comparison of the standard deviation and the mean indicates that the mean reasonably represents the spread of the actual data. The coefficients of skewness suggest that all variables are negatively skewed, confirming asymmetries in the data distribution and thereby violating the assumption of symmetry. The kurtosis coefficient indicates that the fiscal deficit (fis) is leptokurtic, meaning it is likely to exhibit outliers. At the same time, both poverty indicators are platykurtic, suggesting a low likelihood of outliers. Finally, the Jarque-Bera statistics indicate evidence of normality. All variables indicate varying degrees of asymmetry in the data distribution; thus, this validates the need to adopt an asymmetric causality approach.

In tandem with the explanations provided by Hatemi-J (2012) and Toda and Yamamoto (1995), this study justifies testing for stationarity to determine the number of additional unrestricted lags in the VAR framework. This study conducts both linear and nonlinear unit root tests to ensure robust results. The practicality of the nonlinear approach aligns with the study's purpose to integrate nonlinear features and asymmetries into the causal analysis. The data decomposition highlights robust evidence of asymmetric features (Figure 1), and the descriptive statistics in Table 1 further validate the need for a nonlinear unit root approach. Given the data distribution characteristics of fiscal deficits and the poverty indicator, we apply the nonlinear and asymmetric unit root test proposed by Kapetanios and Shin (2011), referred to as KSUR. This approach is more reliable because it utilises Monte Carlo simulation based on the principle of global stationarity with autoregressive exponential smooth transition conditions.

Using the Schwarz Information Criterion (SIC) to determine the optimal lag length, the results for the intercept alone and for the intercept with a trend are presented in Tables 2 and 3, respectively. Table 2 provides information on traditional unit root tests (Phillips-Perron, PP, and Augmented Dickey-Fuller, ADF), while Table 3 presents findings from the nonlinear variant, KSUR. The two variants of unit root tests indicate a mixed order of integration. Most variables are stationary after first differencing, whereas the fiscal deficit remains stationary. These results validate the need to include an additional unrestricted lag in the causal analysis. Following the propositions of Toda and Yamamoto (1995) and Hatemi-J (2012), this study does not present the results of cointegration. We follow the proposition that a cointegration test is not required to test for causality between integrated variables, provided an additional unrestricted lag is included in the VAR framework (Osinubi et al., 2021; Olaniyi, 2020).

Before addressing asymmetric causality, this study first examines the relationship between Nigeria's fiscal deficit and poverty reduction, focusing on symmetric causality. The study's analysis is performed using bootstrapping simulation with leverage modifications, following the foundational work of Hacker and Hatemi-J (2008). The findings are synthesised in Tables 4 and 5. Table 4 illustrates the results of the analysis utilising the poverty headcount ratio as an indicator of poverty. In contrast, Table 5 presents findings based on real consumption per capita as a measure of poverty. The findings exhibit variability across two measures of poverty. The results from these dimensions substantiate a case of unidirectional causality, albeit with divergent causal inferences and implications. The first dimension indicates a one-way causal relationship. It shows the causal inference from the poverty headcount ratio to the fiscal deficit; no evidence of causality is observed in the reverse direction (see Table 4). These findings suggest that the government's efforts to reduce the number of Nigerians living below the poverty line have not led to a sustained reduction in fiscal deficits. It implies that successive Nigerian governments lower income taxes and incur heavy spending on several intervention projects to reduce the intensity of extreme poverty and increase the purchasing power of economically disadvantaged people.

This scenario results in persistent fiscal deficits. The finding suggests that the government's efforts to reduce the number of Nigerians living below the poverty line compel it to incur persistent fiscal deficits. This spending is directed toward social welfare programmes and investments in human capital development, including healthcare, education social infrastructure, and various skill-acquisition initiatives (Ogun, 2010). Hence, successive governments' need to reduce the poverty headcount ratio pushes them to incur heavy spending beyond the limits of the revenues realised. Furthermore, the lack of a causal link from fiscal deficits to the poverty headcount ratio may suggest that increasing deficits may not effectively contribute to poverty alleviation, despite efforts to reduce severe poverty in Nigeria. This circumstance may be attributed to institutional failures in ensuring transparency and accountability in the management of government finances and the channelisation of resources to poverty-reducing initiatives. Nigeria's inability to use fiscal deficits to spur poverty reduction may stem from corruption, political scheming and inefficient management of government resources. These social vices and sharp practices disrupt the effective distribution of fiscal deficit proceeds to social welfare and poverty-reducing initiatives. This process may have diverted the proceeds of fiscal deficits to unproductive activities. Thus, Nigeria's weak fiscal multiplier for poverty reduction may be due to weak institutions and corruption, as well as to inefficient administration of fiscal deficit proceeds for welfare-enhancing initiatives for less privileged Nigerians. These findings highlight the complexities in the nexus between fiscal deficits and poverty reduction in Nigeria.

Also, persistent fiscal deficits may lead to a debt crisis and debt overhang in which debt becomes unsustainable. Servicing such debts may put a serious burden on available resources for investment and growth, depriving the economy of the funds needed to cater for people on low incomes and further compounding the existing chronic and extreme poverty. Hence, fiscal deficits impede productive investment, strain the growth process and reduce resources for social welfare and poverty-reducing initiatives. The policy implications of these findings remain ambiguous and limited within the context of symmetric causality, i.e. whether increases/declines in extreme poverty cause an escalation/reduction in fiscal deficits. To strengthen our argument and validate the study's novelty, we examine the possible asymmetric structure to determine whether there are hidden aspects of causation and policy outcomes. We require additional critical analyses that employ an asymmetric approach. This endeavour will yield more profound insights, leading to more effective policy recommendations.

The results for a symmetric causal relationship indicate a causal flow from fiscal deficit to real consumption per capita (a poverty-reduction/welfare indicator). However, the findings do not suggest a reversal of causal inference, implying that Nigeria's fiscal Deficit Granger-causes real consumption per capita. These findings offer valuable insights that may have multidimensional interpretations, depending on the context and the manner in which fiscal deficits are financed and spent. On a positive note, this may indicate that fiscal deficits are allocated to poverty-reducing initiatives, such as education, healthcare, infrastructure and other projects that promote growth through investments that create job opportunities and generate income for the impoverished (Ayalogu et al., 2023; Olaoye et al., 2025). Higher income improves the welfare of the impoverished and, in turn, reduces poverty. Conversely, the findings may also suggest that fiscal deficits could be inflationary if financed through money printing or spent on unproductive activities (Olaniyi, 2020). This practice tends to increase inflationary pressure, eroding the purchasing power of low-income people, thereby leading to welfare improvements for those experiencing poverty and, in turn, to poverty reduction.

Additionally, Nigeria's fiscal deficits could crowd out private sector investment by raising interest rates, as the government and private investors compete for funds (Dubovik et al., 2025; Bahmani-Oskooee, 1999). This competition may reduce private investment, hinder growth and employment opportunities and ultimately lead to a decline in income and an increase in poverty. The findings from the symmetric causal flow from fiscal deficits to real consumption per capita are challenging to interpret because they do not provide conclusive information regarding the positive and negative shock components that may influence the causality tests and inferred policy implications.

This section discusses the interpretation of the asymmetric causality between fiscal deficit and poverty reduction, in line with the study's novelty and the limitations of a symmetric approach to capturing real-world fundamentals and socioeconomic realities. We present the results in Tables 4 and 5. We find robust evidence of an asymmetric relationship between fiscal deficits and the poverty headcount ratio. We observe bidirectional causation between the positive shock components of fiscal deficits and poverty levels, as shown in Table 4. In this way, these findings support the notion that asymmetries should be taken into account when analysing the relationship between fiscal deficits and poverty. One key finding from this asymmetric bidirectional causality is that the causal inference from $fis+$ to $pov+$ indicates that persistent increases in fiscal deficits cause an increase in the number of Nigerians living below the poverty line. This finding suggests that, as Nigeria's fiscal deficit widens, the Nigerian government often channels the proceeds into activities that exacerbate extreme poverty in the country. Thus, the persistence of fiscal deficits exacerbates extreme poverty and pushes more Nigerians into the web of abject poverty. This syndrome might suggest that fiscal deficits trigger an inflationary spiral that erodes the purchasing power of people in poverty. It could also mean that the government's financing of fiscal deficits increases interest rates, crowds out private investment, stifles growth, reduces investment opportunities, lowers job opportunities and consequently diminishes the incomes of the poor in Nigeria. This crowding-out effect of fiscal deficits worsens the poverty level in Nigeria, and it makes the poor populace worse off. This finding indicates that fiscal deficits, as pro-cyclical measures to provide specific basic amenities and social welfare packages to help and empower people in poverty to meet their basic consumption needs, are counterproductive, as they turn out to be countercyclical fiscal measures that worsen extreme poverty in Nigeria. It implies that fiscal deficit proceeds are not properly channelled to poverty-reducing initiatives but are instead diverted to activities that make the disadvantaged and less privileged Nigerians more vulnerable and worsen their economic conditions. Hence, the institutional frameworks guiding the management and distribution of fiscal deficit proceeds should be scrutinised, monitored and pruned to prevent sharp practices and perceived opportunism.

The second important feature of this nonlinear bidirectional causality is that. $pov+$ Granger-causes $fis+$⁠. This, therefore, uncovers the underlying relationship: an increase in the poverty headcount ratio compels Nigerian governments to incur structural and persistent fiscal deficits in their attempts to reduce extreme poverty. In the meantime, persistence in fiscal deficits, $fis+$⁠, contributes to the incidence of extreme poverty, $pov+$⁠. This causal inference supports the theoretical postulate of a vicious cycle of poverty: that extreme poverty in an economy may compel the government to run persistent fiscal deficits through debt financing to provide services and welfare programs that make people's lives more meaningful. The two-dimensional causal inference here suggests that the drive for poverty reduction forces governments to spend more than they raise in revenue, thereby increasing the fiscal deficit; this increased deficit does not translate into poverty reduction; instead, it intensifies poverty in Nigeria. These findings indicate that the increases in Nigeria's fiscal deficits over the years have not been accompanied by appropriate macroeconomic and fiscal policy measures that effectively reduce extreme poverty. This finding is particularly concerning given that the government's primary motivation for incurring these deficits is to combat poverty.

Additionally, we examine the asymmetric relationship between fiscal deficit and real per capita consumption as an indicator of welfare and, by implication, poverty reduction, and find evidence of two distinct sets of asymmetric causal relationships. First, our analysis reveals an asymmetric causal relationship in which an increase in the fiscal deficit Granger causes increases in real consumption per capita. These findings suggest that persistent increases in fiscal deficits can reduce poverty by enhancing the consumption capabilities of the poor, enabling them to meet their basic needs and enjoy better living standards. Therefore, in practice, governments should refocus their expenditures on initiatives that empower those in need, improve their welfare and ensure positive returns for poverty alleviation. These measures may be welfare-enhancing and could create opportunities for economic empowerment and employment, thereby increasing income levels. Similarly, this study finds that cumulative decreases in fiscal deficits Granger-cause an increase in per capita consumption, thereby improving the welfare of impoverished Nigerians and providing evidence of poverty reduction.

These results suggest that reducing unproductive government expenditure – especially components that drain the purchasing power of low-income individuals – can increase their real consumption. This finding indicates that governments at all levels in Nigeria should restrain spending that hampers the populace's ability to fulfil their basic needs. The resources should be channelled into more productive activities and welfare programmes to reduce poverty by creating enabling environments for investment, economic growth and social welfare. As such, this strategic realignment would not only improve the quality of life but also contribute to a more sustainable and equitable economic environment, empowering low-income individuals to live more meaningful lives. These findings emphasise that restructuring government expenditure and the efficient management of fiscal deficits in favour of people experiencing poverty are key to poverty alleviation in Nigeria. There is no clear evidence that sustained, structural increases in Nigeria's fiscal deficits would alleviate poverty. These findings raise concerns about whether accumulated fiscal deficits and debts in Nigeria are utilised for activities and programmes that would reduce abject poverty. The Nigerian government should establish mechanisms and regulatory frameworks that ensure borrowed funds from deficit financing are spent on critical and strategic activities and programmes that empower the poor and alleviate the heavy burden of poverty in Nigeria. The Nigerian government should establish mechanisms and regulatory frameworks that ensure borrowed funds from deficit financing are spent on critical and strategic activities and programmes that empower the poor and alleviate the heavy burden of poverty in Nigeria.

This paper contributes to understanding the complex causal relationship between fiscal deficits and poverty reduction in several vital respects. First, it performs the first empirical test of the causal relationship between fiscal deficits and poverty within the context of bootstrap simulation with leverage adjustments. Second, it complements previous studies by introducing asymmetries and nonlinearities into the causal analysis of fiscal deficits and poverty reduction. In this study, we utilise annual data for Nigeria spanning the period from 1981 to 2023. This choice is because Nigeria has one of the highest numbers of people living in extreme poverty globally. In addition, the country has also registered fiscal deficits in almost every year covered by this study. This phenomenon has continued to occur alongside unabated upsurges in extreme poverty. It therefore calls for an elaborate empirical examination to reveal the missing dimensions of the relationship between fiscal deficits and poverty reduction in Nigeria. This exercise creates a fresh insight for scholars to explore. It also helps Nigeria's stakeholders and the general public identify the root issues in the critical relationship between persistent fiscal deficits and extreme poverty, which continues to surge in the country. This study analyses the objectives using the Hatemi-J asymmetric approach (2012), which builds on the work of Toda and Yamamoto (1995).

The empirical analyses reveal interesting findings on the causal relationship between fiscal deficits and poverty reduction in Nigeria. These include, inter alia, the following: First, the data decomposition processes reveal significant asymmetric structures in the distribution of data, as well as in the dynamics of fiscal deficits and poverty indicators. Ignoring these asymmetric structures in causal analysis may yield suboptimal outcomes, obscure hidden causal inferences and distort policy options. Second, findings from symmetric causality tests suggest that the poverty headcount ratio is a cause of fiscal deficits in Nigeria; however, there is no evidence that fiscal deficits act as a causal force to promote poverty alleviation. Third, other symmetric causal inferences show that fiscal deficits are causal agents in stimulating real consumption per capita among Nigerian citizens.

Meanwhile, there is no causal flow from real consumption per capita to fiscal deficits. Aside from the findings from symmetric causal inferences, we present the summary of asymmetric causality tests as follows: Fourth, we identify a two-way causal relationship between the positive shock components of both the fiscal deficit and the poverty headcount ratio. On the one hand, the findings suggest that cumulative increases in extreme poverty contribute to persistent rises in fiscal deficits in Nigeria. Conversely, rising fiscal deficits act as causal agents that push more Nigerians below the poverty line, thereby increasing extreme poverty in the country. Fifth, this study finds that the cumulative increases in fiscal deficits correspond to the cumulative increases in real consumption per capita, suggesting a decline in extreme poverty. In addition, our findings indicate that fiscal deficits cumulatively decline, serving as a causal force that contributes to the cumulative decrease in poverty, as evidenced by the cumulative rise in real consumption per capita.

Based on the emphasised empirical results, we provide some concrete policy ideas to improve the theoretical framework and the way policymakers approach the relationship between fiscal deficits and poverty reduction: First, this, therefore, confirms that the process of theorising and analysing fiscal deficit–poverty alleviation nexus with no emphasis on asymmetric structure and nonlinear characteristics may lead to a suboptimal result and biased policy alternatives, which might lead to a misrepresentation of the actual fundamentals and socioeconomic facts. Hence, we suggest that scholars and policymakers prioritise asymmetries for a pragmatic analysis and thorough scrutiny of the critical uses of fiscal deficits in poverty alleviation. This finding and its policy implications provide a basis for considering asymmetric structures in the causal relationship between fiscal deficits and poverty, especially in developing and emerging economies with weak institutions and widespread corruption. Second, examining the vital roles of fiscal deficits in mitigating poverty while neglecting feedback effects may lead to wrong empirical investigations. This oversight may bias policymakers and stakeholders toward some policies and hide others. Therefore, policy analysts and theorists should acknowledge the potential two-way relationship between poverty and fiscal deficits. Third, all levels of the Nigerian government must establish oversight procedures and monitoring systems to track the allocation of fiscal deficits, their management and the implementation of poverty-reduction programmes. The policy tool is essential, as the causal analysis demonstrates that the government's fiscal deficits stem from extreme poverty; however, there is no evidence that these deficits have reduced poverty in Nigeria. Fourth, we recommend that governments in Nigeria should be more deliberate in harnessing fiscal deficits as an instrument to empower economically disadvantaged individuals. The Nigerian government should establish efficient institutions to ensure that it allocates more resources to critical initiatives, such as healthcare, education, infrastructure and other welfare and poverty-reduction social benefits, thereby improving the consumption capacity of people experiencing poverty. The government should allocate more resources to financing initiatives that promote the country's investment profile and create employment opportunities. These processes are crucial for enhancing the income and consumption of individuals with low income. Implementation of this policy suggestion depends on the establishment of strong institutions and the reduction of corruption.

The symmetric causal analyses lead us to propose policies 3 and 4. Therefore, we emphasise the following policy implications in accordance with the findings on asymmetric causality. Fifth, the Nigerian government should establish mechanisms to identify and address the inherent issues in the relationship between cumulative increases in fiscal deficits and the exacerbation of extreme poverty, particularly in terms of how these fiscal deficits contribute to the rise in the number of its citizens living below the poverty line. We suggest two strategies and policy options to address these critical issues. Firstly, the Nigerian government should systematically utilise deficit financing without causing interest rates to increase. Fiscal deficits' financing tends to spur interest rate increases in Nigeria. In that case, it will crowd out private-sector investment, thereby dampening job creation and economic growth, which, in turn, will further reduce the income of low-income individuals and their capacity to meet their basic needs. Secondly, Nigeria's governments should avoid channelling the proceeds of fiscal deficits into unproductive activities that could trigger an inflationary spiral, further eroding the purchasing power of the economically vulnerable. Sixth, governments in Nigeria need to be more strategic in the use and allocation of fiscal deficit proceeds for poverty-alleviation initiatives. They should devise measures to ensure funds are used efficiently to reduce poverty in the country. This policy implication is necessary to curb the rising fiscal deficits, which are associated with higher poverty levels. Moreover, fiscal deficit accumulation does not necessarily lead to poverty reduction; instead, it deepens poverty in Nigeria.

Seventh, Nigeria's government needs to design deliberate institutional strategies to incentivise allocation of cumulative increases in fiscal deficit proceeds to initiatives and welfare programmes that enhance consumption capacity among poor populations, thereby improving their welfare packages. Governments should develop efficient institutional frameworks and specific incentives to ensure that such distributions achieve the target of poverty alleviation, thereby easing the burdens of extreme poverty on vulnerable Nigerians. Eighth, this study recommends that Nigeria's governments should stop allocating fiscal deficit proceeds to unproductive activities and welfare-impeding initiatives that limit poor Nigerians' ability to meet their basic needs. Ninth, this study suggests the need to design regulatory mechanisms and institutional structures to detect, monitor and prevent corrupt practices and potential misappropriation of proceeds from fiscal deficits to activities and programmes that make life more difficult for the impoverished. These steps are necessary for fiscal deficits to contribute effectively to poverty reduction rather than aggravate it in Nigeria.

This research effort has added fresh insights and innovations by incorporating nonlinearities and asymmetric structures into the causal analysis of the relationship between poverty reduction and fiscal deficits. Meanwhile, this study encounters some limitations that other scholars can address in subsequent research. We highlight the following restriction: first, the study's policy relevance is limited because we focus on Nigerian data. The empirical outcomes explain the Nigerian economy more effectively than those of any other country. These findings may vary across datasets from other countries. Hence, we urge other scholars to explore the datasets of other countries to increase the global relevance of our empirical outcomes and policy suggestions. Two, this study confines itself to time series analysis of Nigeria's data. To improve the international acceptance of this study, other scholars should consider using panel datasets from various countries within the frameworks of different panel causality approaches. The panel analysis has an edge because it enhances the generalisability of empirical outcomes. Three, the approach adopted in this study does not account for heterogeneity and cross-sectional dependence, which may skew empirical estimates and bias the policy implications for practice and society. We encourage other scholars to consider this aspect in the causal analysis of fiscal deficits and poverty reduction. Fourth, this study uses two poverty metrics: real consumption per capita and the poverty headcount ratio. Future research efforts should explore the relationship between other poverty indicators and fiscal deficits to complement our findings. Fifth, our findings reveal potential opportunism and sharp practices in the management and distribution of fiscal deficits as drivers of fiscal policy to combat poverty in Nigeria. Thus, this study suggests that institutional frameworks and corruption control strategies may influence the extent to which fiscal deficits contribute to poverty alleviation in Nigeria. This study, therefore, challenges other scholars to examine the moderating role of institutional quality in shaping the effects of fiscal deficits on poverty reduction in Nigeria. The limitations raised do not undermine the importance of our empirical analysis and findings. Instead, they are highlighted to keep the research cycle moving and to enhance the global relevance of our empirical efforts, findings and policy suggestions.