Effect of Debt Servicing and Social and Welfare Expenditure on Tax Revenue in Nigeria

This study examines the impact of debt servicing and social and welfare expenditure on tax revenue in Nigeria, while controlling for inflation. Grounded in the productive-expenditure and endogenous-growth framework, the study employs an ex-post facto research design using annual time-series data from 1989–2024, sourced from the Central Bank of Nigeria, Debt Management Office, Federal Ministry of Finance, and World Bank/IMF databases. Using the Autoregressive Distributed Lag (ARDL) bounds test and Error Correction Model (ECM), the analysis addresses dynamic interactions, mixed integration orders, and potential endogeneity. Results indicate that short-run increases in both debt servicing and social and welfare expenditure significantly raise the effective tax rate. The error-correction coefficient of negative 0.152 reveals a moderate annual adjustment speed of 15.2 percent toward equilibrium. While the bounds test yielded inconclusive evidence of long-run cointegration, the significant, correctly signed error-correction term suggests fiscal dynamics tend toward stability over time. These findings support the productive-expenditure perspective, demonstrating that targeted social and welfare outlays enhance compliance, formalization, and tax morale, while debt pressures stimulate near-term revenue mobilization. The study concludes that expenditure composition, particularly the balance between debt obligations and social investments, critically determines Nigeria's short-run tax performance, whereas governance quality and fiscal sustainability shape long-run outcomes. Policy recommendations include strengthening tax administration to manage debt-service pressures, improving social expenditure targeting and efficiency, and ensuring fiscal discipline to sustain revenue performance and macroeconomic stability.