Since the past year budget deficit is corrected in the current year, this study seek to examine the lag effect of previous year‟s budget deficit on performance of the Nigeria economy in the contemporary year using VAR estimation between the periods 1981 to 2015. From the foregoing statistical output, findings established that Budget deficit significantly stimulate economic performance. The output of the granger causality test shows that budget deficit statistically granger cause economic performance and viz versa while the result of the multiple regression of the ordinary least square report a significant but negative relationship to economic performance. The negative response of budget deficit to economic performance could be attributed to moral hazard, mismanagement of fund and financial indiscipline which prevent the country from enjoying the sustainable level of expected growth overtime. The output of the VAR estimate established that the lag value of federal government budget deficit has contributed to performance of the economy in the current year although the contributive quadrant is not been felt to a reasonable extent. This empirical findings support the Keynesian postulation of significant relationship between budget deficit and economic performance. Prior to our findings, study recommends that Policy makers should ensure effective utilisation of borrowed fund and maintain a sporadic evaluation and supervision of such project in which borrowed fund are channelled into in order to achieve a profitable returns which will help in servicing of such debt and also stimulate economic performance.