Dangers of budget deficit amidst revenue downturn
Budget deficit occurs when expenses exceed revenue and can indicate the financial health of a country. Fiscal deficits are negative balances that arise whenever a government spends more money than it brings in during the fiscal year. This imbalance sometimes called the current accounts deficit or the budget deficit is common among contemporary governments all over the world. This is a practical example in Nigeria whereby the government is borrowing to pay salaries and finance very few other capital projects. Recall that Anamekwe Nwabuoku, Former Acting Accountant-general of the Federation (AGF) this year during a retreat organised by the office of the AGF for members of the technical sub-committee on cash management (TSCM) had revealed that Nigeria is borrowing money to pay salaries. He emphasized that there is an increase in government expenditure due to rising security challenges and the social needs of the citizenry.
“We have to borrow to augment payment of salaries and wages. This shows we are in very difficult times. Government income is highly challenged. This a bad omen in the face of the economic downturn.”
A government runs a fiscal deficit when, for a specific period, it spends more money than it takes in from taxes and other revenues, excluding debt. This gap between income and spending is subsequently closed by government borrowing, increasing the national debt. An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more. Long-term deficits, however, can be detrimental for economic growth and stability. The U.S. has run deficits consistently over the past decade. Economist and policy analysts disagree about the impact of fiscal deficits on the economy. Some, such as Nobel laureate Paul Krugman, suggest that the government does not spend enough money. The sluggish recovery from the Great Recession of 2007 to 2009 was attributable to the reluctance of Congress to run larger deficits to boost aggregate demand.
A peep into the U.S. federal shortfall for fiscal year 2020 was $3.1 trillion (due in large part to the coronavirus pandemic). The gap increased from 2019’s deficit of $984 billion. Fiscal year 2021’s budget deficit came in at $2.7 trillion. Such a deficit occurs because the U.S. Government currently spends more than it receives.
Focusing on the recent budget presentation by President Muhammadu Buhari at the National Assembly. He said the amended 2022 Budget was based on a benchmark oil price of 73 U.S. Dollars per barrel, oil production of 1.60 million barrels per day, and exchange rate of N410.15 to U.S. Dollar. As at 31st July 2022, Federal Government’s retained revenues was N3.66 trillion, excluding the revenue of Government-Owned Enterprises. Thus, revenue collection was only 63 percent of our target, largely due to the underperformance of oil and gas revenue sources.
The President stated that despite higher oil prices in 2022, oil revenue was below target due to significant oil production shortfalls and high petrol subsidy cost resulting from the significant rise in Crude prices which ultimately increased PMS prices worldwide. Oil output stood at an average of 1.30 million barrels per day as at June 2022, while the sum of N1.59 trillion was spent on fuel subsidy between January and June 2022. The NNPC, working in collaboration with security and other relevant agencies, is putting in place additional measures to curb the incidence of pipeline vandalism and crude oil theft in order to meet our crude oil production quota. On the expenditure side, the sum of N8.29 trillion had been spent by July 31 2022 out of the total appropriation of N17.32 trillion. Despite our revenue challenges, we have consistently met our debt service commitments. Staff salaries and statutory transfers have also been paid as and when due. Total non-debt recurrent expenditure in January to July 2002 was N3.24 trillion, of which N2.87 trillion was for Salaries, Pensions and Overheads. A total of N3.09 trillion was spent on debt service obligations during the period. Furthermore, about N1.48 trillion had been released to MDAs for capital expenditure as at the end of July 2022. I am pleased to inform you that we expect to fund MDAs’ capital budget fully by the end of the fiscal year 2022.
The President stressed that our debt position remains within cautious and acceptable limits compared to peer countries. As at the end of June 2022, total public debt is within our self-imposed limit of 40 percent of GDP, which is significantly below the 55 percent international threshold for comparator countries, and a global average of 99 percent post-COVID-19.
Nonetheless, our debt-service-to-revenue ratio needs close attention. The current low revenue performance of government, as reflected in the low revenue-to-GDP ratio of just about 8 percent. Our medium-term objective remains to raise this ratio to 15 percent, at which the debt service to revenue ratio will cease to be a concern.
He noted that revenue shortfalls remain the greatest threat to Nigeria’s fiscal viability. We have therefore accelerated efforts towards ensuring that all taxable Nigerians declare income from all sources and pay taxes due to the appropriate authorities. We are also monitoring the internally generated revenues of MDAs to ensure they are appropriately accounted for and remitted to the Consolidated Revenue Fund
President Buhari emphasized that the 2023 revenue estimate based on these fiscal assumptions and parameters, total federally-collectible revenue is estimated at N16.87 trillion in 2023. Total federally distributable revenue is estimated at N11.09 trillion in 2023, while total revenue available to fund the 2023 Federal Budget is estimated at N9.73 trillion. This includes the revenues of 63 Government-Owned Enterprises.Oil revenue is projected at N1.92 trillion, Non-oil taxes are estimated at N2.43 trillion, FGN Independent revenues are projected to be N2.21 trillion. Other revenues total N762 billion, while the retained revenues of the GOEs amount to N2.42 trillion. The 2023 Appropriation Bill aims to maintain the focus of MDAs on the revenue side of the budget and greater attention to internal revenue generation. Sustenance of revenue diversification strategy would further increase the non-oil revenue share of total revenues.
According to him, a total expenditure of N20.51 trillion is proposed for the Federal Government in 2023. This includes N2.42 trillion spending by Government-Owned Enterprises. The proposed N20.51 trillion Naira 2023 expenditure comprises: Statutory Transfers of N744.11 billion; Non-debt Recurrent Costs of N8.27 trillion; Personnel Costs of N4.99 trillion; Pensions, Gratuities and Retirees’ Benefits of N854.8 billion; Overheads of N1.11 trillion; Capital Expenditure of N5.35 trillion, including the capital component of Statutory Transfers; Debt Service of N6.31 trillion; and sinking Fund of N247.73 billion to retire certain maturing bonds.
A Financial Expert, Chief Executive officer Association of National Accountants of Nigeria (ANAN), Dr. Kayode Olushola while expressing his perception of the proposed 2023 budget said the budget is comprehensive enough. However, it’s just an estimate for 2023, worthy of note is that we are having a larger projection to cater for Nigerians in 2023 as N20.51trn is about the largest in Nigeria’s history.
He pointed that the Capital expenditure is lower than recurrent expenditure; ideally it should have been the other way round for development purpose. This is because our recurrent expenditure profile is too extravagant. We have always known that we need more fiscal discipline.
“Also of note is the fact that the debt servicing is higher than the capital expenditure; this shows the alarming rates of our borrowing. However, government and relevant authorities must ensure that these debts are judiciously used for capital projects for the good of Nigerians and not recurrent issues. We also need to slow down on debts so that it’s servicing will not be this burdensome on Nigerians.
“I am impressed that this government returned the fiscal year back to what it should be according to our constitution of January to December. Recall that our budget cycle before now had always violated that provision until this administration came into power some years back and has been consistent with it..”
The statement from DMO website captured in part, “The Total Public Debt Stock, representing the Domestic and External Debt Stocks of the Federal Government of Nigeria, the 36 State Governments and the Federal Capital Territory, was N42.84tn ($103.31bn) as at June 30, 2022. The comparative figures for March 30, 2022, was N41.60trn ($100.07bn). It noted that the Federal Government was unable to secure any foreign loans in the second quarter of 2022.”
At this electioneering period, we can categorically say all the manifestoes of the various presidential Aspirants in the 2023 general elections should capture or provide remedies for running the Government on deficit. The incoming Government must think outside the box by initiating programmes and policies that will expand our revenue generation internally to service the budget.
