MONEY MATTERS: Budget season or ‘government magic’

Earlier this month, the FGN presented her 2010-2012 Medium-Term Expenditure Framework (MTEF) to the National Assembly. This was done in order to comply with the Fiscal Responsibility Act, which the President signed into law in 2007. This law sets out basic rules of good housekeeping on expenditure management, which the FGN has bound herself to.

The FGN is now obliged to publish her MTEF annually. The document should set out government revenue, government spending and budget balance for the next three years. It should also examine various sources of financing government deficits, if any, and the effect such deficits will have on government debt.

According to the MTEF, the FGN will earn ₦2.0 trillion in 2010 but she plans to spend ₦ 3.1 trillion during the same year. This means that that government spending will be 155% of her revenues and this represents a “modest” deficit of 3.5% of national income. During the next three years, the plan is that government spending will average 150% of her revenues! Housewives will wonder how a person can consistently spend more than she earns and not go bust. Fela Kuti called it “government magic”.

What is government spending so much money on? The ₦3.1 trillion is made up of ₦0.3 trillion to pay interest on government debt and a similar sum is set aside as statutory transfers. The remaining ₦2.5 trillion is to be spent by Ministries,

Departments and Agencies of government (MDA). Statutory transfers are obligatory payments that the FGN must make to the Judiciary, the Niger-Delta Development Commission, the Universal Basic Education scheme and pensioners.

The MDA spending of ₦ 2.5 trillion represents 80% of government spending and it is made up of personn₦el costs ₦1.2 trillion, purchase of goods and services ₦0.4 trillion and capital expenditure of ₦0.9 trillion. This means that over half of government spending or two thirds of MDA spending is on personnel costs and purchase of goods and services for the day to day running of the government. Is this the right mix of spending or should government prune down the size of her bureaucracy and free more money for capital projects and social services?

Average capital expenditure per annum over the next three years is ₦ 1 trillion. Is this enough to rehabilitate our roads, provide water for all, ensure uninterrupted electricity supply, modernize our railways, rehabilitate our hospitals and schools and enforce law and order. Clearly funds available for investment are short therefore government needs to be humble enough to accept that they cannot solve all our problems for us. They should engage private sector businesses and Nigerians. Private sector businesses should be encouraged to invest in most of these areas and Nigerians should be convinced that they must pay for most of these services. As private sector investments go into most of these areas,

employment will be generated and the ability of Nigerians to pay for these services will be enhanced. Also, the pressure on the government to run large deficits to “stimulate” the economy will reduce.

A government that spends more than she earns every year will go bust and hurt businesses and households. How does this happen? The explanation can be found on how government finances her excess spending. Firstly, she can deplete her savings.

For example, the FGN partly finances her deficit by dipping into her “excess crude savings”. Secondly, the government can sell some of her assets (e.g. privatization proceeds) and use the proceeds to finance her deficit. Ultimately, savings will finish and most of the state-owned enterprises in Nigeria have liabilities in excess of their assets so very little cash can be squeezed from selling them.

Thirdly, the government can borrow from domestic and external sources. This increases public sector debt and debt service costs. Currently, 15% of FGN revenue goes to service interest on her debts. If borrowings increase this percentage increases further reducing the ability of the government to fund her investment projects.

As government builds up debt lenders become wary of lending additional funds therefore, government has to offer higher interest in the bid to attract funding, this is how high public sector borrowing requirements drive up interest rates and reduce the amount of credit available to the private sector.

Fourthly, the government can increase taxes to close her funding gap. This drives away investments as taxes become uncompetitive and might have limited impact on revenue generation in a country like Nigeria where the level of tax compliance is low.

Lastly, a government can print money to fund her spending. This leads to hyper-inflation, large currency depreciations and very high interest rates. These ills destroy businesses and make households bankrupt. Thankfully, we are very far from this and should not get there but once again “a stitch in time saves nine”.

Government cannot run budget deficits indefinitely without hurting the macro-economy, businesses and households. They must therefore explain, in clear and credible terms, how they will balance the books.