President Buhari is preparing a 2016 budget that will be the largest the nation has ever seen; almost double the size of the previous year.
While an extraordinary budget was half expected given the increased likelihood of the economy sliding into a recession (Q3 2015 GDP growth is estimated at 1%), and the lofty promises of the social-capitalist APC party, the sheer size of the budget has left many with mouths wide open.
Why such a large budget?
- Contrary to perception, Nigeria’s public sector (government income and spending) is actually quite small and not commensurate to the size of its GDP, when compared to other nations. Nigeria’s government size, measured by its spending power as a percentage of GDP stands at 8% (world bank, 2013). This compares to South Africa (20.3%, 2014) Brazil (20.2%, 2014) and China (13.6%, 2013)
General government final consumption expenditure (World Bank)
- The government also urgently needs to embark on an Expansionary fiscal policy to reflate the economy. This will involve the government spending more than it earns in tax revenues. Usually, this policy option is mostly undertaken during recessions.
Is this out-sized budget a good thing?
When a government upgrades the size of its taxation and spending (Fiscal policy) from a lower pedestal to a higher one, it influences aggregate demand and the level of economic activity. Such a reflationary fiscal policy is effective in stabilizing an economy over the boom and bust cycles in business.
The change in government spending will affect the following macroeconomic variables:
- Aggregate demand and the level of economic activity, which will lead to growth
- Savings and investment which boosts output in the economy and lead to growth
- The distribution and re-distribution of income, which spreads purchasing power throughout the various segments of the population, increases the buying power and demand of the population. Which also leads to growth.
Increased government spending can either be financed by more taxation, more borrowing, printing more money, the spending of the government reserves, or the sale of government assets such as oil blocs and government enterprises.
Nigeria’s problem is more about filling a leaking bucket, rather than filling an empty bucket.
Leading Nigerian economists are of the opinion that Nigeria while the government doesn’t do too badly in the area of revenue generation; the gravest problem has always been in accountability and leakages.
According to Temitope Osunkoya, CEO of Nextnomics, an economic consultancy, some analysts have estimated that out of $100/bbl in revenue during the period of high oil prices, only about $50 a barrel was being utilized by the government (the oil price benchmark budgeting system set by the senate supports this theory).
The additional windfall revenues have been frittered away, shared, lost, etc.
According to Ayo Teriba, CEO of Economic Associates “we are not dealing with a government that wasn’t collecting sufficient revenues, but we are dealing with a situation where the government was collecting as much revenues as its African peers”.
Teriba says: “In one of the years in the last decade, the government collected as much as 40% of GDP in total revenues collected”.
“In 2009 when oil prices were as low as $50-$60 a barrel, the revenue was about 25% of GDP. Today we are getting 12 percent”.
“So, we are dealing with leakages, and the first and most sensible thing to do is not to touch the tax structure or raise any new tax but to plug the leakages”.
To appreciate the gravity of the situation, non-oil African economies, which are smaller than Nigeria (Morocco, South Africa), raise as much 25% in government revenue. The oil economies such as Angola, Algeria raise as much as 33% – 40% in government revenues as percentage of GDP.
Why you probably don’t need to lose sleep about the revenue side of the budget
According to Osunkoya of Nextnomics (quoting the IMF), increasing VAT from 5% to 10%, (which is still small by global standards), closing all tax exemptions and diversifying the revenue base could fetch the government an almost 400 percent increase in taxes from $5Billion to $18 billion.
Nigeria’s current VAT of 5%, introduced back in 1995, was meant to be an introductory rate to be revised upwards after 2 years. But 20 years after, it is still at 5%.
Nigeria’s current VAT of 5 percent is the lowest amongst its peers. Cameroon pays 19.3 per cent as VAT, South Africa pays 14 percent, Zambia pays 18 percent and Egypt pays 10 per cent.
Additional to the usual corruption and oil theft, the government has to also deal with the abuse of import waivers, tax waivers, the sneaking in of goods through porous borders, the subsidy fraud and efficiency gains (tax that was due but not yet collected, and tax that was collected but was lost along the way).
When asked to quantify the amount that could have been lost to leakages, fraud and inefficiencies, Osunkoya gave an estimate of N3 trillion.(N3 trillion added to last year’s budget already gives about N7 trillion).
If all these problems are addressed in the spirit of change, we could all be home dry, like nothing ever happened.
We can say with a measure of confidence that President Buhari has probably taken the most important step in solving Nigeria’s public sector financial problems – consolidating Nigeria’s fiscal revenues into one bucket.