It is true that governments all over the world continually argue for and indeed deploy public expenditure to put their GDP on the desired trajectory in what is called aggregate demand management. It is no shame that the Buhari’s administration borrowed and spent massively in order to achieve its GDP target, grow the economic pie and create jobs.
However, the major worry of citizens, businesses and investors is whether government’s budgeted expenditure is having the desired impact on GDP. In other words, what is the efficiency of government’s expenditure so far? This can be question can be answered using a simple concept called fiscal multiplier. Fiscal multiplier is a static analysis.
Source: CBN Statistical Bulletin 2017
In the chart above, the first thing one observes is the relationship between Q1 2015 and Q3 2016. However, government expenditure (red line) is so erratic even within a budget cycle which should not be. Nigeria’s marginal consumption propensity, which simply means how much kobo enters the economy from every one Naira of spent income, is 87 Kobo. Therefore, a total of 52 Kobo leaks out of our economy due to imports from one Naira income spent on import. This should have been more but has been constrained due to import controls by the CBN. These two results in a fiscal (expenditure) multiplier of 1.54, assuming net taxes is zero for lack of data.
With that out of the way, we can begin to solve (in-sample forecast) for the desired or expected GDP for the Buhari’s administration (Q3 2016- Q3 2017) depending on the size of their quarterly budget releases. Therefore, according to our preceding analysis, the quarterly GDP forecasts are 3,690.63, 5,976.61, 8,230.34, 9,935.26 and 11,948.63 Billion Naira for the periods between Q3 2016 and Q3 2017 respectively.
Note: GDP_F means GDP Forecast
The chart above shows the variance from Q3 2016 which further widened from Q4 2016 to Q3 2017. Why? Q4 2016 showed the impact of a slump which only meant a huge loss of consumers and investors confidence, both important autonomous aggregate demand components. There were signs of upbeat in output at Q2 2017 onwards but, it is still worlds apart from forecasts. Certainly the economy needs shots of confidence which is something the economic managers have to devise. However, for this sort of situation oftentimes analysts are quick to site poor budget implementation or outturn for the massive variance but our analysis has shown that once monies have been spent it has to go somewhere, at least our short-run fiscal multiplier says it must show up as income to folks in the economy. Sadly that is why some empirical findings have shown that looted treasury funds if spent internally without finding a safe haven abroad can impact GDP positively.
In conclusion watchers of economic forecasts from successful economies should be conversant with the work of the US President’s Council of Economic Advisers. Through technical reports and research, they provide the objectives, strategies and intelligence for drafting economic management tools like the budget. Here in Nigeria, we continue to bemoan the strategy where the National Economic Council, (essentially a collection of politicians), continually show disdain for technical insights. Nigeria needs a blueprint (or institution) for enhancing budget performance efficiency, especially from the planning angle. In a future analysis, we will try to construct 2018 GDP forecast combining our knowledge of fiscal multipliers and warranted growth analysis.