The theme of 2014’s Budget was ‘inclusive budget’. Whether it was indeed inclusive or not is debatable. Given the current economic climate, 2015’s budget radically departs from that narrative – it is barely inclusive. This is bad, but there’s good news…The proposed 2015 budget is one largely based on faith and hope; so given our religious propensity, we should be quite familiar with it. Fret not, you’ll need that faith when you understand the composition of our 2015 budget.
Wait First. What Exactly is This Budget Thing?
For those who know, feel free to skip this. For those that don’t, you’ll need this part to understand the ‘wisdom’ of Nigeria’s 2015 budget. A national budget is simply an estimate of a government’s anticipated revenue and expenditure during the year. The Nigerian Government plans to spend N4.3trillion in 2015.
The budget consists of two major parts: the recurrent and the capital cost. Recurrent consists mainly of expenditure on wages, salaries and statutory transfers, purchases of goods and services, and debt service. Clearly, recurrent costs keep the Government running and the civil servants happy. This is great for those in Government, but for the overall economy and the people, the benefits are negligible. To the economy, recurrent expenditure is like when that Uncle comes during Christmas to give you money for biscuit and sweet. You spend it and that’s the end. The effects are direct, but neither long lasting nor inclusive.
Capital expenditure typically consists of infrastructures such as bridges, hospitals, schools, etc. It’s through capital expenditures that infrastructure and other critical services that touch majority of the people are provided. The only way you’ll directly feel the impact of the budget as a citizen is through the capital expenditures – not monetarily, but through an improvement in quality of living. Capital expenditure is like what your mother spends on your education – you might not appreciate it, but it goes a long way.
So What Does the Budget Have to Do With This Austerity Thing We Keep Hearing About?
Austerity measures are policies used to tighten government expenditure, close loopholes that cause revenue losses and initiate a gross reduction of budget deficits during adverse economic conditions. Why does Nigeria need austerity measures? Nigeria is kinda broke due to falling oil price. You can read more on how we got into this mess here.
Austerity measures are created to ‘trim the fat’ of government, so money goes to crucial areas that encourage economic development. This means that recurrent costs like high wages and salaries, duplicate workers, unnecessary spendings on travels and new goods get cut.
Ohhh. So The Budget Spent More on Capital Than on Recurrent, Right?
Well…not exactly. In fact, not at all. For all the talk about austerity measures, Nigeria’s recurrent cost rose. The budget showed that Recurrent Expenditure takes 86% of the budget, rising from N2.468tn to N2.622tn.
Spending more on Capital cost than recurrent might be the most economic prudent decision, but it never happens. Even in the good old days of higher oil revenue, Capital expenditure suffered. Capital expenditure dipped from N1.55tn in 2014 to N634bn in 2015. That’s a 42% drop from the previous year. Sadly, capital expenditure is like the unappreciated house-help that does all the work and yet doesn’t get Christmas clothes.
Governments find cutting capital costs easier cause there’s little direct impact on the pocket of citizens as compared to cutting recurrent cost. The Nigerian Government is the largest employer of labor in the country, so it would be politically suicidal to go on a firing spree during this election period. Moreover, it’s simply hard to get the same people setting their wages to cut it down. Also, with a new presidential private jet and the usual 150 billion for the National Assembly included in the 2015 Budget, it seems the angel of austerity spared our top Government officials just like the angel of Death spared the Israelites in Egypt.
In the short run, it might be the easier and more politically-expedient move to sacrifice capital expenditure on the altar of recurrent cost, but it’s not the smartest economic move. The overall health of the economy suffers from this move. It’s like your mother spending on your Christmas cloth rather than keeping money for your January school fees. It’s sweet now, but painful later.
So How Does the Government Plan to Fund the Budget?
A budget is only as useful as the amount you have. If you like, write a long list, when you go to the market with only N10, you’ll only come out with pure water. Similarly, with our falling oil revenue, Nigeria desperately needs to find money from other sources. Nigeria plans to sponsor the budget with oil revenue and make up the rest of the revenue by diversifying its non-oil revenue sources, and broadening and updating its sources of tax receipts.
This is the part where the budget’s theme goes from ‘austerity budget’ to ‘faith budget’. Nigeria’s budget benchmark is set at $65 per barrel, however, the price of oil is currently at $59 and could fall further. In fact, Saudi Arabia has their 2015 budget benchmark at $60 – they’re obviously less optimistic than we are. If they’re right, it means we’ll make less money than we’re expecting. It’s like buying the iPhone 6 on credit, only to find out that your dad gave you money for a Nokia torchlight phone.
There’s also a tad bit too much optimism on the non-oil revenue front. The Federal Government expects to bring in N1.68tn for 2015. Given that revenue generated in 2013 was N1.07tn, our 2015 target might be a bit too optimistic. Perhaps if independent revenue agencies and MDAs get squeezed, we could pull in N1.2tn. Remember, this is also by faith.
Also, increasing taxes should bring in some money. The tax on luxury items such as private jets, luxury yachts, luxury cars, business and first class airline tickets, champagnes, wines and spirits adds to N10.56 Billion in a year. Musicians, now is the only time when your ‘bottle-popping’ music videos directly contribute to Nigeria’s hustle. I’m uncertain how much it does, but just for some perspective, N21 Billion was donated to the President’s election campaign in one night.
So What Happens If the Revenue Doesn’t Add Up?
When this happens to a Government, the next predictable step is to borrow to cover the budget cost. If oil prices stay below $65 per barrel, we shall borrow. If our volume of crude oil sold falls below our target, we shall borrow. And if we do not meet our quite optimistic non-oil revenue target, we shall…borrow. Our domestic debt has risen from N4.55trillion in 2010 to N7.65trillion as at September 2014…and things were still a bit economically smooth back then.
Yes. That’s a lot of borrowing. The Government knows this and has tried to stem it. After the curtailing of international travels, reduction of procurement and upgrade of buildings, and a partial implementation of the Steve Oronsaye report, the Government will save N82 billion next year. Yes, Aunty Ngozi try small, but a glance at the composition of the budget still ‘dey turn belle.’
So What’s The Implication?
The budget report mentions several government efforts at diversification of revenue, but the act of slashing capital expenditure introduces a conundrum. For us to increase our non-oil revenue, we must diversify both our sources of government revenue and our economy. However, diversification can only occur if capital spending is high, not when you slash it – which is exactly what we’re doing.
The budget depicts the future economic plan of a government for its country. If so, then Nigeria’s proposed 2015 budget goes a step backward into our past to highlight our addiction to extravagantly large governments and our nonchalance for strategic long-term investment.
We’ve treated the economy the same way we treat our roads. We wait for it to have huge potholes, then kill a bus load of (preferably prominent) people before it gets fixed. Meanwhile, those who drive down the road do so by faith, hoping not to get killed. Currently, we’re staring at the potholes littering our economy’s future and we need to not only avoid them, we’ve got to fix them. This 2015 budget might just optimistically dodge these holes, but it’ll do little to fix them. Merry Christmas and a Happy New Year to all! With a budget like this, you’ll need all the happiness you can get in 2015.
NB: I’m sure there’s a legitimate reason the budget looks like a cake…