Many developing countries, including Nigeria, use fiscal deficits to support growth and development due to a significant financial imbalance.
A fiscal deficit is the excess of government spending over its revenue. This happens due to the government’s expansionary fiscal policy that leads to revenue falling short of expenditure in a given fiscal year.
Except for 1995 and 1996, when the government budget was surplus, Nigeria has run a fiscal deficit since 1981. The 2021 approved budget deficit was N5.6 trillion (up from N4.98 trillion in 2020), accounting for nearly 70 percent of federal government revenues and 3.93 percent of nominal GDP, but the total for the year was N6.45 trillion. The overall budget deficit for 2022 is N6.42 trillion, which is 3.46 percent of GDP. Thus the country has been operating budget deficits as its expenses are always greater than the revenue.
Furthermore, the pandemic (COVID-19) played a significant toll on the economy of developed and developing countries, but developing countries experienced the profound effect of this. This made the government of many developing countries, including Nigeria, to borrow more funds locally and internationally to finance the expenditure in the economy.
According to the Keynesian school of economic theory, there is a need for government intervention when the government’s income falls short of its public spending. This school of thought believes that increasing government expenditure will boost demand, raise domestic production, improve the private sector’s position, and ultimately contribute to economic growth.
Also, to ensure that individuals enjoy a minimum standard of living, good infrastructural facilities, access to employment opportunities, reduce poverty, and enjoy other social goods and services to attain sustainable development, the government requires several resources to achieve these goals. This increases government expenditure more than its revenue.
Financing investment for sustainable development, therefore, requires the government to borrow. This situation leads to borrowing (public and private) to complement the available income. Borrowing is classified into domestic (money owed by the government to creditors within the country) and external (money owed to international creditors). As specified in Section 41 (1) of the Fiscal Responsibility Act 2007, borrowings are essential for capital expenditure and human development.
The expanding budget deficit has prompted borrowing to close the gap. Financing 2022 fiscal deficit of N6.42 trillion will be through domestic borrowing (N2.57 trillion), foreign borrowing (N2.57 trillion), multilateral/bi-lateral loan (N1.16 trillion), and privatisation proceeds (N90.7 billion). This will result in a considerable increase in debt stock and an increase in the cost of repaying outstanding obligations.
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Nigeria’s government debt rose to N38 trillion as of September 2021, while the 2022 budget for the debt service is N3.61 trillion, 21 percent of total expenditure and 34 percent of total revenues. However, higher debt service costs will weigh on capital expenditure. The budget summary shows that a significant proportion of the budgetary allocation is for recurrent expenditure (6.9 trillion) while 5.93 trillion is for capital expenditure.
The minister of finance, Zainab Shamsuna Ahmed, in the public presentation of the federal government budget, said that there is a conscious effort in providing a solution to the government problem of the inadequate fund by growing the country’s revenue and padding all leakages. She buttressed that the target in the medium term is to increase revenue to GDP ratio from the current 8-9 percent to 15 percent by 2025.
Also, the Strategic Revenue Growth Initiatives and other ongoing initiatives address the shortfall in revenue, as decreasing expenditure is now not a practical option.
In addition, a sizeable fiscal deficit can benefit the economy if the funds are used to build productive assets like motorways, roads, ports, and airports that increase economic growth and create jobs. However, in most transition economies, huge and continuous fiscal deficits have mostly been accompanied by large debts, high-interest rates, and inflation, and countries that experienced noticeable economic growth had considerable reductions in their debts.
Fiscal imbalances have contributed to Nigeria’s poor performance and ranking in global growth and development indexes. Deficit financing thus exacerbates economic problems, trapping the economy in a vicious cycle of deficits. As a result, using the budget deficit to boost economic performance has proven ineffective and has had negative economic implications. Thus, the government should control her borrowing because excess debt burdens can be detrimental and hinder growth and sustainable development.
In conclusion, fiscal deficit has not produced the anticipated impact on the economy as fiscal spending is not accompanied by sufficient domestic and foreign investment.
Busayo Aderounmu is an economics lecturer at Covenant University, Ota, Ogun State.
