“I am in favour of reducing all budget items. But the item I don’t want to reduce is the pension expenditure because it affects the weakest part of the society”
– Mariano Rajoy
President Muhammadu Buhari on August 3rd 2015 directed the National Planning Commission (NPC) to review the framework for the 2016 national budget with a view to reducing recurrent expenditure and prioritizing developmental projects. It is not clear the role that the Ministry of Finance will play given that it has hitherto been producing the Medium Term Expenditure Framework (MTEF) and the annual budget.
Particularly, the Budget Office of the Federation, a division the Finance Ministry, designs and produces the MTEF and the Annual Budget. Section 13(1) of the Fiscal Responsibility Act (2007) empowers the Minister of Finance to prepare the MTEF and in doing this, shall seek inputs from other agencies including the NPC. Furthermore, section 18(1) of the Act provides that the MTEF shall be the basis on which the annual budget is prepared.
Although the federal cabinet is yet to be constituted and a finance minister not in place, directing the NPC to work with the Finance Ministry would have been more appropriate. However, the objective of this piece is not to discuss the intrigues that have characterized operations of the NPC and the Finance Ministry over the years as it concerns the budget; rather, it is argued that changing the composition of the federal budget will require difficult and unpopular choices. These decisions cannot be taken by either the NPC or the Finance Ministry.
The structure of the federal budget, like any financial plan, comprises projected revenues and proposed expenditures. The revenues used to fund the federal budget come from the share of proceeds accruing to the Federation Account (oil revenues, Customs & Excise revenue, and Corporate Income Tax), the share from the Value Added Tax Pool and the independent revenues like remittances by revenue-generating agencies, dividends from investments, proceeds from privatization, etc.
On the expenditure side, spending comprises statutory transfers, debt service and expenditures by the Ministries, Departments and Agencies (MDAs). Statutory transfers are the mandatory expenditures to the National Judicial Council, Niger Delta Development Commission (NDDC), Universal Basic Education Commission, Independent National Electoral Commission, National Assembly, and National Human Rights Commission. The debt service is the interest and principal that government pays on its debts while the MDA outlays are monies spent on recurrent and capital projects. While recurrent expenditure comprises personnel costs, overheads, pensions and other service wide votes, capital spending is used to provide infrastructure such as roads, water and power, etc.
A review of the Appropriation Acts between 2000 and 2014 shows that the Federal Government expended a total of N39.8 trillion of which N19.8 trillion was on recurrent expenditure, N12.7 trillion on capital expenditure and the remaining N7.3 trillion on other issues such as the statutory transfers. This means that on average about 32 per cent of the total expenditure between 2000 and 2014 was for capital expenditure. If the supplementary appropriations as well as capital components of statutory transfers and SURE-P are taken into consideration, then the ratio of capital spending to total budget will increase for the period.
Looking at the breakdown of the 2014 budget, the total expenditure of N4.642 trillion comprises statutory transfers of N399.69 billion (of which N166.23 billion was for capital spending), debt service of N712 billion (15.3 per cent of the budget), recurrent non-debt expenditure N2,430.66 billion (52.4 per cent of total budget) and capital expenditure of N1,100.61 billion. The breakdown of the recurrent non-debt expenditure shows that personnel cost was N1,723.31 billion (37.1 per cent of total budget), overheads of N216.77 billion (4.7 per cent of total budget), pensions of N187.45 billion (4 per cent of total budget) and other service wide votes of N303.14 billion (6.5 per cent of total budget).
From the breakdown of the 2014, it is obvious that the wage bill (including pensions) is huge. But why is this so? This is so because between 2009 and 2011, government wage bill increased significantly due to pressures by labour unions and the enactment of the National Minimum Wage (Amendment) Act of 2011. When juxtaposed against increases in pension obligations which are linked to the wage increases, then the federal wage bill obviously had to go up. To address the challenge of the enormous wage bill (excluding pensions), the government will need to take the hard and unpopular choice of salaries reduction and/or downsizing.
Pensions of senior citizens must continue to be paid as at when due, but the process has unfortunately been abused in the past. The setting up of the Pension Transition Arrangement Department (PTAD) by the previous administration is helping to address the problem. On debt service, government must continue to meet its contractual obligations without which the country runs the risk of ratings downgrade. The best that can be done here is seeking restructuring and rescheduling of matured obligations. Government can certainly rein-in on overheads and the service wide votes components of recurrent non-debt expenditure, both of which sum up to N519.91 billion or 11.2 per cent of the 2014 Budget. Most MDAs repeat same line items like computers, photocopiers, etc., in every year’s budget, thereby increasing overheads. Also, the line items in the service wide votes should be reviewed so as to remove unjustifiable expenses.
In close, it will be erroneous to think that Nigeria will get out of the woods by merely reducing recurrent expenditure component of the federal budget. The question to ask is: does the state of infrastructure in Nigeria today reflect the N12.7 trillion capital votes (excluding supplementary budgets and capital component of statutory transfers) between 2000 and 2014?
President Buhari should not only be interested in reducing recurrent expenditure, but must also scrutinize how capital expenditures are expended. Tanzi and Davoodi (1998), in their IMF publication titled ‘Roads to Nowhere: How Corruption in Public Investment Hurts Growth’, show that there is a link between capital expenditure and corruption. Nigeria should and must increase its capital spending given its infrastructure deficit. However, increasing capital outlays without putting in place appropriate measures to improve the quality of spending will result in increased corruption.