• Wednesday, February 21, 2024
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Compromise on the fiscal stance

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The submission of the 2014 budget proposals to the National Assembly on Thursday marked a softening of the impressive fiscal stance in the medium term expenditure framework (MTEF) 2014-16. The FGN, not for the first time, had to compromise in order to smooth the passage of the finance bill. The assembly has been growing in authority in recent years, and may be tempted to feel that its negotiating position has been strengthened still further by the well-documented political difficulties of President Goodluck Jonathan.

The most publicized compromise surrounded the oil-based fiscal rule. The FGN has proposed a threshold of US$77.5/b to match the assembly’s preference, compared with the assumption of US$74/b in the MTEF. There is precedent. For the current year’s budget, the FGN initially proposed US$75/b and the House of Representatives US$82/b. The approved 2013 budget is based on US$79/b. The two parties in discussion have a different agenda: the FGN knows that a decrease in the threshold brings higher savings and the assembly that an increase allows higher expenditure.

There has been a shift in the relationship between the FGN and the assembly to the latter’s benefit, which is evident from the recent history of the threshold. In the 2009 budget it was set as low as US$45/b. In part this reflected the slump in oil prices in Q4 2008 to less than US$40/b (briefly) on Christmas Eve. A threshold at this level would be inconceivable today due to the steep increase in FGN expenditure.

In 2008 FGN personnel costs were marginally lower than its capital spending (N943bn vs N961bn). Four years later, they were almost twice as high (N1.66trn vs N875bn). Capital spending declined in nominal terms. The dramatic change in the spending mix tells us about the condition of the infrastructure, fiscal responsibility and the impact of elections. Personnel costs soared because of a sizeable hike in civil service salaries and allowances ahead of the 2011 elections. (Another sweetener, which the state governments and the formal private sector have had to digest, took the form of the rise in the national minimum wage from N7.500 to N18,000 per month.)

A second compromise in the proposals was the allocation of N4.91trn for total FGN spending including N268bn for the subsidy reinvestment and empowerment programme (SURE-P). This represents an increase on the MTEF projections for 2014 of N4.50trn for regular spending and N274bn for SURE-P. The fiscal tightening in the proposals is also modest in the context of the final 2013 budget, which allocated N4.99trn and N273bn respectively. (Regular spending in the first three quarters was running a little below budget, at N3.42trn.)

One core element in the proposals unchanged from the framework is the assumption for average oil production of 2.39 mbpd. We struggle to understand how the commentary in the MTEF described the figure as “conservative” when the average for the first eight months of this year according to the CBN was 2.19 mbpd, compared with the full-year assumption of 2.53 mpbd. We are not in a position to forecast when the losses/leakages in crude production will be recovered so we view the assumption in the proposals and framework as ambitious. It would be naïve to think that the plumber could simultaneously make good all the leaks.

The question of how the 2014 budget process will be affected by the president’s party political difficulties is really one for the political economist. However, given its topicality and importance, we have some views to share on the subject. If members of the legislature generally followed their party allegiances, then we would have a ready answer at hand. The majority switches from the party of the president to the opposition, so its stance switches from cooperation to confrontation. This would be the sequence in many other democracies such as the US, which provides the model for the Nigerian constitution. Indeed the fiscal cliff and the lockdown in the US resulted directly from Congressional elections.

In Nigeria’s case, in contrast, it is not apparent to the observer that the president and the majority in the assembly have belonged to the same party. The annual budget confrontation suggests otherwise. The assembly has its own agenda, and it is driven by its institutional interests rather than its various party loyalties. One of those interests is the protection of spending levels in the constituencies and closer to home. It does not follow, therefore, that the stance of the legislature changes with the majority. When the majority belonged to the president’s party, it did not embrace the fiscal compression advocated by the FGN. Now that it is said to belong to the opposition, we should not expect any dramatic change.

What we do see ahead is another drawn out process. The last two budgets were approved in May and April of the following year. It does not help the assembly to become more confrontational because the passage of the budget is required for the release of funds for spending although there is provision for releases for three months on the basis on the previous year’s levels.

By: Gregory Kronsten