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Debunking economic myths: Government budget deficits are not always bad

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While critics may caution against the risks of fiscal indiscipline and debt vulnerability, citing examples of past fiscal mismanagement and debt distress in different regions, such concerns are valid.

However, they should not overshadow the imperative of strategic deficit financing in contexts where public investments are essential for long-term development.

 “Recent economic realities challenge this conventional wisdom, revealing a more nuanced truth: deficits, when managed strategically, can serve as powerful tools for driving growth and addressing socio-economic challenges.”

In a recent investigation into global economic trends, a groundbreaking discovery has emerged, challenging the age-old belief that government budget deficits are always harmful.

Recent economic realities challenge this conventional wisdom, revealing a more nuanced truth: deficits, when managed strategically, can serve as powerful tools for driving growth and addressing socio-economic challenges.

Nigeria, Africa’s largest economy, has faced significant fiscal challenges in recent years, exacerbated by factors such as volatile oil prices, weak revenue diversification, and inefficient public spending.

Persistent budget deficits in the past 11 years in Nigeria have strained fiscal sustainability, leading to rising debt levels and macroeconomic vulnerabilities. Critics argue that excessive government borrowing crowds out private investment, fuels inflation, and undermines long-term growth prospects.

BusinessDay analysis, based on data unveiled by Budgit, reveals a staggering allocation of approximately N35.001 trillion towards capital expenditure within Nigeria over the past 11 years.

This allocation purportedly encompasses a spectrum of vital sectors, including education, health, energy, housing and infrastructure, agricultural development, telecommunications, and defence, among others.

Such extensive endeavours fall under the dual classifications of either ‘investment expenditure’ or ‘consumption expenditure,’ as analysed by public sector economists. These allocations, aimed at fostering economic growth, are pivotal in shaping the nation’s developmental trajectory and socioeconomic landscape.

In a disheartening narrative, the vast sums allocated to capital expenditure over the years seem to have missed the mark in uplifting the lives of everyday Nigerians. Instead, these allocations have only deepened economic woes, plunging countless individuals into the abyss of poverty.

The grim reality is stark: over 104 million Nigerians currently find themselves grappling below the poverty line, according to the World Poverty Clock. This dire situation is compounded by an alarming inflation rate of 31.7 percent beyond the threshold of 21.4 percent as announced by the Central Bank of Nigeria (CBN) for the 2024 year-end, burdening households nationwide.

With an unemployment rate of 5 percent, as reported by the National Bureau of Statistics (NBS), the socio-economic fabric of the country is undoubtedly strained, with insecurity ominously becoming the norm rather than the exception.

The situation is dire, worsened by the scarcity of basic necessities. Take, for instance, the recent staggering 231 percent increase in electricity tariffs, exclusive of VAT, announced by the Nigeria Electricity Regulatory Commission (NERC).

The spike catapults rates from N68/Kwh to N225/Kwh; when VAT is factored in, consumers in Band A face a daunting N241/Kwh bill for 20 hours of daily electricity access.

Amidst promises of a ‘renewed hope’ agenda by the present administration, the harsh reality on the ground tells a different story of escalating hardship. Though this economic strain cannot be solely attributed to the current administration, it’s an accumulation of fiscal irresponsibility.

Oluwatobi Abisoye, a corporate reporting analyst, lamented, “The government has failed me in providing basic amenities. I’ll provide for myself before the heat kills me.” He insightfully added that significant improvements in domestic production may not be achieved anytime soon.

Oluwatobi further advises caution in pushing Western ideas onto Nigerian society. “You cannot force a patient to take all the doses at once due to your hastiness for healing; it’s a gradual process.”

Another commentator, Bukola Oyeboade, voiced a similar sentiment to Oluwatobi on ‘X’, formerly known as Twitter. She expressed her concerns, stating, “The problem I have with the tariff hike from N68/Kwh to N225/Kwh is that a lot of ‘Band A’ customers would pay the new tariff without receiving up to 20 hours of electricity. It’s like paying for darkness.”

This sobering truth underscores the urgent need for policy interventions prioritising inclusive growth and equitable resource distribution.

A lamentable truth emerges: the government budget deficit, once hailed as a saviour to address revenue shortfalls and ignite growth, has failed to deliver on its promises, leaving hope dashed and infrastructure neglected. This assertion finds backing in Nigeria’s position, ranking 131st out of 137 countries in terms of infrastructure quality, as reported by the World Economic Forum (WEF).

It is imperative that government strategies pivot towards addressing stark disparities in wealth and opportunity, ensuring economic progress benefits all segments of society. Only through concerted efforts to foster a more inclusive and resilient economy can Nigeria pave the way towards a brighter and more prosperous future for its citizens.

Beyond the confines of Nigeria lies a realm of comparative analysis, juxtaposing the nation with select countries that share similarities in economic structure, challenges, or policy responses; all other factors are held constant.

India

India, a player in the global economy, manages its fiscal journey with a deficit budget. Despite this financial tightrope, the nation’s economic outlook reveals a mosaic of promising indicators.

With a GDP towering at $3.15 trillion, India entices investors with a landscape brimming with opportunities. The unemployment rate dropped to 3.1 percent in 2023 from 3.6 percent in 2022 and 4.2 percent in 2021, showcasing adept inclusive growth strategies, according to the Periodic Labour Force Survey (PLFS).

Amid fiscal strains, inflation remains tame at 5.46 percent, ensuring stability in prices and bolstering consumer confidence, as reported by Statista in 2023. The poverty rate declined to 4.5–5 percent in 2022–23, with rural poverty decreasing to 7.2 percent and urban poverty to 4.6 percent, according to the data from the Economic Times.

India’s commitment to human development shines through an HDI of 0.645, reflecting strides in healthcare, education, and living standards, as reported by the UNDP in 2020. Additionally, infrastructure initiatives like the National Infrastructure Pipeline promise bolstered economic growth and an improved quality of life. According to a World Bank report, India’s infrastructure score has improved significantly, moving up five places from 52nd in 2018 to 47th in 2023.

In the face of fiscal challenges, India’s economic resilience endures, echoing its potential for sustained development and global influence.

South Africa:

South Africa, much like Nigeria, stands as one of Africa’s largest economies, grappling with shared challenges of inequality, unemployment, and infrastructure deficits. According to the World Economic Report, the nation’s GDP reached $812 billion by the end of 2023 in purchasing power parity terms, offering promising investment opportunities. With a population of 60,414,495, the GDP per capita for South Africa is approximately $13,444.07.

However, concerning figures reveal a challenging reality. The unemployment rate stood at 32.1 percent at the end of the fourth quarter of 2023, as reported by Africanews, while the poverty rate remained high at 30.1%. Despite these socio-economic hurdles, inflation has remained stable at 6.0 percent, according to Stats SA, fostering consumer confidence.

South Africa demonstrates dedication to human development, with a reported HDI score of 0.71, indicating a high level of development, as reported by Statista. Infrastructure initiatives are underway to bolster economic growth and enhance living standards. Despite these challenges, South Africa’s resilience positions it for sustainable development and regional influence.

Brazil:

Brazil, like Nigeria, grapples with income inequality, poverty, and infrastructure challenges. By managing budget deficits and implementing social welfare programmes, Brazil offers insights into Nigeria’s fiscal policies. IBGE reports Brazil’s GDP at over US$2.2 trillion in 2023, with GDP per capita rising to US$10,138.

Despite a decline in unemployment to 7.4 percent and slightly higher inflation at 4.62 percent, Brazil remains within its target range. Poverty dropped from 36.7 percent in 2021 to 31.6 percent in 2022, and Brazil boasts a high HDI score of 0.76, reflecting progress in human development, as per UNDP. Brazil’s resilience and commitment to inclusive growth shine amidst its challenges.

Indonesia:

In 2023, Indonesia’s economic landscape revealed resilience amidst global challenges. According to BPS- statistics, the gross domestic product (GDP) soared to IDR 20,892.4 trillion, with a notable GDP per capita of IDR 75.0 million, or US$4,919.7. Despite a slightly lower growth rate of 5.05 percent compared to the previous year, as reported by BPS-Statistics, Indonesia exhibited a decline in unemployment to 5.32 percent, signalling improved labour market conditions.

Moreover, Indonesia’s inflation rate witnessed a steady decrease, standing at 2.62 percent in December 2023, as per official statistics. This downward trend contrasts with the average inflation rate of around 3.69 percent throughout the year. Encouragingly, the proportion of the population living below the poverty line decreased to 9.36 percent, showcasing gradual progress in poverty alleviation efforts since 2003.

Indonesia’s commitment to human development is underscored by its rising Human Development Index (HDI), reaching 74.39 in 2023, a noteworthy increase from the previous year. Over the period from 2020 to 2023, Indonesia’s HDI exhibited consistent growth, reflecting advancements in healthcare, education, and living standards for its populace.

Nigeria grapples with significant challenges, ranking poorly in government spending efficiency (120th) and quality infrastructure (131st) among 137 countries. This underscores the urgent need for enhanced fiscal management and investment in basic amenities like roads, electricity, and water supply to drive economic growth.

India shines in quality infrastructure (46th) and credit rating (47th), yet struggles with government spending efficiency (20th) and quality education (26th), highlighting areas for improvement to sustain its economic momentum.

Brazil displays a mixed performance, excelling in quality infrastructure (108th) and credit rating (59th) but lagging behind in government spending efficiency (133rd) and quality education (125th), posing challenges for addressing socioeconomic inequalities.

Indonesia showcases strengths in government spending efficiency (25th) and quality education (33rd), signalling effective governance and investment in human capital. However, challenges persist in quality infrastructure (68th) and life expectancy (101st), urging efforts to enhance public services and healthcare access.

Given the dire situation in government spending efficiency and quality infrastructure, Nigeria must prioritise fiscal reforms and infrastructure investment. Enhancing transparency and accountability in fiscal management can unlock resources for critical infrastructure projects, foster economic growth, and improve citizens’ quality of life.

Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).

Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and Education.