The budget chickens are home to roost

Since 2015 the budgets have been afflicted with an unfortunate disease: over-optimism. This is especially with regards to revenue expectations. In the wake of dwindling revenues from falling oil prices in 2015, the new government stated its intention to plug leakages and “grow” non-oil revenues. To be fair they are not the first government to state that intention. If you read old newspapers you will quickly see that almost all governments have made increasing non-oil revenues a policy objective. However, in 2015 the new regime took that policy mandate and laced it a heavy dose of belief in their abilities. This belief resulted in budgets and revenue expectations that were borderline fantastical.

The 2016 budget assumed that revenue would be 20 percent higher than it was in 2015. That unfortunately did not happen. But if at first you don’t succeed, please try again. The 2017 budget assumed that revenue would be 67 percent higher than what it actually was in 2016. To be fair there was a devaluation effect there because oil income was expected to be worth a lot more in devalued naira terms. Still it was wildly optimistic. Actual revenue came in 47 percent below target.

The year 2018 saw the same expectations repeat itself with a bit more prayers attached. The budget assumed that revenue would be 170 percent more than what it actually was in 2017. The 2018 budget assumed revenue of over N7 trillion while actual revenue in 2017 was 2.5 trillion. In 2019? The budget assumed revenues that were 75 percent higher than actual revenues in 2018. We have not finished 2019 yet but based on half year actual revenue we can say the federal government is assuming that revenue will grow by 100 percent between 2019 and 2020. Even if you are a prayerful person you know that these expectations were a tad bit extreme.

Of course, if you expect to get revenue then you must also expect to spend money. As everyone knows, getting money is very hard but spending money is very easy. The same was true for the federal government. As it raised its revenue expectations it also raised its spending expectations. However, not only did it plan to spend money that it was expecting to raise, it also planned to spend money that it was going to borrow. One of the most popular phrases in 2016 was “we are borrowing money to reflate the economy”.

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In all the years since 2015 the budget has planned to run deficits of around N2 trillion. Sometimes above and sometimes below. To summarise we planned to raise significant revenue and also planned to raise expenditure to even higher levels which we expected to be funded by debt.

We are a prayerful nation but apparently our prayers were not really answered. Our actions did not yield that much fruit either, at least not to the level we expected. As anyone could have predicted, the expected miraculous revenue growth did not materialise. We still kind of spent the money though. Government expenditure grew rapidly. New debt grew rapidly. Other indirect debt from sources which will not be named also grow rapidly. The outcome is that the government now finds itself with significant debt service payments, liabilities that it will continue to struggle to meet, and revenue expectations that still look like a struggle.

The 2020 budget proposal contains some interesting highlights such as oil revenue now being significantly lower than non-debt recurrent expenditure meaning that oil income cannot even pay salaries anymore. Debt servicing continues to rise and is almost as large as expected oil income. We still plan to “borrow to pay salaries”. The capital expenditure expectation still looks like something that was plucked out of thin air. Finally, there is a mysterious other revenue expectation. It will be interesting to see where that comes from once the detailed budget breakdown in published.

To summarise, the budget looks unimplementable. Revenue will probably increase compared to 2019 thanks to all the revenue-generating measures being proposed. Still, it is unlikely to grow by 100 percent. Once the revenue expectations fail then it will be back to scraping around to see what can be done. Debts must be serviced, and salaries must be paid. Capital expenditure will be cut as usual and around we go again. The seeds for our budget problems were planted long ago and it look like we will keep harvesting those problems for some time.

NONSO OBIKILI

Dr. Obikili is chief economist at BusinessDay.