• Thursday, March 28, 2024
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Why we need to stop focusing on the recurrent versus capital portions of the budget

2020 Budget

One of the first things analysts in Nigeria look for when trying to understand our public budgets are the shares of recurrent and capital expenditure. The thinking typically simplifies things by arguing that a higher share to capital expenditure is good whereas a higher share going to recurrent expenditure is bad. For example, a state that has a capital to recurrent expenditure ratio of 70 to 30 is typically lauded in the press as having a good budget, whereas a state that spends 80 percent of its budget on recurrent items is considered as having a not so good budget.

But is it really that simple? Should we be judging budgets based on this simplistic narrative?
To answer this, it is useful to go into more detail on what is in these broad categories. First, recurrent expenditure. The first part of recurrent expenditure that typically riles analysts up is personnel costs. “We are spending too much on salaries of civil servants who don’t do anything”, is a line you typically hear. But is it that simple? What if the salaries are for health care professionals? Or for teachers? Or for police? You typically cannot argue that a society does not need police or soldiers. Of course, they do. Spending on education and health is also technically an investment in human capital which most economists consider to be good for the economy. So, should we really complain so much if a higher fraction of spending goes to security services or investment in education and health?

Looking at the federal government’s 2020 budget proposal for instance. Almost 80 percent of personnel costs go towards security agencies, education, and health. Does anyone really want the federal government to spend less on security? Or to invest less in education and health? There are questions around the efficiency of that spending for sure but even if the federal government became more efficient, can anyone argue that we should be spending less on those things?

Then there is the debt servicing part of recurrent expenditure. This is a bit trickier. On the one hand the larger the share of the budget that goes into servicing debt, the smaller the share that can be spent on everything else. On the other hand, if you raised new debt for important infrastructure projects in the previous budget then that would increase your debt servicing going forward. Is it really bad to finance infrastructure with debt? The question for debt servicing is therefore really about what new debt is used for and how sustainable the debt picture is. A debt servicing to revenue ratio of 60 percent is obviously unsustainable. Still once you have debt it must be serviced. It is not negotiable.

Finally, there is the capital expenditure section of the budget. We typically think of this as spending on infrastructure and that is mostly true. However, it is not the only thing that officially goes into the capital expenditure component of budgets. Spending on new four-wheel drives for senior civil servants technically counts as capital expenditure. So, does spending on computers, fancy office buildings, and furniture.

Digging deeper into the capital expenditure component of the average federal government agency for instance shows that the majority of capital expenditure goes to office buildings, furniture, computers, and other tangibles. If you dig deeper it becomes clear that not all capital expenditure counts as infrastructure spending and therefore not all of it is what can describe as good spending.

What does this all mean? It means we need to spend less time justifying budgets based on the simplistic recurrent versus capital expenditure dichotomy. We need to focus on new metrics that properly describe how much is spent on things we consider important. How much are we actually spending on infrastructure relative to the size of the budget? How much are we investing in human capital from an education and health spending perspective, and how efficient is this spending? What exactly are we using new debt for and is the debt position sustainable? These are the kinds of questions we should be asking about our public budgets and the metrics we should be focusing on.

 

NONSO OBIKILI

Dr. Obikili is chief economist at BusinessDay.