Nigeria is laying too much emphasis on its budget, ignoring the needed actions on key components of the economy necessary to achieve faster economic growth and improve the lives of millions of its citizens living in poverty.
In traditional economics, gross domestic product, otherwise known as monetary value of all economic activities, is a function of government expenditure, private investment and household consumption.
Mathematically, the equation is represented as Y=G+I+C, where Y= output, G represents government expenditure (budget), I represents private investments, and C represents consumption by households. What the equation implies is that the three components on the right-hand side of the equation are all prerequisite to lifting the gross domestic growth of any economy.
Last week, the Federal Government presented to the National Assembly a N10.33 trillion budget which has attracted debates from all fronts.
The proposed budget set aside N2.14 trillion for capital expenditure, N4.88 trillion for payment of salaries and overheads, N296 billion for sinking fund to retire maturing bonds issued to local contractors, and N2.45 trillion was set aside to service debt.
To finance the proposed expenditure of N10.33 trillion, the government hopes to generate N8.155 trillion as revenue from oil, non-oil and other sources.
Taking it back to our equation earlier, Nigeria’s nominal gross domestic product in 2018 stood at N129.11 trillion. At N10.33 trillion expenditure, Nigeria’s budget as a percentage of the GDP is 8 percent while about 92 percent is from a combination of private investments and household consumption.
What this implies is that Nigeria’s budget is too small to cause any needed impact on growth.
What is needed to drive its growth is an enabling environment to attract private investments which will, in turn, boost household consumption.
“In terms of spending to stimulate growth, Nigeria has not started scratching the surface due to its lean budget,” said Philip Anegbe, head of research at Cardinal Stone, a research and investment firm based in Lagos.
“But this reality should have dawned on us that the government alone cannot drive growth. It needs to attract long-term investment that would create employment which in turn would help in boosting disposable income,” Anegbe told BusinessDay.
In reality, no country operates in autarky – an economic policy or situation in which a nation is independent of international trade and not reliant upon imported goods – hence the need to bring in external indicators, such as exports and imports.
Even when this is considered, it is businesses and firms that produce goods and services that generate foreign exchange earnings for a country. And so if manufacturing productivity falls, receipt from foreign exchange is expected to drop.
The talk of an increase in government expenditure gained major prominence when John Maynard Keynes, a 20th-century British economist, raised concerns on the need for government to spend more to create a multiplier effect in the economy.
His economic thinking gained ground during 1930s, in the wake of the global economic meltdown generally known as the Great Depression. At that time, private investment and aggregate demand were dropping, hence he advocated that the governments must increase their spending to boost aggregate demand, as against a prior economic thinking that the forces of demand and supply should be allowed to determine the direction of activities.
Keynes’ notion of an increased government spending went far in getting the economy back on track at that time. But his postulation is to a large extent a far cry from what Nigeria is practicing.
While Keynes argued that government should intervene in areas that would boost consumption and economic growth, Nigeria’s budget has headed north only to pay salaries, overheads and service debts and not for expenditure on capital projects that would create positive ripple effects on the economy.
At N721.33 billion, capital expenditure proposed for the 2020 budget is 77.3 percent lower than the approved N3.18 trillion for the 2019 budget.
Meanwhile, non-debt recurrent expenditure was estimated at N3.6 trillion, an increase of N620.28 billion from 2019 levels.
The Federal Government has been confronted with increasing revenue shortfalls that have made it resort to borrowing, thereby increasing its debt service obligation.
But elementary economics, from the knowledge of the circular flow of income, shows that the government becomes buoyant enough to rake in more revenues through taxes (ejection) when private firms are attracted and can produce for the households to consume, both of which are known as (injection) into the system.
However, instead of empowering firms to improve household purchasing power which in turn would increase consumption, Nigeria has gone hard by aggressively increasing taxes and placing fines on companies as a better way to raise revenue.
In doing this, the government could inadvertently be preparing the economy for what economists call fiscal drag: a situation where the government takes away so much from both households and firms through taxes that their spending power falls. When this happens, less money would be put into the economy to spur expansion, which is another name for growth.
This is just a possibility.
MICHAEL ANI
