Friday, June 22, 2018 1:50PM / FDC
On June 20th, the President signed the 2018 budget (N9.1trn) into law, five weeks after it was approved by the Senate. Buhari expressed reservations concerning the 6% upward re-view of the budget to N9.1trn from N8.6trn and stated that he gave his assent so as not to interrupt the ongoing economic recovery. In dollar terms, the budget is now $29.8bn, higher than 2017’s budget of $24.4bn.
According to reports, the President was of the opinion that the excess revenue received from higher crude prices should be used to finance the growing deficit (1.4% of GDP) and reduce borrowing, rather than in-crease spending. This view has under-lying similarities with the monetarist school of thought. Monetarists advocate that, as much as possible, the government should run a balanced budget. However, while monetarists are focused on the implications of this on money supply, Buhari is more concerned about the implications for debt.
On the other hand, the National Assembly hold more of a Keynesian view. In Keynesian economics, expansionary fiscal policy is one of the vital ways to kick-start economic activity. Deficit spending occurs when the revenues fall short of expenditures. With the upward review of the budget, total expenditure is now N9.6trn, com-pared to expected revenue of N7.15trn. This leaves a deficit of N1.95trn, which is to be financed by borrowing.
However, this creates a future problem- debt, Buhari’s biggest concern. Nigeria’s total debt currently stands at N22.71trn ($74.28bn) (as at March 2018)5. Earlier in the year, the IMF ex-pressed concern over rising debt levels and more importantly, debt servicing ratio, estimated at 63%.6 Total debts to export revenue is also at an alarming high of 52.3%.7
While increasing spending today, at the expense of higher debt tomorrow might appear short-sighted, the FGN’s options are few. The alternative would be to maintain a conservative budget, and watch unemployment skyrocket, income per capita plunge, and economic growth crawl.
A quick look at the sections of the budget which accounted for the upward review show that increased spending in these areas would have a positive multiplier effect on the economy. Capital expenditure was in-creased by 18.11% to N2.87trn, much higher than the 0.86% increase in re-current expenditure to N3.52trn. The budgets for health, security, education and, power, housing and works were also adjusted upwards.
This boost in government spending will negate the effects of lower private consumption and keep aggregate demand at equilibrium. This will ultimately ensure that businesses stay afloat, and unemployment does not scale through the roof.
Furthermore, the spending will have a multiplier effect on GDP, and in re-turn, this could lead to an uptick in government revenue (from taxes), and ultimately support FG’s ability to service debt in the long-term. Thus, given the current economic situation, the focus of the government should, be on increasing revenue, rather than curtailing expenditure.