Driving Effective Fiscal Spending In Nigeria as A Part Of Fiscal Consolidation

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 Friday, August 17, 2018 /12:55PM/FDC

Fiscal consolidation is a process by which the government adopts strategies to promote fiscal sustainability, through reduction in its deficits and debt accumulation. According to the International Monetary Fund (IMF), Nigeria’s fiscal deficit stood at 4.3% in 2017. In the 2018 article IV review, the Fund recommended an increase in non-oil revenues in order to reduce this deficit and ensure macroeconomic stability. Sub-Saharan African (SSA) economies such as Ghana and South Africa have also shown efforts towards fiscal consolidation. Ghana’s debt to GDP ratio declined from 9% in 2016 to 6% in 2017. South Africa also recorded a debt to GDP ratio of 3.9% in 2017 down from 4.5% in 2016. The government’s fiscal consolidation efforts in 2018 might however be limited by pre-election spending ahead of the 2019 polls.

The proposed expenditure in Nigeria’s federal government’s annual budget has consistently been inadequate to drive growth when compared to other advanced economies with higher growth rates. Even more worrisome is that the government consistently spends below its budgeted expenditure. Nigeria spent, on average, approximately 10% below its proposed budget between 2012-2015. In 2016 the gap between budget and actual rose astronomically to 27.4%, decreasing only slightly in 2017 to 25.7% below its proposed expenditure.

In the current 2018 budget, the government has proposed a total expenditure of N9.12trn, 22.6% above the 2017 proposed expenditure. While this has been received optimistically due to its potential impact on growth, the actual performance in each year since 2012 dampens this positive outlook. Nigeria’s pattern of budget under-spending and the resulting stunted growth are not expected to change in 2018 unless a new strategy is employed. The government needs to reduce the gap between the proposed-actual expenditure to result in a faster growth than preceding years. Raising more revenue through a concerted effort to expand tax compliance should be considered as an important part of the solution. An increase in government tax revenue could also complement the government’s efforts to reduce its budget deficit and achieve fiscal consolidation.

Federal Government expenditure profile in Nigeria

Governments typically adopt an expansionary fiscal policy to stimulate growth. It involves one or a combination of an increase in government expenditure and tax cuts. These strategies boost aggregate demand, production and employment. The Nigerian government has consistently proposed an expansionary budget since 2012. The exception was in 2014 which coincided with the global oil market crash. This expansionary policy is commendable as it suggests a positive intent towards growth. However, the strategy has largely been illusory as the federal government has spent well below its projections. In the last three years, the government has spent an average of 20% below its proposed expenditure, trending higher in the past two years.

In fact, in 2016, when the government proposed a larger budget size, it ended up spending below the previous year in actual terms. Given a population estimated at 190 million people, proposed government spending per head in 2017 came in at about N39,000 ($127). This is well below other bigger and faster growing economies, such as China and Brazil, that spend approximately $2,200 and $4,100 respectively per citizen.8,9 Economic growth is correlated with actual budgetary disbursements as against pro-posed amounts. Nigeria’s actual spending per head has fallen below $120. In 2015, 2016 and 2017, actual spending per head came in at $131.6, $77.43 and $94.96 respectively.10 While government expenditures are not expected to increase enough to significantly boost per capita spending, the government should at least ensure it spends up to its proposals.

 

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Way forward – Raising fiscal revenues and spending through improved tax compliance

It is noteworthy that the Nigerian federal government’s budgetary spending efforts have been largely subject to revenue shocks. The government’s actual revenues have consistently stayed below projections. Between  2012-2016, revenue shortfall was at an average of 15% below the projection.

This largely explains why the federal government’s expenditure has also fallen short of what it proposes. Raising revenues to close the proposed and actual spending gaps demands clear strategies.

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Nigeria’s aggregate government revenue stream is broadly composed of oil (crude oil sales) and non-oil revenues (taxes, royalties, etc). To boost total revenue, raising the non-oil component is more feasible. This is be-cause oil revenues are more difficult to influence. Revenues from crude oil sales usually depend on global oil price and domestic out-put. The Organization of Petroleum Exporting Countries (OPEC) has capped Nigeria’s crude oil output at 1.8 million barrels per day (mbpd) in an attempt to avoid a global supply glut and a price crash. Nigeria has little influence on the global price of crude as it remains a relatively small player among oil producing countries. This makes raising taxes, royalties and other non-oil components a more viable option to boost revenue inflows.

To shore up revenues, the government could consider raising taxes, which contribute approximately 82.5% to total non-oil revenues in Nigeria. These include corporate income tax and value added tax (VAT) among others. An increase in these taxes could be justified as the tax revenue to gross domestic product (GDP) ratio is currently very low even though the country charges one of the highest corporate income tax rates in Sub-Saharan Africa. At 6%, Nigeria’s tax to GDP ratio is one of the lowest in the world. It is significantly below that of other oil producing countries such as China (28%), US (10.89%), Angola (10.32%) and Russia (9.13%).

However, raising tax rates to boost government spending will not stimulate aggregate demand and economic growth as higher tax rates are part of a contractionary fiscal policy, inconsistent with a growth drive. Raising tax rates could also discourage the needed investment to spur growth. A more economic potent tool is to improve tax compliance in the country.

It is noteworthy that Nigeria’s tax compliance rate has been very low, and this has filtered into sub-optimal tax revenue inflows. According to the International Monetary Fund (IMF), only 1.95% of the registered personal income tax payers in the country are active. For corporate income tax, the rate is 5.62%, while it is only 5.12% for VAT.14 This low compliance rate has constrained the government’s tax revenues and budget spending ability.

To improve tax compliance, Nigeria needs to invest in a tax monitoring system, which involves a scrutiny of tax receipts. Under this system, the government would be able to more easily detect and clamp down on tax evasion. To strength-en its ability to enforce compliance, the government could consider technology transfers from the US. The US has achieved a voluntary tax compliance rate of 81.7% in part because it employs an effective tax monitoring technology.

The Nigerian federal government’s budget under-spending has typically undermined the effectiveness of expansionary fiscal policies in the country. If new steps are not taken, 2018 is poised to repeat the same trend. Reversing this trajectory is expected to call for an increase in government revenues, which would enhance the government’s spending ability. These increased revenue measures should include an improvement in tax monitoring and compliance. The good news is the 2018 budget was just passed into law, which suggests ample time for the implementation of these recommendations.

 

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