Public finances and the good life

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The sole purpose of government, since Aristotle and Kautilya, is to ensure the peace, security and well-being of the citizens. Ancient Greek Athenianthat’s what we call Eudaimonia or “flourishing”. Entire nations and civilizations rose and fell on the foundation upon which their public finances were built. If it is based on prudence, discipline and parsimonious responsibility, the company will flourish. If, on the other hand, they are inspired by madness and gratuitous debauchery, sooner or later they will collapse.

The Ministry of Finance, Planning and Budget recently released details of the Medium Term Expenditure Framework and Budget Strategy Paper for 2022 to 2024. The document projects staggering spending of N14.6 trillion on the service of the debt during the period – N3. 6,000 billion in 2022; 4.9 trillion naira in 2023; and 6.1 trillion naira in 2024.

The minister revealed that in 2022, the government is forecasting a revenue stream of 6.54 trillion naira to be paid into the Federation account and an additional 2.62 trillion naira in VAT, bringing the total revenue. expected for the coming year at 10.16 trillion naira. The budget deficit is expected to be 5.62 trillion naira, which is a marginal increase from the figure of 5.60 trillion naira in 2021. By 2023, total revenue is expected to reach 13.98 naira.

The key macroeconomic assumptions are based on a benchmark crude oil price of $ 57 per barrel for 2022, a production level of 1.88 million barrels per day, and an exchange rate of N410 to the US dollar, a inflation rate of 10% and nominal GDP of 149,369 billion naira. I find some of them to be quite optimistic. We have never reached single-digit targets for inflation since 2015. It is highly unlikely that we will be able to reduce it to the 10% forecast during an election campaign in 2022. The recent decision to move currency sales BDCs to commercial banks led to a marginal decline of the naira against the dollar. With all the geopolitical tensions and uncertainties, I don’t see the naira stabilizing anytime soon.

Times are not easy for the leaders of an economy like ours. Inflation and unemployment are spiraling out of control, in a context of slow growth, geopolitical tensions and widespread insecurity. Economists describe our current economy as “stagflation”. Two American academics, Robert Rotberg and John Campbell, referred to our country as a “failed state” in an article they recently wrote in the iinfluential newspaperal, Foreign Affairs. In line with our opening remarks, the international rating agency Fitch recently issued a forecast that by the end of 2022 we will need over 300% of our income to service our debt. .

To better appreciate the challenges we face, a trend analysis is useful. As of March 31, Nigeria’s total debt stock stood at 33.107 trillion naira (US $ 87.239 billion in dollars). The external component of the total stock of national debt stood at $ 32.86 billion (N12.4 trillion). Nigeria’s current debt-to-GDP ratio is estimated at 31.94 percent. It almost doubled from a low of 17.4% in 2014. And right now, the National Assembly has approved a new wave of borrowing worth billions of dollars more. You and I know that you are not using GDP to pay off your debt; you use government revenues to pay off your debts. In 2014, before the current CPA-led regime came to power, the former Goodluck Jonathan administration paid 500 billion naira in debt service. This represented only 10% of total government revenue. We were in a relatively comfortable position. The following year, 2015, coinciding with a global recession and a precipitous drop in global oil prices, the debt repayment bill tripled to 1.5 billion naira, amounting to 30% of government revenue. . In 2017, the figure galloped to N3tn, which amounted to 61.6% of government revenue. In 2020, the government achieved a total of 3.25 billion naira in revenue while spending 2.34 billion naira on debt service. This represented 72% of the revenue allocated to servicing our loans for that year. It is interesting to note that in the same year the government spent only 1.7 billion naira on capital expenditure.

A recent budget implementation report says the federal government spent 1.8 billion naira on debt servicing in the first five months of this year alone, accounting for 98% of total income earned during this period. From January to May, the government generated a total of 1.84 billion naira in total revenue, a significant shortfall from the projected figure of 3.32 billion naira. This obviously indicates that if the same trend were repeated for the rest of the year, we would be spending 98% of all income on debt service.

Interestingly, the 2021 budget allocation for capital spending stands at 3.4 billion naira, or 29% of the total annual budget. A situation where debt service obligations exceed the allocation of capital expenditure would be of particular concern. All of the above suggests that there is an accelerating trend in increasing both the amount of debt and the percentage of income spent on servicing our repayment obligations. Judging by the laws of statistical probability, the change in the percentage of receipts on debt service is expected to increase very significantly over the coming year.

As difficult as the economic conditions are, we have a few options. The late John Magufuli, former President of Tanzania, decided to reduce the level of borrowing to the bare minimum, with extraordinary results. The Chinese had offered him a loan of 10 billion dollars. When he saw that in the fine print they wanted to secure the port of Dar es Salaam for 99 years, he declined the offer. Rather, it focused on increasing national income, drastically reducing overseas travel, and rigorous implementation of infrastructure projects. The results have been outstanding. Tanzania enjoyed one of the fastest growth rates in the world without going through the frenzy of external borrowing.

We Nigerians have a lot to learn from this. As far as I’m concerned, if we have to borrow, let it be strictly for projects with guaranteed returns on investments. We should also reduce the cost of government while closing some of the loopholes that are sapping our foreign currencies. We can run government while living within our means. We also need to control the cost of governance. The government should also engage with our creditors to restructure our loans to ensure the fiscal space that will allow us to continue to grow while expanding the boundaries of collective welfare possibilities.

The worst a government can do under our circumstances is to succumb to the penchant for increasing taxes and tariffs. It would amount to folly consumed in a time of economic stagnation. There is the phenomenon of the Laffer curve, associated with the American economist Arthur Laffer. It shows that there is an optimal level where the government can impose taxes. When you exceed this optimal level, you will actually experience a disproportionate decline in tax revenue. This is more likely to be the case during a recession. The great economist, John Maynard Keynes, taught that in times of economic lows, managers of the economy should ensure that more money is placed in the hands of households, businesses and businesses in order to stimulate the economy. aggregate demand. Therefore, widening the tax net is the way to go. Many countries collect taxes through lifestyle audits. When a man keeps a dozen exotic cars in his mansion garage and rents private jets for his trips, authorities have a duty to do a lifestyle audit to make sure his tax payments reflect his high lifestyle.

I would also like to insist on a more rigorous accountability system for revenue generating agencies – customs, federal tax service, Nigeria National Petroleum Corporation and others. We hear bloody stories of billions of billions withheld, sometimes from private bank accounts.

Boosting income in our situation would also require securing a healthy macroeconomic environment and an attractive business ecosystem for businesses to thrive. The current cost of running the government is far too high. There are many loopholes and loopholes that facilitate financial leakage and bleeding. These must be rigorously plugged.

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