Fiscal Sustainability: Between Nigeria’s Debt Plan and the 2018 Budget

By - Kingson Elendu

Debt servicing costs are becoming a burden in Nigeria, and was expected to absorb more than 60 percent of government revenues in 2017, according to the International Monetary Fund’s (IMF) Regional Economic Outlook released on 30 October, 2017. The World Bank, through its Senior Economist, Gloria Joseph-Raji, also warned that the cost of borrowing or paying interest on Nigeria’s debt was not sustainable as revenues to make such payments had dried up, and confirmed its fears that the future of unborn generations is being mortgaged by the federal government.

These warnings were issued to demonstrate lack of fiscal or public finance sustainability in government’s recent plan to borrow about $5.5 billion to finance the 2017 budget deficit, and  the N8.06 trillion 2018 draft budget proposal approved by the Federal Executive Council (FEC) on 26 October, 2017.

The concept of fiscal or public finance sustainability is the ability of a government to sustain its current spending, tax and other policies without threatening government solvency (ability to meet long-term financial obligations) or promised expenditures. It considers the ability of the government to meet the costs of its debt through future revenues without any major interventions in tax and spending patterns, as sustainability requires a non ever-rising tax ratio.

The most commonly used criterion for fiscal sustainability is the government's inter-temporal budget constraint – which states that the initial debt level should be equal to the present value of future surpluses. That is, the government debt must be backed by expected future cash flows. If this condition is met, the government avoids excessive debt accumulation and can always pay its debts as they become due.

But, is Nigeria treading on the path of fiscal sustainability with our current budgeting and borrowing plans?

How Can Nigeria Achieve Fiscal Sustainability?

Building a sustainable public debt policy and budgeting requires that Nigeria should avoid fiscal conditions that may hinder economic growth, cause tax burdens to rise, or transfer significant costs to future taxpayers.  

Good understanding of the following multiple dimensions of fiscal sustainability will guide the nation towards responsible public finance policy:

Intergenerational sustainability/Equity 

The concept of sustainability is grounded in the norm that responsible governments should avoid doing harm that will appear decades after the relevant policies were adopted. Intergenerational sustainability in this case involves the capacity of government to pay current obligations without shifting the cost to future generations, and reflects concern that government should avoid accumulated long-term liabilities that do not appear in current budgets or balance sheets but may disadvantage future generations when the debts are due. This entails ‘fair/equitable’ sharing of the budget’s collection, tax burdens, expenditure benefits, and distribution of scarce resources across successive generations.

Unfortunately, the latest data from National Bureau of Statistics (NBS) indicates that the Federal Government has already accumulated over $15billion in foreign debt and N14Tn (about $45billion) in domestic debt as at June 30th, 2017, and this has caused debt servicing costs to absorb more than 60 per cent of government revenues in 2017. As the revenue generation of the nation declines, the implication of the current plan to borrow additional $5.5 billion, is that the repayment of these debts is likely to be shifted to the future in order to satisfy the needs of the present generation.  

Through this perspective, it is clearly not fair to provide benefits to one age cohort that will have to be paid for by taxes levied on younger cohorts. This concept of sustainability is embedded in Australia’s Intergenerational Report which asserts that: “Fiscal sustainability…ensures [that] future generations of taxpayers do not face an unmanageable bill for government services provided to the current generation”, and Britain’s Long-Term Public Finance Report which declares a primary objective of fiscal policy of being to ensure “that spending and taxation impact fairly both within and between generations”.

Tax stability/sustainability

Tax stability/sustainability is the capacity of government to meet future obligations with existing tax burdens and without regular tax rate increases. This ensures that the fiscal projected trajectory of spending would not compel higher taxes (or a larger debt) in the future, but lower or sustain tax burdens at their current level.

If the government can experience deficit in 2017’s N7.44 trillion budget resulting to the current plan to borrow about $5.5 billion, then the 2018 draft budget estimated at N8.06 trillion (about 15.5 percent increase over 2017 figure) will raise additional debt burden. This is obvious as the N5.65 trillion projected revenue or income to be generated by the government in the 2018 draft budget is lower than the estimated N8.06 trillion public spending. Considering the tax sustainability dimension, the reality is that more money may be needed to be squeezed out of the future taxpayers to repay the accumulated debt.  

The underlying premise of this sustainability argument is that tax burdens are already very high and that governments should adopt prudent fiscal positions to avert future increases and to manage efficiently existing resources. The sustainability norm defines tax stability as a core fiscal objective and seeks to discourage the culture of generating additional tax revenue to cover the looming rise in public spending option.  

Solvency

Solvency is the ability of government to pay its financial obligations or promised expenditures. This is usually a problem in countries that take on excessive debt, as well as in developing or emerging market countries, particularly those that have boosted public spending, taken on additional debt, and have an inadequate tax base. During economic downturn, often caused by decline in the revenue, when capital flees, or the currency falls in value, these governments rollover debt at very high interest rates while borrowing more to stay afloat. 

Indeed, after the heavy scars of debt exit in 2006, Nigeria is still treading on the same calamitous path of excessive debt that may deter its credit worthiness and scare foreign investors.  For example, Catherine Pattillo, IMF Chief of Fiscal Policy observed at a monetary briefing in Washington on 14 October, 2017, that two thirds of all Nigeria’s tax revenue is presently applied to just servicing debt annually.

Sustainable Growth

Public finances are sustainable if they are built on a long-term policy that sustains economic growth, and is unsustainable if a country’s debt is growing faster than its Gross Domestic Product (GDP) - the monetary value of all the finished goods and services produced within a country.

The best way for government to meet future obligations, is not by increasing national budget, but by having a robust economy which supplies government with additional revenue. So, whatever debt-to-GDP ratio is chosen as a target for stabilisation or economic recovery, it must be low enough to inspire confidence in the investors who buy Nigeria’s debt certificates. 

Conclusion:

As a nation, we cannot continue to borrow as the only solution to pay off debts, but should drive a development trajectory that can run a primary surplus, where current government spending should be equal or less than the current income. This is applicable in Britain where debt-to-GDP ratio has ranged between 20 and 270 per cent and averaged 117 percent over the past 300 years. Although British debt may have been considered unsustainable on a number of occasions during that long period, the fact that the British government never defaulted meant that the budget was sustainable. With the Treasury Single Account (TSA) in place, the federal government is able to know how much revenue the nation has per time and use funds efficiently, as suggested by the World Bank.

It is possible for Nigeria to maintain fiscal sustainability with investments directed towards boosting economic vitality such as producing an educated workforce, providing efficient transport, investing heavily in agriculture, infrastructure, innovation and research, support for more SMEs, investing more in highly innovative entrepreneurs and providing other favourable conditions for economic growth.

 

Reference

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