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IMPACT OF SUCCESSIVE BUDGETS ON NATIONAL DEVELOPMENT Saibu, M. Olufemi PhD. Department of Economics, University of Lagos, Akoka, Lagos. email: firstname.lastname@example.org
The Outline of the Presentation • Introduction • Theoretical link between Budget and the Economy • Budget and Current Economic Situation in Nigeria • Conclusion • Policy Recommendation
Introduction • WHY GOVERNMENT IN THE FIRST INSTANCE? • According to Adam Smith the state exists to; • Protect citizen from external aggression • Administer exact justice and protect against internal aggression 3. Erect public works and institution that may be unprofitable for individuals
In modern days the government performs basically three functions; • Regulation: this entails enacting laws to create and amend property rights to redistribute resources • Price setting: deployment of resources where necessary through taxes and subsidies • Production: here the government is faced with the responsibility of providing some basic needs of the society ranging from education, health services, social amenities among others.
What does the government uses? • National Development Plan and the Annual Budget. • The Budget is an expression of government financial role in the growth process of an economy. • Development plan is a statement of how the financial position can be translated into long term development. • Growth cumulates to development • Growth that trickles down to the generality of the society is called Development • So we cannot talk of Development without talking about Plans • But we cannot also talk about Plans without talking about Budget • Budget is a slice from the whole lump every year • the smaller unit of development framework of the economy • the financial constitution of government.
Theoretical Link between Budget and the Economy • How does Budget Affect the Economy • Budget can have both micro and macro impact on the economy. • Micro Impacts; • budget decisions impact the economy through taxation. • Increase in both direct and indirect taxes; affect both household spending and business spending. • A rise in direct tax has the effect of reducing the post-tax income of those in work • makes the individual to work more hours to maintain his/her target income. • Leads to less work since the higher tax might act as a disincentive to work. • Of course most workers have little flexibility in the hours that they work. They will be contracted to work a certain number of hours, and changes in direct tax rates will not alter that. • In recent times tax consideration is becoming an issue in determining the place people want to work • Changes to the tax and benefit system also seek to reduce the risk of the ‘poverty trap’ • If tax and benefit reforms can improve incentives and lead to an increase in the labour supply, this will help to reduce the equilibrium rate of unemployment i.e voluntary employment). • Changes to indirect taxes in particular can have an effect on the pattern of demand for goods and service. • The use of indirect taxation and subsidies is often justified on the grounds of instances of market failure
The success of most of the Asian economies that experienced higher growth rate had been attributed to the effective use of this budget instrument in stimulating both domestic and inward investment in these economies. • The very low rates of company tax have been influential although, it is not the only factor that has underpinned the sensational rates of economic growth enjoyed by these economies over the last fifteen years. • Changes in tax system and some areas of government spending can be used to stimulate investment in technology and innovation. • E.g. Improvements in our transport system would add directly to aggregate demand, but would also provide a boost to productivity and competitiveness. • Similarly increase in capital spending in education would have feedback effects in the long term on the supply-side of the economy, the skills of the labour force and social infrastructure.
Macroeconomic Impact of Budget • Changes in spending and taxation can be used “counter-cyclically” • That is to smoothen volatility of real national output particularly when the economy has experienced an external shock. • The National Income is represented by the equation: • Y=C+I+G+X-M Where: Y = Aggregate output/income C = Consumption of goods and services G = Government expenditure X = Exports M = Imports. • It must employ productive forces. Government output is heterogeneous, consisting partly of tangible products and partly, intangible products. • The most intangible products include legal security, well regulated traffic, the right supply of money, social welfare among others . • The overall effect of fiscal policy on the level of aggregate demand is known as the “FISCAL STANCE". If policy increases aggregate demand then fiscal stance is expansionary and or reflation. • If it reduces aggregate demand , it is contractionary. Fiscal stance is normally measured with reference to the government financial balance, or the difference between revenue and expenditure, which is generally expressed as a percentage of Gross Domestic Product (GDP).
The inflationary components of the National Income are Investment Expenditure, Exports Earnings and Government Expenditure (I, X and G) while the deflationary components are Savings, Imports and Taxes (S, M and T). • National Income is in equilibrium only when I + X + G = S + M + T (that is, when injections equals withdrawals). An income injection given either by exports (X) or by Government Expenditure (G), or by Investments (I), leads to an increase of National Income that is, , this is the multiplier . The concept of foreign saving can be approached from two different directions. • Foreign saving can finance the amount by which investment exceeds domestic saving, F=I-S. Alternatively, foreigners can finance the trade deficit, which is the amount by which imports exceed exports, F = M- E. • Because of the way National income is measured, foreign saving must be the same whichever definition we use. • The size of the national income and therefore the level of employment can be influenced by manipulating G and T (budgeting policy).
Where do the IMPACTS of the Budget come from? • There are two ways fiscal policy as instrument of budget can be used to impact the economy at macroeconomic level. • Discretionary changes in fiscal policy and 2.Automatic Stabilizers. Discretionary fiscal changes are deliberate changes in direct and indirect taxation and government spending – for example a decision by the government to increase total capital spending on the road building budget or increase the allocation of resources going direct into the NHS. Automatic fiscal changes are changes in tax revenues and government spending arising automatically as the economy moves through different stages of the business cycle.
These changes are also known as the automatic stabilizers of fiscal policy (that is changing the (t)) • Tax revenues: When the economy is expanding rapidly the amount of tax revenue increases which takes money out of the circular flow of income and spending • Welfare spending: A growing economy means that the government does not have to spend as much on means-tested welfare benefits such as income support and unemployment benefits • Budget balance and the circular flow: A fast-growing economy tends to lead to a net outflow of money from the circular flow. Conversely during a slowdown or a recession, the government normally ends up running a larger budget deficit. • Estimates from studies have found that the effects of the automatic stabilizers of fiscal policy can reduce the volatility of the economic cycle by up to 20%. • In other words, if the government is prepared to allow the automatic stabilizers to work through fully, the fiscal policy can help to curb the excessive growth of demand during a boom, but also provide an important support for income and demand during an economic downturn.
The impact of government budget is much dependent on the stance of the government in term of their perception about the economy. • The fiscal stance is a term that is used to describe whether fiscal policy is being used to actively expand demand and output in the economy (a reflationary or expansionary fiscal stance) or conversely to take demand out of the circular flow (a deflationary fiscal stance). • A neutral fiscal stance might be shown if the government runs with a balanced budget where government spending is equal to tax revenues. Adjusting for where the economy is in the economic cycle, a neutral fiscal stance means that policy has no impact on the level of economic activity. • A reflationary fiscal stance happens when the government is running a large deficit budget (i.e. G>T). Loosening the fiscal stance means the government borrows money to inject funds into the economy so as to increase the level of aggregate demand and economic activity. • A deflationary fiscal stance happens when the government runs a budget surplus (i.e. G<T). The government is injecting fewer funds into the economy than it is withdrawing through taxes. The level of aggregate demand and economic activity falls.
Has successive Budgets Led to Development? • It has led to economic growth • Development , No! • The Budget impact on the National economic Development has not been satisfactory, • Because the current increase in per capita income may not be sustainable. • Is there any prospect? • Yes if……..
Budget is in line with Development Strategy and Plan • Budget preparation and compilation is no more playing with statistics and figures. • Budget moves from allocation or appropriation but to actualization and implementation • That is goes from mere government statistics that is only seen but not felt to real economic figures that felt and enjoyed by all. • Budget programme should emphasis employment generation and not poverty reduction (over 46 poverty strategies programmes have been implemented where are the results?) • We have to change tactics and budget mindset • Budgeted funds are not “FREE MONEY” but PEOPLE’s Sweats ( tax and labour)
In designing subsequent budget, the government must ensure that; • Budget is designed such that it is national development oriented by targeting real growth and improving the general living condition of the people (inclusive growth not jobless growth as we have currently). • For instance budgetary allocation and support must be targeted at projects that have direct impact on the poor. More importantly, government should de-emphasis the current approach of poverty reduction to employment generation. • No country in the world today progresses through poverty reduction strategy rather, most countries developed through massive industrialization and capacity building that create jobs and income both intensively and extensively. ----- ( Amnesty, Youwin, NAPEP)
The budget must be stability oriented. Macroeconomic policy must seek for example improvement in the indicators such as inflation, debts and exchange rate. • Currently, the real interest rate is negative and yet the cost of borrowing is exorbitantly high. • This serves as a double edge sword that discourage saving and investment. • The current macroeconomic conditions are not saving and investment friendly
The government must adopt a public finance strategy that is credible and consistent with reality on ground in the Nigerian economy. • A middle period review of a policy by government after the economic agents had factored the initial policy in their economic decision create doubt and self help in the economy.