Deficit Budgeting, Government Borrowing, Borrowing Cost, Fiscal and Monetary Stability By Prof. Mike Kwanashie Dept. of Economics Ahmadu Bello University Zaria
Outline • Introduction • The Budget • Deficit Budgeting • Government Borrowing • Borrowing Cost and the Debt Burden • Fiscal and Monetary Stability • Conclusions
Introduction • The state and economic management (the nature and changing role of the state) • Fiscal behaviour of the state • Allocative, distributive, regulatory and stabilization functions of the state • The state and economic growth • The state and markets • The state and poverty alleviation • The budget as a critical instrument of state power
The Budget • Budget as an annual statement of projected outlays and revenue during the next financial year • Budget is a tool for managing the economy (key instrument of fiscal policy). • The budget in most democracies today has four broad objectives; to state the scale and allocation of projected government’s outlays; to state projected revenue profile thereby projecting either a surplus, balance or a deficit budget; to stabilize the economy and to encourage the economy long term growth and balanced regional development. • Components of the budget - revenue account and the expenditure account. • The revenue accounts details the expected sources of revenue for government activities in the coming fiscal year. • The expenditure accounts details planned government expenditure for the coming financial year under two heading – recurrent and capital.
The Budget (cont.) • The government overall budget balance is equal to its revenue minus its outlays. • Primary balance is equal to its revenue minus its recurrent outlays • If projected revenues exceed projected outlays, the government has a budget surplus • If projected outlays exceed projected revenue the government has a budget deficit. If both are equal government has a balanced budget. • Classical view of budget balance (live within your means) • Modern view of budget balance (economic realities determine budget balance)
Deficit Budgeting • Policy of deficit budgeting (rationale) • The philosophy of functional finance • Sustainability of deficit budgeting • The Fiscal Responsibility Act - deficit should not exceed 3 percent of GDP • Nigeria’s primary deficit (challenges) • The biggest item of recurrent cost is the personnel cost. Personnel cost increased from N851 billion in 2008 to N1.3 trillion in 2010. This is an increase of about 61 percent and it has gone up to about N1.4 trillion in 2011.
Deficit budgeting cont’d • Deficits and subsidies • Politics and the deficit • Financing the deficit (when a government incurs a deficit, it can meet this deficit by running down its cash reserves, selling some of its assets like properties, printing more currency and using it – financing the budget deficit through ‘ways and means advances’, or it can engage in short term borrowing from the banking system – more specifically by means of Treasury Bills. The treasury bills are mostly purchased by the Central Bank).
Government Borrowing • To borrow or not to borrow • Domestic borrowing by the government to finance the deficit (as against increasing taxes and prices of public goods – removal of subsidy-to raise revenue) • Debt and interest payment • Debt for consumption • Debt for investment • Foreign debt • Domestic debts
Borrowing Cost and Debt Burden • Financing deficit by selling bonds to the public • Borrowing from the banking system (crowding out private borrowing) • Borrowing through debts to domestic contractors (impact of projects) • Interest and the debt burden • Debt servicing and future budgets
Fiscal and Monetary Stability • Prudential fiscal policies • Stabilization of the economy through the budget • Fiscal activism and monetary accommodation • Stabilization function of monetary policy (excess liquidity due to fiscal actions; exchange rate fluctuations due to fiscal actions) • Inflation targeting
Conclusions • Generally Nigeria’s fundamentals have remained strong despite recent challenges to the economy. The country has sustained relatively strong growth although it remains non-inclusive with growing unemployment. The debt stock though increasing and causing concerns have not reach the crisis point and the external balance sheet has remained respectable. The country has made deliberate efforts to build up and stabilize a strong international reserve position in recent time despite increasing public expenditure and growing public sector deficit. The budget must be part of this success story unless state failure becomes a reality.
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