Deficit Budgeting, Government Borrowing, Borrowing Cost[1]

Report
Deficit Budgeting, Government
Borrowing, Borrowing Cost, Fiscal
and Monetary Stability
By
Prof. Mike Kwanashie
Dept. of Economics
Ahmadu Bello University
Zaria
Outline
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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
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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).
Deficit budgeting cont’d
Table 1
Fiscal Balance
Item
Years
2009
2010 budget
2011budget
2012
Total Revenue
1,704.99
3,179.87
2,836.43
3,462.65
Recurrent Expenditure
2,134.86
3,394.97
3,220.21
3,364.60
Capital Expenditure
919.48
1,764.69
1,005.99
1,284.23
Aggregate Expenditure
3,054.34
5,159.66
4,226.19
4,648.85
Gross
Domestic 24,794.23
Product (GDP)
32,648.31
38,427.06
39,904.26
Primary Deficit
429.87
215.10
383.78
626.62
Overall Deficit
1,349.35
1,979.79
1,389.76
1,186.20
Source: PARP Review of the 2011 Budget Proposals and 2012 revised budget documents
Deficit budgeting cont’d
Table 2
Fiscal Deficit and Its Financing
Item
Year
2009
2010
2011
2012
Overall Deficit
-1,349.35
1,979.79
1,389.76
1186.20
Deficit Financing
1,008.30
1,979.70
1,389.76
1186.20
Domestic
Sale of Government
Property
Privatization Proceeds
Excess Crude Account
Signature Bonus
Stabilization Fund
Borrowing
914.70
-7.00
---907.70
1,904.79
9.56
107.21
300.13
132.31
-1,346.58
1,389.76
-242.21
-132.31
150.00
865.24
1186.20
75
306
749.44
93.00
75.00
--
External
International Bond
0.0
Source: Review of the 2011 Budget Proposals and 2012 revised budget documents
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
Government Borrowing
Table 3
Debt Profile of the Federal Government
Item
Year
2009
2010 b
2011 b
2012
Debt Stock (US$ b)
External Debt
Internal Debt
25.74
3.95
21.80
35.05
5.05
30.60
37.29
6.26
31.03
39.94
5.63
34.31
Debt Stock (N b)
External Debts
Internal Debts
3,812.63
584.60
3,228.03
5,347.27
757.28
4,589.99
5,593.16
938.63
4,654.53
6,190.65
872.65
5318.00
Debt Service Payments 3,660.25
(US $ m)
428.00
External Debt
3,232.25
Internal Debt
3,615.88
259.44
3,356.44
3,615.88
259.44
3,356.44
3,730.47
Debt Service Payments 542.09
(N b)
63.39
External Debts
478.70
Internal Debts
542.39
38.92
503.47
542.39
38.92
503.47
Source: CBN, Annual Report and Statement of Accounts, 2010; DMO Website; and Documents Accompanying the 2012 Budget to the National
Assembly from Budget Office of the Federation (BOF).
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.
THE END
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