Ending the Bias of Fiscal Policy Against Future Generations
The dust raised by the 2017 budget has settled. Other issues of our national existence soon overshadowed the late passing and signing of the budget. But it is on the implementation of the budget itself that the dust has piled. Fund releases for the capital expenditures have missed timeliness, disrupting work at project sites.
Certainly, the furore over the fiscal policy of the President Muhammadu Buhari administration will come up over and over again. Indeed, the Minister of Budget and National Planning, Senator Udoma Udo Udoma, was quick to re-enact some of the issues when on July 27th he announced the 2018 – 2020 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP). According to the plan he unveiled, the 2018 budget will be expansionary, rising to N7.9 trillion from N7.44 trillion in 2017.
Like the previous and current budgets, the increase in the 2018 budget proposal is fuelled by the deficit and high-stake bet on revenue from oil export. The fiscal deficit will rise to N2.77 trillion in 2018 from N2.35 trillion in 2017. Oil price of $45 per barrel and 2.3 million barrels production per day have been targeted.
To be clear, the trending combination of massive borrowing for deficit financing and reliance on oil revenue is toxic. It is incompatible with what might be considered as either a sustainable, or responsible fiscal policy for the country. Even in the context of the existing economic challenges, fiscal policy seems more blameworthy than inspiring. The 2016 budget failed to deliver intended economic growth and job creation. While this may be blamed on lacklustre implementation, the current and future budgets will meet additional encumbrances.
The transition in the global energy market will not support budgeting on nearly the bestcase scenario for oil price and domestic production. Virtually all the major oil consuming countries have announced deadlines for phasing out fossil-fuel cars. India and Germany plan complete transition to electric cars by 2030; UK and France by 2040; while 12% of cars in China will be electric by as early as 2020. This is apart from the uptick in the production of renewable energy from solar and wind. In the United States, this transition has gained momentum in the marketplace, overriding the lack of political support for renewable energy.
Innovation is now the catalyst for the energy market transition. It is simply foolhardy to bet against innovation in today's world where major industries, ranging from manufacturing, media to finance are facing major disruptions by technology. Thus, in the context of the MTEF, which is a three-year rolling plan and countercyclical in objective, the 2018 budget plan glosses over the risk of fiscal instability in the subsequent years.
It may be argued that the problems with the fiscal policies of 2016, 2017, and 2018 in prospect, are magnified by looking at the budgets on paper. For instance, while the government stated it would borrow $5.5 billion externally in 2016, it actually raised only about $2 billion over a period that extended to early 2017. The 2017 plan is floundering, even as foreign lenders would avoid the impression of 'sponsoring' electioneering in Nigeria in 2018. In which case, the risk of foreign debt spiralling out of control is quite benign.
And with regard to oil, the government is already talking of a forthcoming “zero oil” Nigerian economy. Moreover, government is also hedging with Dangote's refinery. The refinery is expected to create a huge domestic market for Nigerian crude when it comes on stream in 2019, nullifying the impact of diminished foreign demand.
Both arguments are faulty. While the external borrowing plans have been flapping, domestic borrowing has ratcheted up. Between December 2015 and March 2017, domestic borrowing fuelled the total public debt stock by 65 percent, from N12.6 trillion to N19.2 trillion, according to data by the Debt Management Office. Granted the debt level is about 15 percent of GDP, debt-service-to-revenue ratio has crossed 40 percent. The Finance Minister, Kemi Adeosun, recently acknowledged this as a real cause for concern.
And if Dangote's refinery sees the domestic market simply replace the international markets for Nigerian crude oil, it would mean the country has chosen to swim against the tide, fundamentally delinking from the innovation in the emergent global energy market. In practical terms, therefore, the country would become a dumping ground for obsolete technologies.
The fiscal authorities need to pause and reexamine their plan. Little in the current policy framework supports its continuity. The current recession – which is used to justify short-term planning – has brought into starker terms the dilemma of policy consideration for the current and future generations. But based on the current budget pattern, the policymakers may be rightly accused of bias against the future generations.
To dispel this notion, the government has to make a choice. It should either anchor its budgets on revenue from hydrocarbon and taxes, or taxes and borrowing.
The first option of maximising hydrocarbon revenue and taxes would appear reasonable, given the thinking that oil export revenue is needed to facilitate ongoing efforts at diversification of the economy. The head room for borrowing would then be preserved strictly for the future “zero oil” economy, which no less a personality than the Vice President Yemi Osinbajo has alluded to.
The second means the proceeds of oil export should be saved for future generations. Over the next few decades, fiscal policy would focus on tax revenue, leveraging off rapidly growing foreign currency reserves from saving oil revenue. This could see the fiscal deficit capped slightly above 3 percent of GDP, which is specified in the Fiscal Responsibility Act 2017.
Since the leaders over the years squandered the opportunity to sustainably develop the economy with oil revenue, the second option would be more ideal for the current ruling class. But it would serve more than their comeuppance. Budgeting without reliance on oil will unleash the innovation and the survival instincts that we have been abstracted from since oil exploration began in Nigeria.
There is no easy path to sustainable economic growth and fiscal viability for the country. Fiscal policy should start to promote innovation among the current generation and demonstrate responsibility for the wellbeing of future generations.