Lesson Note

Subject: Economics
Topic: Budget

Lesson Summary


A budget may be defined as a financial statement of the total estimated revenue and the proposed expenditure of a government within a given period of time, usually a year. The budget contains two accounts viz revenue and expenditure.
In Nigeria for example, the financial year, i.e the period of the budget, starts on 1st of January and ends on 31st of December. A budget therefore consists of a package of proposals regarding revenue which is likely to be derived from various sources and expenditure which is likely to be met on various items.
In Nigeria, the Head of State (or President) or the Governor (of a state) prepares the budget with the assistance of the Ministry of Finance or Ministry of Budget and Planning. For a budget to be effective, it must be scrutinized and approved by the highest legislation body in the country, e.g the National Assembly and the state assembly in the case of the state.

Types of Budget

1. Balanced budget: There is a balanced budget if the estimated government revenue is equal to the proposal expenditure for a given financial year. In this case, nothing is left as reserve from the money collected as revenue by the government.
2. Budget surplus: There is budget surplus if the proposed government expenditure is less than the estimated government revenue during a financial year. In other words, the government spends less than it intends to get during a financial year. One good thing about budget surplus is that it leads to an increase in government financial reserves as expenditure is less than revenue.

Uses of budget surplus

i. It is used to reduce aggregate spending (demand) thereby reducing inflationary pressures in the economy.
ii. It might be used to revitalise the economy if the government has to borrow money from external sources, e.g the International Monetary Fund (IMF).
3. Budget deficit: There is budget deficit if the estimated government revenue is less than proposed expenditure for a given financial year. In other words, the government spends more money than it is likely to get from various sources. There is no reserve under budget deficit, rather it had to source for money by:
i. Usage of previous reserves
ii. Borrowing money to finance the deficit
iii. The Central Bank may have to print more money

Uses of budget deficit
i. It is used to increase aggregate expenditure (or demand) and reduce Unemployment.
ii. It is used to correct deflation
iii. It is used to finance projects which involve huge capital outlay
iv. It can also be used to finance a national emergency such as war.

Importance or uses of budget

i. Budget is used as a means of raising revenue
ii. It is used to correct balance of payment deficit
iii. It is used to correct deflation
Iv. It is used as a tool for economic planning
v. It is used to control inflation
vi. Budget is equally used as a means of enhancing public welfare and reducing income inequality in the country.

National or Public Debt

National or public debt refers to the debt a country owes to its citizens or other countries or organisations such as the International Monetary Fund IMF and the World Bank. The debt which a country owes its citizens is known as internal debt while the debt owed foreign governments and organisations is known as external debt.

Instrument or Source of government borrowing in Nigeria

The government of Nigeria can use the following instruments to borrow money. These include:
i. Treasury certificate: These are securities for medium term borrowing. They are for a period of one to two years and they carry higher rate of interest than treasury bills.
ii. Treasury bills: These are securities used for short-term borrowing for about 90 days. This carries low rate of interest.
iii. National savings scheme: Government can also borrow money from the national savings scheme to finance its project.
iv. Development stock: These are referred to as government stock and they are used for long term borrowing of up to five years and above.
v. Negotiations: The government can borrow from external financial institutions such as the Paris Club, International Monetary Fund (IMF), World Bank etc.

Reasons Why Government Borrows

i. To finance budget deficit: When a government suffers deficit budgeting, it may borrow money in order to finance such budget.
ii. To finance huge capital projects: Money can be borrowed by government in order to enable it finance some huge capital projects.
iii. To meet cost of national emergencies: Government can embark on borrowing to enable it meet the cost of national emergencies such as war, drought, famine, hurricane etc.
iv. To reduce economic burden on tax payers: Government can decide to reduce the economic burden on tax payers by borrowing money to execute proposed projects.
v. To provide employment opportunities: Government may equally borrow to establish certain projects capable of generating employment opportunities for the people.
vi. To service some loans: Government can borrow money in order to service another loan earlier taken, either from internal or external sources.
vii. To control fluctuations in national income: A fall in expected income may warrant a government to borrow in order to meet up the required fund to finance its projects.

Some Terms Associated With Budget

i. Debt servicing: Debt servicing refers to the payment of interest on loans taken by the government and the repayment of the capital sum at a future date.
ii. Debt management: Debt management refers to the process or situation whereby the government structures the country’s debts, which are denominated in foreign currency, with the fundamental aim of reducing the total external debt stock.

Burden Of National Or Public Debts

The extent of the burden of national or public debt is determined by the type of debt, whether internal or external, the purpose of the debt and the period of repayment.
A huge national debt can affect the economy of a country in the following ways;
i. The servicing of an external debt will involve an outflow of resources, which can otherwise be used for economic development.
ii. It can reduce the availability of foreign exchange in the form of depleted foreign reserves.
iii. The servicing of a large internal debt will limit government’s ability to provide social capital and services for the people.
iv. A large domestic debt will influence the distribution of income in the country.
v. If a large internal debt is sustained by a high rate of interest, it will reduce private investment on capital goods.
vi. A large external debt can make a country to be susceptible to the whims and caprices of external creditors.

Revenue Allocation in Nigeria

Revenue Allocation refers to the sharing of the nation’s wealth between the component parts of the nation, that is, between the federal, state and local governments.
Revenue allocation is grouped into two major parts. These are;
1. Vertical revenue allocation: This involves the sharing of the revenue accruing to the federal account among the three tiers of government – federal, state and local governments.
2. Horizontal revenue allocation: This refers to the sharing of revenue accruing to the federation accounts among the units within a given level of government. It involves certain principles based on some factors to be applied in revenue allocation. These prinicples include population size, land mass, derivation, ecological problems, etc. It also involve the formula which refers to the system of relative weight assigned to various principles, e.g federal government-40%, state-20%, local government-15%, mineral producing area-10%, ecological problems-5%, special fund-5%, others-7%. These are just tentative figures
The revenue allocation formula used in 1992 by the government from the federation account include:
Federal government’s share = 48.5%
State government’s share = 24%
Local government’s share = 20%
Ecological problems = 2%
Mineral producing areas = 3%
Special fund = 7.5%
Others = 2.5%
It should be noted that there is no fixed revenue allocation. It chamges from time to time. The Revenue Mobilisation Allocation and Fiscal Commission (RMFC) is always at work trying to work out a proposal for a new revenue sharing formula. For example, the oil producing states are currently getting 13% oil derivation from the federation account. As of July 2005 during the Political Reform Conference, the oil producing states agitated for 25% of the federation account and if this is approved by the National Assembly, the entire formula will be changed. The government offered them only 17%.

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