Fiscal austerity vs. revenue deficit:Analysts divided over financial conundrum facing Nigeria’s SNGs 

In Nigeria, the distribution of expenditures among different levels of government has been a highly controversial issue. Each state’s budget season has sparked heated debate over whether subnational governments (SNGs) have a spending problem or a revenue problem. 

Proponents of the spending problem argument argue that state governments should focus on controlling their expenditures and making more efficient use of the resources they have. On the other hand, those who believe that the problem is a lack of revenue argue that state governments need more financial resources to fund essential programmes and services. 

However, it is clear that the current system of allocating expenditures is inefficient and in need of reform. According to a 2022 public finance review by the World Bank, despite its vast development needs, Nigeria spends only $220 per person per year. This is one of the lowest levels of spending in the world, both in absolute terms and as a percentage of GDP (12%). The low level of public spending translates into poor development outcomes, as Nigeria is ranked 167th out of 174 countries on the World Bank’s Human Capital Index.

The World Bank report also highlighted that not only is overall spending low, but spending on social sectors such as education, health, and social protection is particularly low, accounting for less than a quarter of the national budget. This is in stark contrast to other countries at a similar level of development, which typically allocate a much larger share of their budgets to social sectors. This low spending on social sectors has a direct impact on development outcomes, as it leads to under-investment in areas such as education and health, which are critical for human capital development.

The report points out that Nigeria’s revenue has been lower than expected, which is partly due to the country’s rapidly growing population. Despite relatively high oil prices, the economy has not been able to deliver the desired outcomes. The report argues that this is partly due to “business as usual” economic management, which has not been able to address long-standing policy and institutional challenges.

Various economic analyses have shown that Nigeria’s economic growth, as well as its fiscal and external buffers, have become disconnected from the high oil prices. This has led to increased macroeconomic vulnerabilities, such as higher inflation and a weaker currency amid a lack of structural reforms and economic diversification.

As a result, the country’s external buffers, such as its foreign exchange reserves, have been declining, while its debt has been increasing. This combination of factors has increased the risk of a balance of payments crisis.

Despite these challenges, total government spending in Nigeria has been increasing steadily, with state governments increasing their budget allocations each year. However, some of these budgets have been criticised by analysts as being unrealistic, as they are often based on overly optimistic assumptions about revenue growth. In addition, there has been a trend of “budget padding” among state governments, where they inflate their budgets in order to look good in the eyes of the public. This has led to a “race to the top” among state governments, with each trying to outdo the others in terms of budget size.

It is worth noting that total government spending, both recurrent and capital, has been increasing over time. However, the question remains whether this increase has translated into employment, poverty reduction, and economic growth. Some experts argue that increasing government spending does not necessarily lead to positive outcomes, and can in fact have negative effects if it is not well targeted or managed. For example, if government spending is focused on unproductive or inefficient programmes, it can lead to higher levels of debt without delivering any tangible benefits to the people.

An analysis by Open Nigerian States, a website backed by the civic tech organisation, budgIT, has shown that 36 states in Nigeria spent a total of N1.71 trillion on recurrent expenditures between January and September 2023. Recurrent expenditures include allowances, foreign trips, office stationery, and aircraft maintenance. 

The report was based on budget performance reports sourced from each state’s Ministry of Finance, Budget and National Planning.

The states’ recurrent expenditure figures were compared with their capital expenditure figures, which totalled N1.59 trillion  during the same period. This indicates that the states have been spending more on maintaining current operations and less on investments in long-term projects that could help improve the standard of living in their states.

Open Nigerian States also noted that states’ spending on social protection and human capital development remained low, totalling just N213 billion in the first nine months of the year. This figure accounts for only 6.2 percent of the total N3.44 trillion spent by the states.

In a webinar over the weekend titled “SNGs: Spending or revenue problem?”, organised by the IGR Initiative, a network of IGR improvement experts and practitioners, the issues surrounding subnational governments’ revenue allocation and spending were discussed. The webinar highlighted the need for a more strategic and sustainable approach to revenue generation and allocation, and called for greater transparency and accountability in the process. The discussion also touched on the need for subnational governments to prioritise spending on development programmes that have a direct impact on the people, rather than on wasteful and unproductive projects.

Nnanyelugo Ike-Muonso, the moderator of the webinar, stated that the three key factors that affect the amount of revenue a government can generate are its resource endowment, the level of economic activity, and the efficiency of its revenue-generating machinery. He pointed out that a government’s ability to stimulate and sustain economic growth, and to efficiently collect taxes and fees, are essential for a stable and robust revenue profile. 

“In the case of Nigeria, the size of government revenue has increased in absolute terms over time, but this growth has been largely dependent on statutory allocations and the sharing formula,” he said. 

According to Ike-Muonso, the issues surrounding revenue generation, procurement, and debt are all interrelated, and have an impact on government spending and revenue. He noted that there has been much debate over whether sub-national governments face more of a revenue or expenditure problem, and that both sides of the argument have valid points. He explained that when discussing expenditure, it is important to take into account not only the amount of money being spent, but also the management of finances and the issue of corruption and other factors.

Kachi Nwoga, vice president of Nextzon Business Services Ltd, a management consulting and enterprise development company, noted that Nigeria’s low revenue-to-GDP ratio which stood at seven percent as of 2022, means that it would take the country about three hundred years to achieve the level of infrastructure needed to operate a modern economy. He cited data from the World Bank which indicated that Nigeria is not collecting enough revenue to finance the development of essential infrastructure such as roads, power, and water.

Nwoga contended that most Nigerian states are running  unrealistic budgets that are not based on actual revenue projections, but are simply created in order to comply with legal requirements. In other words, he observed that the budgets are more about fulfilling a bureaucratic process than actually planning for and achieving meaningful development.

Using the state of Imo as an example, Nwoga pointed out that the state’s projected revenue of N104 billion is unrealistic and does not reflect the state’s true revenue-generating capacity. He explained that this is due to the state’s low GDP-to-revenue ratio, meaning that its GDP is not growing at the same rate as its revenue. He also noted that the state’s budget is not based on a realistic assessment of its own capacity, but rather on what it hopes to receive from grants, FDIs and external borrowings.

“My problem with this is that it is not realistic because as of now Imo is generating N19 billion. The issue is not whether they can generate N104 billion if everything is put in place effectively  but the issue is that it is an unrealistic budget today because there has been no innovations towards that effect. You are generating N19 billion, how will it become N104 billion. How are you going to get the extra N85 billion?” he queried.

According to Nwoga, the main problem with sub-national governments in Nigeria is that they have not been responsible enough to generate efficient revenue. He stressed that, going forward, the focus should be on wealth creation and substantial revenue generation, rather than simply looking at how much money is being spent on capital or recurrent expenditure. He explained that focusing on spending alone can give a false impression of wealth and revenue, when in reality there is very little revenue to spend in the first place. This, he argued, is the root of the problem.

On his part, Kingsley Eze, partner, FKC Associates, a management consulting firm that provides business support services, shared some data from a report by the Central Bank of Nigeria (CBN), which showed that in 1981, the total revenue of all sub-national governments (SNGs) in Nigeria was just N4.87 billion. By 1998, the eve of the return to democracy, that figure had grown to N143.2 billion. However, in 2018, 20 years later, total revenue for all SNGs had risen to N3.75 trillion. Eze also highlighted that as of 2022,  FAAC allocation alone had risen to N3.16 trillion.

In his view, there has been tremendous growth in the volume of revenue available to SNGs.

He stated, “Money is never enough but we must ask ourselves ‘just how much revenue is enough. At what point do we begin to say that we have started to hit the mark. Do we really have a revenue problem?’’

Eze observed that among the top ten states with the highest allocations from the Federation Account Allocation Committee (FAAC) in 2022, the same ten states also had the highest debt profiles in 2022. This shows a strong correlation between the states that receive the most money from the federal government and those that have the highest levels of debt. He argued that this is not sustainable in the long term, and that it is a problem that will continue to affect future generations. He  noted that this pattern is not limited to 2022, but has been ongoing for several years.

Eze added that the problem of unsustainable spending by sub-national governments is not a new phenomenon, but has been ongoing for many years. He pointed out that these governments have been taking out loans that extend beyond the lifetime of the current administrations, without achieving any significant economic development as a result of the borrowings. 

He noted that this indicates a serious problem in the way that sub-national governments are managing their finances. He argued that the root of the problem is a lack of transparency and accountability in the use of public funds. This makes it difficult to track how money is being spent and whether it is being used effectively.

According to Eze,  the way sub-national governments prioritise their spending is largely influenced by the mindset of their leadership. He argued that instead of focusing on consumption spending, which is not aimed at generating future receipts, sub-national governments should prioritise investment spending. This means that spending should be directed towards projects and initiatives that will generate returns over time, rather than those that simply consume resources in the short term. Eze stated that this requires a shift in thinking and a long-term perspective on the part of government leaders.