Question

The 2020 Nigerian budget shows projected aggregate expenditure of #10.33 trillion with expected revenue of #8.155 trillion resulting in a deficit of #2.18 trillion for the fiscal year. The budget deficit has increased,albeit by 13℅ from 2020 and will be majorly financed by new foreign and domestic borrowings. It has been estimated that this will add our already high debt profile of $81.274bn ,given that the deficit is 21.10℅ of the overall expenditure of #10.33 trillion and 26.7% of the projected revenue of #8.155 trillion. Assuming you are the chief Economic Adviser to the president, what in your own view is the economic implications of the proposed deficit financing strategy on the Nigerian economy and give recommended on the way forward.

Answer 1

Budgetary deficit usually expressed as a percentage of GDP. These can be different types of deficit in a depending upon the types of receipts and expenditure we take into consideration .According to these are three concepts of deficit namely,

A) Revenue deficit

B) Fiscal deficit

C) Primary deficit

Budgetary deficit is the excess of total expenditure over total receipts.

A) Revenue deficit

Revenue deficit is excess of total revenue expenditure of the Government over its total revenue receipts of the Government.

Implications

1) Reduction of assets

Revenue deficit indicates dissaving on Government account because Government has to make up the uncovered gap by drawing upon capital receipts either through borrowing or through sale of its asset.

2) Inflationary situation

Since borrowed funds from capital account are to meet generally consumption expenditure of the Government.It leads to inflationary situation in the economy with all its ills. Thus revenue deficit may result either in increasing Government liabilities or in reduction of government assets.

3) More revenue deficit

Large borrowings to meet revenue deficit will increase debt burden due to repayment liability and interest payments. This may lead to larger and larger revenue deficit to future.

B) Fiscal deficit

Fiscal deficit is defined as excess of total   budget expenditure over total budget receipts excluding borrowing during a fiscal year. It is amount of borrowing the Government has to resort to meet its expense. A large deficit means large amount of borrowing.

Implications

1)Debt traps

Fiscal deficit is financed by borrowing and borrowing creates problem of not only a) payment of interest but also of b) repayment of loans.As the Government borrowing increases its liability in future to repay loan amount along with interest also increases. Payment of interest increases revenue expenditure leading to high revenue deficit.

2) Wasteful expenditure

High fiscal deficit generally leads to wasteful and unnecessary expenditure by the Government.It can create inflationary pressure in the economy.

3) Inflationary pressure

As government borrows from central bank which meets this demand by printing of more currency notes it results in circulation of more money.This may cause inflationary pressure in the economy.

4) Partial use

The entire amount of fiscal deficit either borrowing is not available for growth and development of economy. Only primary deficit is available for financing expenditure.

5) Retards future growth

Borrowing is in fact financial burden on future generation to pay loan and interest amount which retards growth of economy.

C) Primary deficit

Primary deficit is defined as fiscal deficit of current year minus interest payments on previous borrowing. In other words whereas fiscal deficit indicates borrowing requirements inclusive of interest payment. Primary deficit indicates borrowing requirements of interest payment.

Implications

Fiscal deficit reflects the borrowing requirements of the Government for financing the expenditure inclusive of interest payments. As against it primary deficit shows the borrowing requirements of the Government including interest payments for meeting expenditure. Thus if primary deficit is Zero then fiscal deficit is equal to interest payment. Then it is not adding to the existing loan.

These are the main types of deficit and its major implications.