How can Nigeria’s federal government improve its spending?

Campaigns for Nigeria’s 2023 general elections should kick off today. And if past years are anything to go by, one key event that happens all over the country during the campaign period is rallying.

Political parties and their respective flag bearers and supporters will scour the country for votes wherever they believe these votes exist by hosting rallies and sharing endless promises.
 

​​​​​​
Policy statements from political aspirants will also become more profound. Just yesterday, Stears discussed one of such policies—how to remove Nigeria’s petrol subsidy—which presidential aspirants have divergent views on. While some want to keep it, others want it removed.

But subsidy payments are a subset of the federal government’s (FG) troubled finances—a broader economic argument. The FG’s financial challenges range from a rapidly rising budget which connotes a spending problem, to lower than expected income, showing a revenue challenge. Whichever side of the fence you are on, you are right, and the 2023 budget proves both problems are dealing with the FG with equal intensity.

The budget (proposed expense) for next year is set at approximately ₦20 trillion, half of which can’t be funded by potential revenue and will lead to Nigeria’s highest budget deficit (₦11 trillion to ₦12 trillion). Expectedly, proposed policies from presidential aspirants to curb this problem have begun reeling out, one of which is to slash the cost of governance.

Shortly after the FG released the budget proposal, the Presidential candidate for Nigeria’s labour party reiterated his stance on reducing the cost of government and balancing the budget.

Not many people paid attention to the last part of his statement—balancing the budget, which suggests with him as President, the federal government will spend just as much as it earns, nothing more, nothing less.  For his proposed policy to happen, spending will reduce, revenue will rise, or both will happen.

But today, we will concentrate on the spending side of things. If we assume that revenue stays stagnant, what cost is worth cutting to achieve a balanced budget or, at the very least, significantly reduce the cost of governance?

Experts and economists, much wiser than I am, have recommended merging ministries, reducing salaries, and subsidy reforms as areas where the FG should cut its growing cost. But before we review if reducing expenses in some of these areas will make a dent in FG spending, it’s important first to see how costly government spending has become.

Rising spending 

Nigeria's federal government budget spending during the Buhari administration has risen 3x faster than the immediate previous government.



And even though inflation has eroded the value of most naira-priced items, it doesn’t totally account for the FG’s high spending in recent years. When we consider inflation, as shown in the chart below, the rapid increases in FG spending slow down,  but aggregate government expenditure rises nonetheless. 

But even if inflation muted the federal government’s high spending, Nigeria’s dwindling oil supply is worsening potential revenue, showing we still need to cut frivolous spending.

Government expenses have fallen mainly into three major buckets—recurrent non-debt, debt servicing and capital spending.

While spending on these three key line items has also been increasing, the federal government has spent a slightly larger share on recurring non-debt expenditure. For example, in 2021, recurrent non-debt expenditure, which entails personnel costs, pensions, presidential amnesty programs etc., made up 38% of the FG’s aggregate spending. Capital spending was 26%, while debt servicing took up 32%.
 

The FG spent the final 4% of its 2021 aggregate expenses on statutory transfers. The proportion changes per year. However, the constitution backs up certain institutions to determine their budget, which the Presidency can not alter or review. 

Essentially, the FG first spends on these government agencies, such as the National Assembly (NASS), Independent National Electoral Commission (INEC) and the Niger Delta Development Commission (NDDC), before any other ministry. So, it’s worth noting that the constant clamour for reducing National Assembly members' spending will not significantly reduce the FG’s aggregate expenditure, considering that spending on the institution is <4% of its total cost.

Although FG’s spending on statutory transfers is minute compared to the overall budget, huge salary sizes and budget increments for Nigeria’s national assembly members, while wages for ordinary Nigerians stagnate, is a sensitive matter.

Nigeria’s lawmakers allegedly earn roughly $160,000 annually, about ₦68 million, using official rates of ₦430 to $1 in salaries and allowances. However, this income is still higher than the $105,000 lawmakers in the UK earn annually or $104,000 and $75,000 earned by lawmakers in South Africa and Kenya, respectively.

Also, budget allocations for statutory transfers grow yearly, but the line items are closed to the public, which prevents scrutiny.

In summary, the NASS needs to serve as a watchdog to compel other ministries, departments and agencies (MDAs) of the executive arm to strike down corrupt tendencies through bloated and padded expenses. But, if their expenses are shrouded in secrecy, it is hard not to come off as hypocritical and sabotage the chances of the FG significantly reducing its costs. For context, the national assembly approves the proposed budget before the President gives the final permission.

So far, we have seen that recurrent non-debt takes up the largest chunk of government spending and how the FG might need its legislative arms of the government to reduce such costs. The next thing is to justify further why recurrent non-debt costs are worth reducing.
 

Theme 1: Personnel cost, the queen of recurrent non-debt spending

Recurrent non-debt costs are just technical terms for regular expenses—think costs that happen monthly or annually, unrelated to borrowing. These costs include salaries, allowances, pensions, amnesty payments etc.

When grouped, salaries, allowances or wages fall under personnel cost, usually the largest piece of recurrent non-debt expenditure. Last year, personnel costs were over 70% of non-debt recurrent spending.

So, if there is an item worth looking into, it will be personnel cost. Not just because it is large but also because the federal government acknowledges the need to use personnel costs as a strategy to reduce how recurrent expenses have been rising.

In the 2021-2023 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF), the FG explained that it vigorously pursued key initiatives to cut down recurrent costs, such as placing an embargo on unapproved recruitment by MDAs. According to the government, requests for recruitment and staff enrolment into its payroll must first receive financial clearance from the Budget Office of the Federation.

But the continuous increase in personnel costs years after the minimum wage implementation (an obvious reason for a rise in cost) suggests the government might be paying lip service.
 

The country’s accountant general raised some reasons behind high personnel costs in several audited financial reports. For instance, 42 MDAs more than tripled their ₦474 billion proposed personnel cost and spent ₦1.7 trillion for 2019. For context, this is more than the ₦1.6 trillion spent on capital projects in 2020 and amounts to 18% of the FG’s total ₦9.7 trillion budget for the same year.

According to the accountant general’s report, there was no disclosure or explanation of the differences. This wasn’t an isolated incident, either. In 2018, 103 MDAs exceeded their budgeted personnel cost by over ₦600 billion—almost equal to the ministry of works, power and housing appropriated capital spending for that year.

But beyond reducing recurrent personnel costs, the FG must also review recurrent debt servicing costs—the second largest spending item. Debts, often incurred to meet these rising personnel costs, are very prone to go beyond their budgeted limit. 

Recurrent expenditure, (including debt servicing payments and personnel costs) often go overboard due to these rising and additional costs. Last year, recurrence expenditure of ₦8.7 trillion in 2021 was still ₦600 billion higher than its approved ₦8.1 trillion in the budget. Meanwhile, the FG hardly spends the full amount proposed and approved for capital expenditure. 

Despite this lag, the FG must still review its capital expenditure to ensure efficient use of its financial resources. This is because duplicated capital items have become quite popular with budget spending. 

Theme 2: Capital project spending keeps getting duplicates

Duplicated and white elephant projects are another spending challenge to fix. Details of some of the nearly 500 duplicated projects in the 2022 budget, amounting to  ₦380 billion, that BudgIT fished out are too unthinkable not to share. The ministry of water resources not only wants to build a gym but also duplicates the cost. Spending nearly ₦400 billion on viable projects would have improved Nigeria’s capex last year by at least 15%.

The ministry of works also wants to build internal roads worth ₦2.5 billion in universities. This project is even laudable, considering it had budgeted the same project to the tune of ₦3.9 billion. One will wonder how it passed the scrutiny of national assembly members.

My favourite example of these duplicated projects happened at the Ministry of Environment, which wants to construct “Gun Armouries” in four recreational parks with ₦68 million in Cross Rivers, Kaduna, Borno & Yobe States. 

These duplicates are not new, either. Last year, BudgIT identified 316 duplicated projects in the 2021 FG Budget approved by the national assembly. Of the 316 identified duplicates, the Budget office confirmed the existence of only 185 worth ₦20 billion.

Ultimately, eliminating these duplicate costs will greatly reduce the government’s bloated spending, channelling them toward more impactful uses.

Regarding impact, subsidies are one spending item the federal government has stubbornly refused to cut off despite the obvious hole it keeps burning in its pockets. 

Theme 3: Spending choices can be better

As discussed earlier, paying subsidies is one controversial spending item many Nigerians already think the FG needs to curb. After all, subsidy payments have grown from ₦650 billion in 2015 to  ₦1.5 trillion in 2021 and might hit ₦6 trillion this year, taking up a sizable chunk of income the federal government can spend in other areas. 

But even though subsidy payment is not a budget line item tucked under expenditure, the Nigerian National Petroleum Corporation Limited (NNPCL) pays the subsidy amount from oil and gas sales before remitting net revenue to the federation account. This makes it a spending problem because the federal government must find a way to pay as long as they remain in place.

So, the higher subsidies, the lower the chances of the FG attaining its oil revenue projections. Last year, subsidy payment was 75% of total revenue. Instead of a projected ₦2 trillion from oil, the FG could only earn ₦998 billion. While these subsidies ensure people get cheap petrol, they are often not efficiently utilised. For instance, last year, the poorest 20% of the Nigerian population only received 3% of the entire subsidy bill for 2021, showing that the poor, who need it the most, aren’t even benefitting.

We can't ignore how pruning personnel costs alone would have saved the government at least ₦1 trillion or 13% of the overall budget in 2019. Sticking to debt servicing projections by curbing excessive borrowing could have also saved the FG a cool  ₦2.4 trillion between 2015 and 2021.

In contrast, increasing capital expenditure is applaudable. Still, when such increases are for duplicated or for unviable projects, costing the government nearly half a trillion naira within one year, we should withdraw such applause. Finally, subsidies alone will cost half the budget deficit next year or what it cost to run the entire government in 2016. It’s incredible how the government is more motivated to keep borrowing to cushion these costs.

The sad reality is that the federal government still believes revenue generation remains its major fiscal constraint.

So, despite how big the budget gets, the federal government is riding on the half-true notion of spending more to expand the economy.

Unfortunately, this kind of spending can also ruin the economy. Of course, such a trajectory can change. But ultimately, these are some key spending issues presidential aspirants must consider as they set their sights on Aso Rock.