Is our fiscal deficit ceiling pointless?

Nigeria’s debt has been in the news a lot recently. How much is the debt? Did this government increase it and by how much? What was the extra debt used for? Should we be worried about the ballooning (or not ballooning) debt problem? All very valid questions. One question which is set to come to the front burner soon is the fiscal deficit ceiling. Officially, Nigeria has a fiscal deficit ceiling set at three percent of GDP as written in the fiscal responsibility act of 2007. In English, this means that in any given year the federal is not allowed to borrow an amount more than the equivalent of three percent of GDP. The purpose of this is to ensure that the federal government does not borrow more than it has the capacity to absorb and to keep the overall debt picture responsible.

In most countries, this kind of fiscal ceiling act makes sense. But in Nigeria, as usual, e get k-leg. To understand why, consider the now almost settled debate about the debt to GDP ratio. Officially, Nigeria has a debt to GDP ratio that is very healthy by any standard. Unfortunately, as anyone following Nigeria’s finances can observe, Nigeria in reality is almost debt distressed. Almost. The whole point of a debt to GDP target is based on the idea that a government’s revenue is typically collected from taxes on the economy, measured as GDP. Therefore, that governments revenue should grow in sync with GDP. If GDP goes up, tax revenue goes up. If GDP goes down, tax revenue goes down. A debt to GDP statistic and a debt to revenue statistic are therefore kind of the same thing.

However, the federal government’s actual revenue is not related to the country’s GDP. A large fraction of it is from crude oil which makes up only a small fraction of the actual Nigerian economy. As at 2017 the crude oil sector only accounted for nine percent of the economy, and that number is still falling. The oil economy unfortunately is the only place the federal government is able to effectively collect taxes from. Despite all the hullabaloo about generating revenue, the federal government mayactually getting worse and worse at collecting taxes from the non-oil economy. Back in 2011 it was able to collect about 1.5 percent of non-oil taxes as a percent of non-oil GDP, the best performance in at least a decade. In 2017 it only managed to collect 0.9 percent of non-oil taxes as a percent of non-oil GDP. The trend for this statistic is downwards.

So, if federal government revenue is completely unrelated to its economy measured as GDP, a debt to GDP measure is not a very smart way to think about indebtedness. If a debt to GDP measure is not very smart then how useful is the fiscal deficit target, which is also measured as a share of GDP? Similarly not very smart as it does nothing to achieve the goals it was set out to achieve, which is prevent the federal government from debt distress. The federal government can still get distressed even if it sticks within that target as the deficit allowance increases with GDP whereas revenues do not.

There have been no official numbers for revenue published for 2018 but there are rumours that, even despite the very flexible fiscal deficit target, the FG will go past what is set out in the fiscal responsibility act. All the more worrying. The magic pill to resolve all this is for the federal government, and the other levels of government, to become capable of collecting taxes from the non-oil economy. Realistically, that cannot be done without much broader tax reform. Reform that changes the incentives on who collects what from who, who enforces what, and how all that revenue is distributed. Until that happens it might be wise to rethink how we define fiscal responsibility as the current status quo cannot do enough to prevent the federal government from distress.