The optimism bias of Buhari’s Keynesian budget

President Muhammadu Buhari tried very hard in his 2016 budget speech to inspire hope and optimism and lift the gloom in the country. Indeed, the speech reminded me of the words of Margaret Thatcher, former British Prime Minister, when she was first elected in 1979. Quoting St Francis of Assisi, she said: “Where there is discord, may we bring harmony. Where there is error, may we bring truth. Where there is doubt, may we bring faith. And where there is despair, may we bring hope”. Buhari’s budget speech was laced with such positive rhetoric. “I stand before you,” the president said, for instance, “to promise that we will secure our country, rebuild our economy and make the Federal Republic of Nigeria stronger than it has ever been.”

So, you can’t fault the president for lack of ambition or optimism. Yet I have some concerns. Budget speeches are not like political speeches. They are statements about the brass tacks of government spending and revenues, and require hard-nosed assessments of what is within or beyond the realms of possibility. But the president’s budget speech raised huge expectations. The budget was presented as the answer to Nigeria’s huge infrastructural, unemployment and poverty problems. But, as the president himself rightly observed, many people will say ‘I have heard this before’. His response was: “our actions will speak for us”.

Of course, the president is sincere about that pledge. I am one of those who believe he is well-meaning and wants to transform this country. But economies don’t simply respond to presidential wish-lists. They respond to proper incentives, and if you get the incentive structure wrong, however good your intentions may be, you will not get the results you desire. And, let’s be honest, some scepticisms remain about the 2016 budget. For instance, some Nigerians have said that the devil is in the details, while others adopt a wait-and-see attitude to the question of implementation.

I share those concerns. But, for me, there is another issue. I detect what economists call “optimism bias” in the budget. This happens when budget planners, or project appraisers, are overly optimistic and overstate the benefits of a project while understating its costs. It is always necessary to make explicit adjustments for this bias; otherwise a false expectation will be created about what can actually be achieved.

So, you might ask: where is the optimism bias in the 2016 budget? Well, for me, it stems from the fact that the unprecedentedly bloated budget is predicated upon shaky revenue streams. I will explain this in a moment, but, first, let’s understand the nature of the budget.

The 2016 budget is Keynesianism in action. In fact, it’s more than that. It combines Keynesian economics with William Beveridge’s welfare state. Both have their intellectual roots in Britain. Maynard Keynes was the intellectual force behind the idea that, during recessions, government should have an expansionary fiscal policy by investing in labour-intensive infrastructure in order to increase aggregate demand, stimulate the economy and reduce unemployment. Beveridge, on the other hand, was the brain behind the blueprint for conquering what he called the “five giants” of poverty, disease, ignorance, squalor and idleness. That blueprint translated into the British welfare state.

To be sure, all the elements that gave rise to Keynesianism and the British welfare state are present in Nigeria today. The economy is in doldrums. The infrastructural decay is alarming. Unemployment levels are astronomical. And poverty has morphed into squalor and even disease! So, you could say that Nigeria should experiment with Keynesianism and the pagewelfare state. But, in truth, there is no evidence that such policies are the best solutions to the problems. In contrast, it’s been empirically proven that the combination of Keynesian economic policy, a welfare state and a bloated public sector is dangerous for any country.

Yet this is the path that Nigeria seems ready to tread with the 2016 budget. When President Buhari said in his budget speech that he is committed to “run a lean government”, I ran to my dictionary to check the meaning of “lean”. If a N6.08 trillion budget, nearly half of which is a deficit, reflects a lean government, then it would be interesting to see what a bloated one looks like! But my concern in this piece is not the size of the budget or what the president wants to spend public money on. Those are discussions for another day. My concern here is how the government intends to finance the huge budget.

Now, we know that the N6.08 trillion budget has a deficit of N2.22 trillion, and that the deficit will be funded through borrowing. The government said the deficit is equivalent to 2.16 percent of GDP and that the proposed borrowing takes Nigeria’s overall debt profile to 14 percent of GDP, which are “well within acceptable fiscal limits”. Leaving aside the fact that the projected GDP figure of 4.3 percent is contested, with the World Bank pegging it at 3.7 percent, the alarming fact is that 40 percent of President Buhari’s first budget is a deficit to be financed through huge borrowing.

Of course, running a budget deficit during a recession is acceptable if you ran a surplus and saved during a boom. For instance, Saudi Arabia is going to run a deficit this year because of the collapsing oil revenues, but it is drawing on its huge reserves, in addition to raising taxes, withdrawing subsidies and cutting spending to balance its books. By contrast, Nigeria was profligate in times of booms and now, in recession, lacks the discipline to take difficult economic decisions, such as removing the fuel subsidy and drastically reducing the size of the state and the cost of governance. Instead, recurrent spending will still gulp 70 percent of the 2016 budget, with N2.35 trillion to be spent on maintaining a bloated and acutely inefficient public sector.

What is more worrying, though, and this is where the optimism bias comes in, is that even the non-deficit part of the budget, i.e., the N3.86 trillion, is to be financed from three shaky revenue sources, namely, oil-related revenues (N820 billion), non-oil revenues (N1.45 trillion), and “independent” revenues (N1.51 trillion). The oil revenues are based on a benchmark price of $38 per barrel. Yet less than a week after the budget speech, the oil price fell to $36.78 per barrel. And the turmoil continues. As I write this, there are two headlines in the Financial Times, one says “Fresh fall for crude hits wider sentiment”; the other says “Oil price hits Venezuela housing plan”. The truth is that the oil market is likely to remain unstable. And this poses a risk to the government hitting its oil revenue targets.

Just as well, then, that the main non-deficit funding sources are not oil revenues, but non-oil and “independent” revenues. But how guaranteed are these other sources? Take first the projected N1.45 trillion non-oil revenues, which consist of company income tax, VAT, customs and excise duties and federation account levies. In most countries, these are guaranteed sources of revenues because government agencies are effective in collecting them. But in Nigeria, corruption, inefficiency and lack of capacity significantly hinder revenue collection in these areas. For instance, according to a recent World Bank study, tackling smuggling from Benin “could lead to an estimated gain of $1.2 billion on government revenue”. Of course, the government has rightly appointed new heads for the revenue generating agencies, but what the agencies need are root-and-branch reforms. In the meantime, the government may need a miracle to hit its non-oil revenue targets.

Which then brings me to the so-called “independent” revenues, expected to fetch N1.51 trillion. These, according to the government, will come from public expenditure reform as well as strict enforcement of the Fiscal Responsibility Act (FRA), under which ministries, departments and agencies (MDAs) are required to remit their operating surpluses to the Federation Account. It is risky to predicate huge budget revenue on such a woolly source as efficiency savings. I applaud the establishment of the Efficiency Unit, but, in my view, Nigeria doesn’t have the institutional mechanisms needed to make it work.

For instance, in the UK, the combination of the delivery unit in the Prime Minister’s Office, the monitoring unit in the Cabinet Office and the efficiency unit at the Treasury, coupled with the independent “policing” efforts of the Office of Budget Responsibility, the scrutiny work of the Public Accounts Committee of the House of Commons, and the independent analysis of the Institute of Fiscal Studies make it possible to tackle inefficiency and ensure value for money in government. My hunch is that the president will struggle to entrench the culture of rule compliance, prudence and efficiency in the MDAs without far-reaching public sector reform.

President Buhari expressed “confident optimism” about his budget pledges. In my view, the budget looks too optimistic on the revenue front. Surely, if the government fails to hit its revenue targets, it would either have to break some of its pledges or borrow more to meet them. The former would damage its reputation, and the latter would push Nigeria into more debt. Already the cost of servicing Nigeria’s debt is a huge burden on the economy. For instance, N1.36 trillion is set aside in the 2016 budget to service foreign and domestic debt. What an unproductive use of public money!

All that said, I believe President Buhari could still fulfil his budget pledges if he cuts non-essential spending drastically. The fuel subsidy should go. Stories in the papers about N6.9 billion being allocated for presidential fleet are unhelpful, nor is the failure to keep the promise to sell off some of the presidential planes. Buhari should genuinely reduce the size of the state and cut the cost of governance. In addition, he must fulfil his promise to recover all public money stolen “no matter where it is hidden”. If the president can do all these, he may, with some luck on the revenue front, meet his budget pledges without plunging the country into further debt!

Happy New Year everyone! May 2016 bring us and Nigeria abundant peace and prosperity.

OLU FASAN
Fasan, a London-based lawyer and political economist, is a Visiting Fellow at the London School of Economics.
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@olu_fasan