Mainstreaming Fiscal Responsibility In The Budget Process By Dr Aliyu Jibril Yelwa



Implicit in the topic, Mainstreaming Fiscal Responsibility in the Budget Process, is the basic assumption that the concepts of “fiscal responsibility” and “budget process” are understood by all the stakeholders to budgeting.  In order to avoid misunderstanding and possible resistance to the introduction of fiscal responsibility, it is appropriate, right from the beginning, to define certain concepts that will be used in the course of discussion.

2.       The concepts which require definition include budget process, discretionary fiscal policy, fiscal responsibility and, of course, mainstreaming.  In addition, we will, highlight the benefits of budgeting, some of the pros and cons of discretionary fiscal policy and fiscal responsibility, explain why the current policy trend in public finance management is in favour of fiscal responsibility.

3.       With some understanding of the budget process and fiscal responsibility as the background, we will focus on the issue of mainstreaming or making fiscal responsibility acceptable in the budget process.   We will highlight the need to implement fiscal responsibility in public finance management, specifying the agency to enforce and monitor fiscal responsibility, laws on the procedure and substance of fiscal responsibility, public education and advocacy on the enabling law, problems associated with mainstreaming and some prescriptions for remedial policies and actions aimed at achieving complete success, in the mainstreaming activity.

4.       Certainly, some empirical and theoretical data will be used in the course of discussion.  This will range from data from countries that practise fiscal responsibility diligently and countries that do not.   Nigeria will be the focus of discussion.

Definitions

5.       Budget Process: Budget process is a cycle which starts with the preparation and approval of the medium term expenditure framework (MTEF), budget preparation, budget approval, budget execution, budget control and ends with auditor’s report.  People are interested in the budget process because it is strongly associated with their welfare.  In fact, and in theory, budget affects economic growth, the growth of national income and income per capita, inflation, rates of interest, movement of external reserve, foreign exchange rate, investment and employment.  These variables are some of the channels through which the budget affects the welfare of the people.   Little wonder why the budget process should not be left to the bureaucrats and politicians alone.

6.       Discretionary Fiscal Policy: Discretionary Fiscal Policy is a regime in which the bureaucrats and politicians are allowed freehand to adopt and implement fiscal policies of their own choice to achieve economic stabilization of the national economy.  This regime relies on the macro-economic principle of automatic adjustment.  This means that when the economy is in recession, the authorities spend more money than the revenue available through borrowing or increased taxation in order to rejuvenate the depressed economy and return it to the path of growth.  On the other hand, when the national economy is in boom, prosoerity or at the peak, the authorities spend less money than the revenue collected in order to contract the growth of the economy and associated high inflation.

7.       The discretional fiscal policy regime is characterized by certain fiscal problems.  Many democratic societies, according to Buchanan and Wagner (1977) and Kydland and Prescott (1977), have indulged in time-inconsistent fiscal policy.  Typically, rhetorical commitment to fiscal discipline made by a government at the beginning of its mandate was abandoned in the run-up to the next election, as politicians felt compelled to set up expenditures or cut taxes in order to win election.

8.       By the same, token, interest-group pressures bear sometimes irresitably on every government, without regard to the overall budget constraint,  creating, according to Person and Tabellini (2000), a common-pool problem.  This problem is noted to be particularly acute in a decentralized fiscal system where lower-level governments pursue an expansionary fiscal stance without regard to its impact on the overall budgetary outcome.  This is sometimes referred to as “the tragedy of the commons”.  Implicitly, such free-rider behavior assumes that the central government and other lower-level governments will adopt a compensatory policy course, or that the central government will bail out sub-national governments as they run into financial problems.  This was observed in Argentina, Brazil and India a few years ago before the introduction of the fiscal responsibility framework (FRF).

9.       Overtime, many developed economies sought to build a generous welfare state, not always matched with a rise in tax revenue, resulting in widening deficits.  Time-inconsistency of fiscal policy, often compounded by the common-pool and generous welfare state problems, leads to deficits bias, to procyclicality, and to expenditure distortions.

10.     Apart from the foregoing fiscal problems, Nigeria had other problems associated with discretional fiscal policy before the introduction of fiscal responsibility.  These included:

(i)      Lack of modern law on procurement;

(ii)     Absence of a permanent regulatory/oversight body;

(iii)    Poor human capacity in procurement management;

(iv)    In efficiency and corruption in Tender Boards; and

(v)     Loss of about 100billion annually to corrupt practice through procurement.

(Emeka, 2007:5).

11.     In order to avoid the disadvantages of discretionary fiscal policy, some Governments, particularly the Federal Government of Nigeria, reformed their public finance management systems and adopted fiscal responsibility.  The fiscal responsibility framework was, however, passed into law on 30 July, 2007, in Nigeria.

12.     Fiscal Responsibility: Fiscal Responsibility can be defined from many perspectives such as:

(i)      Reducing the debt;

(ii)     Completely eliminating the debt;

(iii)    Balancing the budget;

(iv)    Reducing the debt burden (growing the GDP faster than debt);

(v)     Maintaining a constant debt burden (GDP=debt growth); and

(vi)    Keeping unemployment low and inflation under control.

13.     According to Feingold (2004), fiscal responsibility is about balancing the budget and eliminating wasteful government spending.  Fiscal responsibility is therefore the basic duty of any government, cutting wasteful spending taxpayers’ money wisely.

14.     To me, fiscal responsibility is managing public finance in accordance with the fiscal rules laid down in the Fiscal Responsibility Act (FRA), 2007, through the budget process, the contravention of which is sanctioned.  Fiscal responsibility does not wait for boom or recession before spending less or more money than revenue.  Rather, it expects long term macroeconomic stability by fixing the deficit, sustainable, debt level, benchmark commodity price and other levels in advance.  Fiscal responsibility rules are both procedural and substantial and provide for time limes throughout the budget process.

15.     Fiscal responsibility has clearly identifiable objectives as contained in the PREAMBLE to the FRA, 2007:

An Act to provide for prudent management of the nation’s resources,

ensure long-term macroeconomic stability of the national economy,

secure greater accountability and transparency in fiscal operations

within a medium term fiscal policy framework, and the establishment

of the Fiscal Responsibility Commission to ensure the promotion and

enforcement of the nation’s economic objectives, and other related matters.

16.     Without spending time on the objectives of fiscal responsibility, let us use the variables of economic growth that is GDP growth rate and GDP growth volatility (macroeconomic stability) to test the impact of fiscal responsibility in some countries that adopted and practised it dutifully.  The International Monetary Fund (IMF) studied some of such countries from the years they adopted fiscal responsibility framework to the years their average data were reported as contained in the Table 1 below.

 

Table 1: Selected Countries: Growth and Volatility under Fiscal Responsibility Framework

S/n Country Effective Date GDP Growth Rate (Geometric Mean GDP Growth Volatility (Coefficient of Variation)
1

 

2.

 

3.

 

4.

 

5.

 

6.

 

7.

 

8.

 

9.

 

10.

New Zealand (1998)

 

Sweden (1997-98)

 

Euro Area: Finland (1998)

 

Euro Area: Ireland (1998)

 

Euro Area: Luxemburg (1998)

 

Bulgaria (1998)

 

Estonia (1998)

 

Chile (2000)

 

Peru (2000)

 

Brazil (2001)

3.6

(2.7)

3.0

(2.1)

3.3

(2.1)

6.8

(2.1)

5.0

(2.1)

4.6

(3.8)

7.2

(3.8)

4.4

(2.9)

4.0

(2.9)

2.2

(2.6)

0.2

(0.3)

0.4

(0.5)

0.4

(0.5)

0.4

(0.5)

0.5

(0.5)

0.2

(0.6)

0.2

(0.6)

0.4

(0.8)

0.6

(0.8)

0.8

(0.9)

Source: International Monitory Fund.

17.     As can be seen from Table 1 above, all the countries experienced stable macroeconomic growth.  The stability of the last three countries were somehow not very good because they adopted fiscal responsibility framework a year or two before the study.  Beside stability, the countries were successful in eliminating their debts in excess of the prescribed sustainable limit.  They restored investor-confidence in the economy.

18.     Countries that have not been diligent in the application of fiscal responsibility are currently facing financial problems largely due to debt overhang.  They include Euro Area countries like the United Kingdom (UK), Italy, Greece, France and non-European Countries such as Japan, the United States and so on, whose debt-to-GDP ratios exceed 60%.

19.     Since the introduction of fiscal responsibility in Nigeria, its GDP has been growing.  The GDP recorded 7.5% in 2010 and about 6.69 in 2011.  The external reserve has remained high at over 15 months in term of the cost of imports against the international standard of 3 months.  Though Nigeria’s debt is rising, it is just 16.40% this year, and compares favourably with the standard threshold of 40%.  Unfortunately, the deficit-to-GDP ratio of 4%-6% is high compared with 3% prescribed by the FRA, 2007.  In the circumstances, Nigeria still needs more effective mainstreaming fiscal responsibility in the budget process, if it wants to avoid the rigors of fiscal problems associated with discretionary fiscal policy.

20.     Mainstreaming: Mainstreaming means making a particular idea or opinion acceptable by most people.  In this discussion, mainstreaming means making fiscal responsibility acceptable to most stakeholders in the budget process.  That is, making fiscal responsibility acceptable in the budget process through enforcement and monitoring.  In this regard, we should look at the facilities and methods available for enforcing fiscal responsibility, how the facilities and methods have been used in Nigeria, and the hindrances on the way of successful mainstreaming.

21.     One of the principles of successful mainstreaming of fiscal responsibility in the budget process is that there must be an independent body charged with the surveillance and enforcement of the fiscal responsibility.  This point was made by Ukertor Gabriel Moti when he wrote;

Compliance with the fiscal policy rules and procedural rules, along

with observance of transparency standards, must be subject to continuous

monitoring preferably by an independent authority, in addition to the ordinary

oversight by the legislature and reporting exercised by the media and civil

society.  Beyond traditional auditing of accounts and of observance, monitoring

the FRF (Fiscal Responsibility Framework) involves real-time surveillance

with a broader reach, including assessment of the realism of macro-fiscal

projections as well as the fiscal risks and sustainability over the medium to long run.

22.     As if in tandem with the foregoing principle, the FRA, 2007, makes ample provisions for the enforcement of the FRF.  For examples, sections 1-3of the RA, 2007, provide for the establishment of the Fiscal Responsibility Commission (FRC), its power and functions, while section 10 obligates the Commission to render annual report and accounts to the National Assembly (NASS).  While section 51 of the FRA, 2007, permits any person to enforce the FRF, section 55 grants the President the power to make regulations for continuous surveillance and enforcement of fiscal responsibility.

23.     According to the FRA, 2007,:

1-(i)1       There shall be established, a body to be known as the Fiscal Responsibility

Commission which “shall be a body corporate… and shall have power to

compel any person or government institution to disclose information relating

to public revenues and expenditure…”

24.     The functions of the FRC are spelt out as follows:

3-(i)  The Commission shall:

(a)      Monitor and enforce the provisions of this Act…

With regard to the legislative oversight, the FRA, 2007, provides at its section 10:

The Commission shall prepare and submit to the National Assembly

not later than 30th June in each financial year, a report of its activities

including all cases of contravention investigated during the preceding

financial year, and shall include in the report a copy of its audited accounts

for the preceding financial year.

 

25.     Still for the purpose of enforcement, section 51 of the FRA, 2007, permits any person to mainstream the FRF as hereunder:

Any person shall have legal capacity to enforce the provisions

of this Act by obtaining prerogative orders or other remedies

at the Federal High Court without having to show any special

or particular interest.

 

26.     Like Nigeria, other countries make allowances for special authorities to enforce the FRF.  In the UK, enforcement and surveillance are done by the national audit which reports to the legislature, while ultimate judgment rests with the courts.  In Peru, enforcement is assigned to the Central Bank.  In Brazil there are the Fiscal Responsibility Council and Courts of Auditors with the jurisdictional powers of appeal courts.  The question remains, however, as to the technical competence and independence of some of the bodies.

The Practice of Mainstreaming in Nigeria

27.     The FRC studies the FRA, 2007, and identifies the areas, items and time lines requiring enforcement and monitoring.   These items run into thousands.  The stakeholders are intimated with the FRA, 2007, as it concerns them and the FRC’s programme of monitoring and enforcement.  To equip it to carry out its mandate, the FRC upgrades the knowledge and skills of its members and staff through seminars, conferences, courses and workshops.

28.     The public, Federal ministries, departments and agencies (MDAs), States and international organizations such as the World Bank are also carried along in the process of public education and advocacy on fiscal responsibility.  The FRC pays advocacy visits to the President, Governors and Traditional Rulers, and engages in radio programmes to educate the public on the need and enforcement of fiscal responsibility.

29.     Apart from prodding and nudging stakeholders to comply with the provisions of the FRA, 2007, the Commission calls and receives quarterly, annual and periodic reports from them.  These include the Medium Term Expenditure Framework (MTEF), Appropriation Bills, Quarterly Budget Implementation Reports (BIR), Consolidated Budget Execution Report, Audited Accounts and Annual Reports.

30.     The FRC examines the reports from the view points of accountability and transparency, value for money, standards and good international practice, prudence, economic stability, realism of projections and so on.  Gray areas and contraventions are investigated.

31.     Usually, the FRC makes comments on the reports, and its views on the reports are sent to the clients, Ministry of Finance and Presidency.    As regards its activities and accounts, the FRC has always submitted them to the NASS as and when due.  The reports are circulated to many places including the Federal Stakeholders, States, Traditional Rulers, Organized Labour, Private Sector and Civil Societies.

Results Achieved

32.     As we observed earlier, because of the adoption, enforcement and monitoring fiscal responsibility, Nigeria is surviving the current global economic crisis without passing through the rigors of debt vulnerability and severe financial crunch.  However, there is frequent blowout of financial scams in places.  This is because the mainstreaming of fiscal responsibility has not taken firm root in Nigeria.  There are many obstacles to the mainstreaming of fiscal responsibility.  Permit to high some of the problems.

Obstacles

33.     Nigeria has a decentralized fiscal system administered by the Federal Government, 36 State Governments, one Federal Capital Territory and 774 Local Governments.  Only the Federal Government which receives about 48% of the nationally shared resources implements the FRF.  The lower-level governments are a drag on fiscal responsibility because they still practise discretionary fiscal policy with the attendant time-inconsistent fiscal policies, common-pool problem and populist generous welfarism not matched with increase in tax revenues.

34.     The FRC is like a police without gun sent to put down riot and arrest offenders.  The FRA, 2007, provides for offences, but does not specify punishment.  Worse still, requiring the FRC to report contraventions to the Attorney-General for possible prosecution in section 2(2) of the FRA, 2007, is not likely to help.  In the circumstances, officers and government agencies contravene the FRA, 2007, with impunity.

35.     In Nigeria, we practice “broken budget”.  Budgets are prepared late, approved late and implemented late.  For example, for the past seven years, budget approvals came over three months after the commencement of the budget years.  The budgets often deviated from the MTEF, and the legislature, through amendments and supplements vary the budgets beyond plus or minus 5%.  Of course, the execution of the capital budget was often extended three months into the following financial year.

Table 2 below shows how the budget for the past 6 years were processed.

Table 2: Budget Presentation and Approval 2005-2010

S/n Date of Presentation Presidential Consent
1 12 October, 2004 12 April, 2005
2 6 December, 2005 22 February, 2006
3 11 October, 2006 22December, 2006
4 8 November, 2007 11 April, 2008
5 2December, 2008 3 March, 2009
6 23 November, 2009 April, 2010

Source: Fiscal Responsibility Commission 2010 Annual Report, page 18.

Remedial Action

36.     The observed and encountered obstacles are not insurmountably countervailing.  They need to be tackled with greater sense of commitment and purpose.  This should be done as prescribed below.

37.     Instead of the prevailing persuasive and reputational punishment in which offences are provided without punishments, the FRA, 2007, should be amended to provide  for criminal punishments in the form of fines, recovery of assets unjustly acquired, imprisonment and ban from holding public office for a reasonable length of time.  This approach is practised in Brazil.

38.     The FRC should be empowered to prosecute offenders under the FRA, 2007, without necessarily reporting them to the Attorney-General of the Federation for possible prosecution.  This empowerment will considerably compel compliance with fiscal responsibility.

39.     Leaving sub-national governments, which control over 50% of the national resources, out of the purview of fiscal responsibility is obviously counterproductive.  To checkmate the incidence of time-inconsistent fiscal policy, common-pool problem or the tragedy of the commons, and embarking on generous welfare state without matching rise in tax revenue, the FRA, 2007, should be made applicable to the lower-levels of governments. This can be done in the first place by persuasion and dialogue through the channels of National Council of State, National Economic Council and Governor’s Forum, unavailing which, recourse should be made to the policy of “carrot and stick” and, ultimately, to constitutional amendment.

40.     One of the best ways of securing compliance with fiscal responsibility is to mainstream it in the heart of the Nigerian politics.  Make the FRF one of the manifestoes of the electioneering campaign by candidates for the posts of the President, Governor and Chairman (Local Government).  These public officeholders should be assessed partly on the basis of their performance in compliance with the FRF.

41.     Heads of Government at the three tiers should be permitted to alter the MTEF planning horizon to synchronize or tally with their tenures in office.  They should, however, be restrained, 12 months to the end of the tenure, from embarking on new projects that they cannot complete before leaving office unless they set aside cash or fund for completing them.  At the end of their tenure, Heads of Government who contravene the FRA, 2007, should be persecuted and, if found guilty, punished with fine, forfeiture of illegally acquired assets, imprisonment and ban from holding public office for a reasonable length of time.  This approach is practised in Brazil and it is working perfectly well.

42.     Our budget should be approved and signed into law one or two months before the commencement of the related financial year.  This is the international practice in places like Canada and Switzerland, and it makes for full execution of the budget within the financial year.

43.     Above all, the body established to enforce and monitor the FRA, 2007, should be accorded the independence it deserves by assuring it of adequate funding, and if possible, through the system of statutory transfer.

Conclusion

44.     We have tried to grapple with the topic, “Mainstreaming Fiscal Responsibility in the Budget Process”, illustrating what it means, its benefits, its enforcement, the obstacles hindering its full realization and what further actions are required to be taken to achieve complete full implementation of the FRA.  The discussion may not have been the ideal. This will certainly provoke questions, comments and rejoinders.  These are welcome.

45.     On that note, I wish to thank the Actionaid most sincerely for organizing a town hall meeting on 2012 budget and the economy and, particularly, for offering the FRC the window  of opportunity to discuss the topical issue of compliance with, and surveillance of, fiscal responsibility in the budget process.  Permit me at this point to appeal to you not to wait for Government or trade blames indefinitely, but to take full advantage of the provisions in section 51 of the FRA, 2007, and latch on it to mainstream fiscal responsibility in the budget process whenever reasonable need arises.  Together, the FRC and all the stakeholders, including the Actionaid, will strive to build a nation where prudent management of the national resources, macroeconomic stability, greater accountability and transparency in fiscal operations, full employment, high real income per capital and greater income equality reign….

Being excerpts from a Paper Presented at A One Day Town Hall Meeting 2012 Budget and the Economy Organized by Actionaid on 12 March, 2012, in Abuja By Alh. (Dr.) Aliyu Jibril Yelwa, OON, (Saduanan Yauri) Chairman, Fiscal Responsibility Commission, Abuja.

 

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