Budget

Back to: ECONOMICS SS2

 

Welcome to class! 

In today’s class, we will be talking about the budget. Enjoy the class!

Budget

A budget may be defined as a financial statement of the total estimated revenue and the proposed expenditure of a government in a given period, usually a year.

FUNCTION/USES/IMPORTANCE OF BUDGETS

The national budget is used to achieve the following objectives

1. It is used as a means of raising revenue
2. It is used to control inflation
3. It is used as a remedy a depression (recession) or deflation.
4. It is used to correct a balance of payments deficit
5. It is used as a tool for economic planning
6. It is a means of enhancing public welfare and reducing income inequality in the country
7. Budgets are used to allocate resources between different sectors of the economy
8. It is used to control the economy to foster economic growth and development.

TYPES OF BUDGET

1. Balance Budget: This is when the total estimated revenue is equal to the proposed expenditure of the government. This means that nothing will be left as a reserve from the money collected in form of revenue
2. Surplus Budget: A budget is called surplus budget when the total estimated revenue is more than the proposed expenditure. In this type of budget, not all the estimated revenue is proposed to be spent in that year. That is, there will be a reserve.
3. Deficit Budget: This is when the government total proposed expenditure for the period is more than the total estimated revenue. The shortfall in revenue is sourced through borrowings, the printing of more currency, aids and grants etc.

ECONOMIC CONDITIONS WARRANTING THE ADOPTION OF THE DIFFERENT TYPES OF BUDGETS

1. A budget surplus is desirable in a period of inflation because it reduces aggregate demand thereby reducing inflationary pressure in the economy
2. A deficit budget is used in the following instances

(a) To reduce unemployment by increasing aggregate demand.

(b) To finance a national emergency such as war

(c) To remedy a deflationary trend

EVALUATION

1. Define a budget.
2. List the types of budget.

NATIONAL DEBT

National debt or Public Debt refers to the total of debts owed by the government of a country both internally and externally. The debts may or may not be with interest

REASONS WHY GOVERNMENT BORROW

1. To finance deficit budget
2. To finance a huge capital project
3. To prosecute a war i.e. for the procurement of ammunition and other war materials
4. To service existing loans
5. To manage an emergency e.g. flood, drought, epidemic, famine
6. To correct an unfavourable balance of payment

INSTRUMENTS OF GOVERNMENT BORROWING IN NIGERIA

1. Treasury Bills – used for short term borrowing i.e. 90 days
2. Treasury Certificates- used for medium-term borrowing i.e. 1 – 2 years
3. Development Stocks – used for long above
4. Stabilization Securities
5. National Saving Scheme
6. Negotiation with External Financial Institutions
7. Municipal Revenue Bond

EFFECTS OF HUGE NATIONAL DEBT ON THE ECONOMY OF A COUNTRY

1. It reduces the availability of foreign exchange
2. It makes a country to be susceptible to the dictates of external creditors
3. It makes it difficult for the country to source fresh loans – i.e. it lowers a country’s credit ratings
4. Large domestic debt will influence the distribution of income in the country
5. The servicing of external debt will involve an outflow of resources which can otherwise be used for economic development.
6. The servicing of a large national debt will limit the government’s ability to provide welfare / social services to the people

EVALUATION

1. What is the national debt?
2. State five reasons why government borrow.

REVENUE ALLOCATION

Revenue allocation refers to the sharing of the nation’s wealth among various tiers of government or various units that make up the country.  The various units include Federal, State and local governments.

PARTS OF REVENUE ALLOCATION

Revenue allocation is grouped into two major parts namely:

1. Vertical Revenue Allocation
2. Horizontal Revenue Allocation

Vertical Revenue Allocation – in vertical revenue allocation, revenue accruing to the federal account is shared among the three tiers of government – Federal, State and Local government.

Horizontal Revenue Allocation – under the horizontal revenue allocation, revenue accruing to federation account is shared among the units within a given level of government. It involves certain principles based on some factors to be applied in revenue allocation.  These principles include:

1. Population size
2. Landmass
3. Derivation, e.g oil-producing areas.
4. Ecological problems.

REVENUE ALLOCATION FORMULA

This involves the weight assigned to various principles e.g. Federal government – 48.5%, State – 24%, Local government – 20%, special fund – 7.5%.  These are just for the short time.  It should be noted that there is no fixed revenue allocation.  It changes from time to time.  The Revenue Mobilization Allocation and Fiscal Commission (RMFC) is always at work trying to work out a proposal for a new revenue sharing formula.

EVALUATION 

1. Distinguish between vertical revenue allocation and horizontal revenue allocation.
2. Mention any three principles used in sharing the revenue accruing to Federation Account.

 

In our next class, we will be talking about Capital Market.  We hope you enjoyed the class.

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