This is a financed statement of estimated revenue and expenditure of a government for a period of time usually one year. Budget can also be defined as a document containing detailed estimate of government expected revenue and proposed expenditure in a particular year. In short, it is a future plan of action. In Nigeria, budget are prepared at all levels of government.
Supplementary budget is the additional estimate of revenue and expenditure when there is a fall in the main budget. It should be given approval by the legislature.
Functions of Budget
It is used to control government revenue and expenditure to ensure all the items budgeted for are carried out.
It helps to set goods and formulate policies. It is a future plan of action.
It helps to stimulate economic activities
It helps to correct or checks adverse balance of payment
It shows the direction of government policy
It helps to redirect income among the components of an economy and improved standard of living
It is a tools to curb inflation by reducing spending and embrace surplus budgeting system.
It is a tool for allocation of resources
Types of Budget
Surplus Budget : This is a type of budget in which proposed revenue of the government for the year is more than proposed expenditure. The government spends less than its revenue, during the financial year. It increases the reserves of a country.
Budget surplus = Y>E Where Y = Income , E = Expenditure
Uses of Budget
It is used to curb inflation
It is one of the conditions requires by IMF for lending
It increases reserves of a nation
It is used to solve balance of payment problem
It can be used to repay public debt
Deficit Budget : The expected expenditures incurred by The government are more than the expected revenue for a fiscal year. It is the excess of government total expenditure over its income. It unusually financed by borrowing.
Budget deficit = Y < E Where Y= income, E= Expenditure
Uses of Deficit Budget
It is used to curb deflation or depression
It is used to reduce unemployment rate
It is used to meet national emergency
It is used to finance capital project
However, its effects are
It leads to increase in government expenditure
It leads to increase in employment rate
It increases government expenditure which in turns leads to inflation
It reduces the disposable income of tax payer when government increase tax
Sources of financing Deficit Budget
The government can borrow from internal sources through the use of instruments like bonds
The government can borrow from the banking sector through the use of treasury bills and certificates
The government can borrow from the international capital market
The government can borrow from the central bank
Tax can be increases for finance deficit
Government can also financed its deficit through bilateral or multilateral agreement with other countries
External reserves can be drawn by the government of a country to finance its effect
Balanced Budget : There is a balance budget when the estimated revenue is equal to the estimated expenditure for the year. That is ,the total receipts is equal to total expenditures. It is a useful instruments when there is no inflation or deflation.
Balance budget = Y = E Where Y = Income , E = Expenditure
This is the debt of a country borrowed by the government from individuals, institutions and foreign governments during a given period of time. It is the total sum of debts a country owes its citizens, or organizations or the other government to finance developmental programs. It could be internal or external.
It is internal when government borrowed from its citizens while external if loans are collected from from institutions like World Bank, International Monetary Fund and Paris Club etc.
Instruments of Government Borrowing in Nigeria
Treasury certificates : These are securities for medium borrowing . They are interest earning obligations of Federal Government foe maturities from one to two years. The rate of interest is higher than treasury bills
Treasury bills: These are financial Instruments used for short term borrowing. The date of maturity is about 90 days. That is ,3 months. It carries low rate of interest.
Development stocks: These are long – term securities usually issued to financed development projects. The tenure is about five to ten years and above. The yield is high and it has a definite rate of interest.
By negotiations : The government can also take loan from external financial institutions through negotiations.
Revenue bond: This is a municipal bind issued on the condition that interest and principal will be repaid from the revenue generated from the usage of the facilities.
Reasons for Public Debt
To finance huge capital projects like hydro electricity, roads, water dams and steel projects to develop economy
To ensure economic stability and generate high level of employment for the people
To finance budget deficit since the revenue from tax cannot meet the revenue expectations of the government
To finance unforeseen occurrence or emergency like wars, natural disasters and drought
It is used to regulate the economy during inflationary period
It is also use to pay outstanding debt
Government borrow to finance huge capital investment
Causes of Debt in Nigeria
Mis-management of economy by successive government
Most revenue derived from various sources of government revenue are stolen and taken overseas
Nigeria is a mono -product economy as we depend solely on earnings from oil sector
Nigeria has a taste and preference for foreign luxurious goods. This has resulted in short debt borrowing
Borrowed money is wrongly deployed to the execution of wasteful and white elephant projects
Positive Effects of Debt
Loans and grants can be used to supports balance of payment
It helps to finance huge capital projects
Borrowed money helps to increase the level of economic activities such as employment and production
Borrowed money could be spent on productive activities
It leads to expansion of private sector
Negative Effects of Debt
It drains scarce foreign exchange earning
Foreign creditors exercise control over the economy
Foreign reserve becomes depleted
It leads to galloping inflation and unemployment
It leads to worsening political and economic life of the people
Sources of Borrowing
Government can borrow from internal and external sources.
Internal sources: These are sources of borrowing within the country. The government can take loan from the following people or institutions
National provider fund
External sources: These are organizations outside the country government gets loans from. The sources are as follows
International Monetary Fund
Africa Development bank
Foreign Government like Britain Japan, France and America
London club of creditors
Classification of Debt
Short-term: This is a type of Debt which is taken to meet the short term needs of the government. They are not use to finance projects . It is repaid within a short period of time
Long-term : This is a dent which is raised by the government to finance long term capital projects. It lasts for a long period of time repayment. It is mainly used for developmental projects.
Bilateral: This is a type of Debt in which a country borrowed from another country. It is a two way situation. For example, if Nigeria obtained loan from USA, it is a bilateral long agreement.
Multilateral: This occurs when a country obtains credit faculties from multilateral financial institutions such as World bank, IMF etc. Such loan s normally comes with stringent conditions.
Internal debt: This is a dent that the government of a country raised from individuals and organisations within the country. The sources are Treasury bill and Treasury certificates. It is repayable in domestic currency
External debt: This occurs when government borrowed from individuals or institutions operating outside the country
This is the process of distributing the revenue derived by the government annually among the levels of government. It is the division of proceeds of Federal Government among the Federal, State and Local government. It can be grouped into:
Vertical revenue allocation: This involves the sharing of the revenue accruing to the federal account among the three tiers of government
Horizontal revenue allocation: This refers to the sharing of revenue accruing to the federation accounts among the units within a given level of government. It is based on principles like population size, land mass, derivation, ecological problems etc .