Budget – SS2 Economics Lesson Note (Third Term)

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.

Behavioural objectives

By the end of the lesson, students should be able to:

• define a budget and state its uses;
• distinguish between balanced, surplus and deficit budgets;
• state the economic conditions in which surplus and deficit budgets are adopted;
• explain national debt, why governments borrow and the effects of a huge national debt;
• explain vertical and horizontal revenue allocation and the principles used in sharing revenue.

What are the functions of a budget?

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 for 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. It is used to allocate resources between different sectors of the economy.
8. It is used to control the economy to promote economic growth and development.

What are the types of budget?

1. Balanced 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 as revenue.
2. Surplus budget: A budget is called a 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’s total proposed expenditure for the period is more than the total estimated revenue. The shortfall in revenue is sourced through borrowing, printing of more currency, aids, grants and so on.

When is each type of budget adopted?

The type of budget a government adopts depends on the economic conditions of the country.

1. A surplus budget is desirable in periods of inflation because it reduces aggregate demand, thereby reducing inflationary pressure in the economy.
2. A deficit budget is used in the following instances:
   • to reduce unemployment by increasing aggregate demand;
   • to finance a national emergency such as war;
   • to remedy a deflationary trend.

What is 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 carry interest.

Why does a government borrow?

1. To finance the 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 or famine.
6. To correct an unfavourable balance of payments.

What are the 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 to 2 years.
3. Development Stocks: used for long-term borrowing.
4. Stabilisation Securities.
5. National Savings Scheme.
6. Negotiation with external financial institutions.
7. Municipal Revenue Bond.

What are the effects of a huge national debt on the economy?

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

What is revenue allocation?

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

Revenue allocation is grouped into two major parts: vertical revenue allocation and horizontal revenue allocation.

Vertical revenue allocation

In vertical revenue allocation, revenue accruing to the Federation Account is shared among the three tiers of government: Federal, State and Local government.

Horizontal revenue allocation

Under horizontal revenue allocation, revenue accruing to the Federation Account is shared among the units within a given level of government. It involves certain principles based on some factors. These principles include:

• population size;
• landmass;
• derivation, e.g. oil-producing areas;
• ecological problems.

What is the revenue allocation formula?

The formula is the weight assigned to the various principles, e.g. Federal Government 48.5%, State 24%, Local government 20%, special fund 7.5%. These figures applied only for a short time. There is no fixed revenue allocation, and it changes from time to time. The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) is always at work trying to produce a proposal for a new revenue-sharing formula.

Evaluation

1. Define a budget.
2. Distinguish between a surplus budget and a deficit budget.
3. State four reasons why a government borrows.
4. State three effects of a huge national debt on the economy.
5. Explain the difference between vertical and horizontal revenue allocation.

Assignment

1. The government imposes taxes mainly to
   1. punish the citizens
   2. provide social amenities
   3. donate to poorer countries
   4. execute white elephant projects.
2. A budget deficit can be financed by
   1. reducing the level of taxation
   2. printing more money
   3. lending to financial institutions
   4. employing more workers.
3. A continuous fall in the general price level is called
   1. recession
   2. depression
   3. deflation
   4. stagflation.
4. A budget surplus implies that
   1. expenditure equals revenue
   2. expenditure is less than revenue
   3. expenditure is greater than taxation
   4. direct tax is more than indirect tax.
5. The greatest revenue-earning industry in Nigeria is
   1. construction
   2. agriculture
   3. manufacturing
   4. mining.