BALANCED AND

UNBALANCED BUDGET
 THE BUDGET
The budget is a financial statement made by the
government which spell out estimated government
revenue and proposed expenditure for the coming
financial year.(in Nigeria, the financial year starts
on January 1 and ends on 31st December).
The budget can be categorized into 2 parts –
(1) Income (2) expenditure
 Income part
It is made mostly on how much to spend or consume based on how much
they may be expecting as income.
Expenditure part
This one exists in a situations where how much is projected to be spent.
When income expected exceeds the expenditure or vice-versa we say we
have an unbalanced budget.
However, when the projected income equals the expenditure we say we
have a balanced budget.
 Importance or Uses of Budget
The budget of a country is used to achieve the following objective
1. Allocation of resource: budget is usually used to allocate resource from one sector of the
economy to another.
2. To communicate government economics objective and policies: government usually uses
budget as a medium to communicate her economics objective and policies to its people.
3. Appraisal government performance: budget is used by the citizen and international
community to appraise the performance of the government.
4. To foster economics growth and development: budget is used generally to foster economics
growth and development of a country.
5. Budget is used to curb inflation and deflation: budget is generally used by government to
control inflation and deflation in the economy.
 REASONS FOR BALANCED BUDGETS
There are some reasons why the government has to plan a
balanced budget, they are as follows;
i. To finance important capital projects e.g. construction of
roads, dams etc.
ii. To finance public goods that would be of benefit to all and
sundry
iii.To close recession gap
iv. To meet current increase in government, expenditure
v. To finance economic enterprises that will provide goods this
would be self-fiscal policy.
BUDGET DEFICIT AND BUDGET SURPLUS
BUDGET DEFICIT
There is a budget deficit if the estimated government
revenue is less than proposed expenditure for a given
financial year. For example in 2007 Nigeria has a total
expenditure of N2.52 trillion but could only realize
revenue of N2.43 trillion. We can say that Nigeria has a
budget deficit of N0.9 trillion naira. It can be used to
increase capital formation.
 use of a budget deficit
i. A budget deficit is used to increase aggregate
expenditure (or demand and reduce unemployment)
ii. A budget deficit is used to finance a national
emergency such as war.
iii.It is used to finance projects which involve huge
capital outlays
iv.It is used to remedy a deflationary trend (or depression)
by increasing aggregate expenditure and demand.
 BUDGET SURPLUS
There is a budget surplus if the proposed government expenditure is
less than the estimated government revenue during a financial year.
uses of budget surplus
(i) A surplus budget is used to reduce aggregate spending (demand)
thereby reducing inflationary pressures in the economy.
(ii) It is sometimes used in order to meet one of the condition of
world financial institution (such as the IMF) for lending money,
to enable the borrowing country to revitalize the economy
Ways of financing deficit budget and their effects (e.g. debt burden, debt
relief debt buy back)
(i) Borrowing from the banking sector: - it can be financed through
borrowing from the banks or other financial institutions.
(ii) Increase
in tax: - government can also use fiscal policy like increase in
tax to finance deficit.
(iii)Borrowing
from the banking sector: - deficit budget can be financed
through borrowing from the banks or other financial institutions.
(iv)Fromthe Central Bank: -Central Bank can lend money to the
government from the reserve.
(v) Borrowing
from internal source: - they can use instruments like bonds
or development stock.
 NATIONAL OR PUBLIC DEBT
National or public debt refers to the debt a country owes
to its citizens or other countries or organizations such as
the International Monetary Fund (IMF) and the World
Bank. The debt which a country owes its citizens is
known as internal debt while the debt owed foreign
governments and organizations is known as external
debt.
 INSTRUMENT OR SOURCES OF GOVERNMENT BORROWING IN NIGERIA
The government of Nigeria can use the following instruments to borrow money.
These include;
i. Treasury certificate: these are securities for medium term borrowing. They
are for a period of one to two years and they carry higher rate of interest
than treasury bills.
ii. Treasury bills: these are securities used for short-term borrowing for about 90
days. This carries low rate of interest.
iii. National savings scheme: government can also borrow money from the
national savings scheme to finance its projects.
iv. Development stock: these are referred to as government stock and they are
used for long term borrowing of up to five years and above.
v. Negotiations: the government can borrow from external financial institutions
such as the Paris Club, International Monetary Fund (IMF), World Bank, etc.
 REASONS WHY GOVERNMENT BORROWS
i. To finance budget deficit
ii. To finance huge capital projects
iii. To meet cost of national emergencies
iv. To reduce economic burden on tax-payers.
v. To meet balance of payment disequilibrium
vi. To provide employment opportunities
vii. To service some loans
viii. To control fluctuations in national income
 SOME TERMS ASSOCIATED WITH BUDGET
DEBT SERVICING: Debt servicing refers to the payment of
interest on loans taken by the government and the repayment of
the capital sum at a future date.
DEBT MANAGEMENT: Debt management refers to a
process or situation whereby the government structures the
country’s debts, which are dominated in foreign currency, with
the fundamental aim of reducing the total external debt stock.
 ASSIGNMENT
A huge national debt can affect the economy of a country through the
following ways; Highlight ten 10 how a huge national debt can affect the
economy of a country
 ECONOMICS
Revenue Allocation in Nigeria
Revenue allocation is the process of sharing the nation’s annually generated
revenue among the various levels of government i.e. Federal, State and Local
governments.
In Nigeria, various commissions were set up over the years to resolve the
problems arising from revenue allocation. These include:
 ECONOMICS
i. The Phillipson Commission (1946)
ii. Hicks – Phillipson Commission (1951)
iii.Chick Commission (1953)
iv. Raisman Commission (1958)
v. Binns Commission (1964)
vi. Dina Commission (1968)
vii.Aboyade Commission (1977)
viii.Okigbo Commission (1979)
ix. National Revenue Mobilization Allocation and Fiscal Commission (1989).
In all, each of these commissions came up with a formula thought to be workable in allocating
the centrally-collected revenue among the different levels of government. These formulae
were based on some principles.
 ECONOMICS

Principles of Revenue Allocation in Nigeria

The principles used by one or the other of the revenue
allocation commissions include the following:
1.Derivation: that states from which a source of revenue is
obtained should receive an extra share over and above others.
2.Even Development: spreading growth and development in a
way to reduce inequality among states and local
governments.
3.Population: consideration to be given to population strengths
of states.
 ECONOMICS

4. Land Mass: that states with large expanses of land would require
more revenue to develop the land resource.
5. Equality of States: this principle views states as being equally
created. Therefore, they should be equally empowered.
6. Need: that needs of individual states should be given consideration in
sharing national revenue.
7. Absorptive or utilization capacity: that revenue should be allocated
on the basis of how each state is able to efficiently utilize them.
8. National interest: this is used by the highest level of government on
discretion to allocate funds to lower levels or units to serve diverse
needs and considerations.
 ECONOMICS
ONE OR MORE OF THESE PRINCIPLES HAVE BEEN USED BY THE VARIOUS COMMISSIONS OVER THE YEARS TO COME UP WITH DIFFERENT FORMULAE AS IN THE TABLE BELOW:

Year Federal State Local Special

% % % %
1977 60 30 10 --
1979 53 30 10 7
1987 40 40 20 --
2002 48.5 24 20 7.5
2003 46.63 33 --
20.37 19
 BURDEN OF NATIONAL OR PUBLIC DEBT
The extent of the burden of national or public debt is
determined by the type of debt, whether internal or external,
the purpose of the debt and the period of repayment.
A huge national debt can affect the economy of a country in
the following ways;
i. The servicing of an external debt will involve an outflow of
resources, which can otherwise be used for economic
development
i. It can reduce the availability of foreign exchange in the form of
depleted foreign reserves.
ii. The servicing of a large internal debt will limit government’s
ability to provide social capital and services for the people.
iii. If a large internal debt is sustained by a high rate of interest, it
will reduce private investment on capital goods
iv. A large domestic debt will influence the distribution of income in
the country.
v. A large external debt can make a country to be susceptible to the
whims and caprices of external creditors.