INTRODUCTION
Fiscal
responsibility relates to fiscal federalism. It is the assignment of revenue
and expenditure functions to the different tiers of government, namely Central,
State and Local Governments in a federal system of government. However, Fiscal
Federalism and inter-governmental fiscal relations are often used
interchangeably. Intergovernmental fiscal relations refer to the fiscal
transactions and coordinating arrangements among the various tiers of
government in a federation (Musgrave and Musgrave, 1989). The nature of
intergovernmental fiscal relations constitutes an extremely relevant
consideration for the attainment of fiscal nationality and macroeconomic
stability in a federal structure of government. Nigerian operates a federal
The 1999
constitution of the Federal government of Nigeria gives each tier of government
a set of responsibilities around which programmes are articulated and budgeted
for, and for which expenditure requirements need to be funded (Ezeabasili &
Herbert, 2007). Government intervention through fiscal policy is geared towards
the achievement of macroeconomic stability and real growth. This interventional
role is warranted by the failure of market mechanisms, due mainly to market
imperfections to efficiently allocate resources and achieve a stable
equilibrium and fair distribution of income (Okunroumu, 2000). However, public
sector management in Nigeria since independence has failed to deliver the much
expected macroeconomic stability. This is evident from the pattern of public
spending. Specifically, between 1970 to 2004, government expenditures have
shown persistent fiscal deficits. This has led to poor macroeconomic
performance, for example, through rising interest and exchange rates, increases
in money supply, low real gross domestic product and negative trade balances
during much of this three-decade period, Structure of government, with different
tiers as noted above.
Again, because Nigeria operates a federal
system of government, each tier of government adopts its own fiscal policy
without proper coordination or alignment and without caring about its systemic
effect. The implication is that resources are not properly coordinated and
purposefully deployed to projects with specific macro-economic goals. This, in
turn, retards macroeconomic stability. Even with the progressive increase in
revenue accruing to governments over the last three decades, there has been
growing misplacement of fiscal priorities (CBN 2005) as resources, have been
increasingly frittered away or diverted to trivial macroeconomic pursuits. In
effect, resources have not been utilized in non-trivial projects. For how long
will this seeming fiscal irresponsibility continue to dwarf economic
development? How can it be curbed or checkmated? This is the context of the
fiscal responsibly bill which has recently been passed into law. The fiscal
responsibility law is designed to improve inter-governmental fiscal
coordination in the pursuit of greater macroeconomic stability, promote fiscal
prudence and sound financial management of public resources. The law provides
legal backing for ensuring compliance with agreed fiscal benchmarks, enabling
environment for accelerating economic growth, and seeks to curb excessive
expenditure and thus limit the danger of running unsustainable deficits by the
different tiers of government.
WHAT IS FISCAL RESPONSIBILITY
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 and
spending taxpayer money wisely.
FISCAL RESPONSIBILITY ACT- AN
OVERVIEW
The
long title to the Act aptly captures the import of this new legislation. It is
made as an Act to provide for the 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 (FRC) to ensure the promotion and enforcement of the nations
economic objectives and for related matters. Alhaji Aliyu Yelwa - Chairman
Fiscal Responsibility Commission The Explanatory Memorandum to the Act
describes it as: This Act among other things, establishes the Fiscal
Responsibility Commission charged with the responsibility of monitoring and enforcing
the provisions of this Act to ensure greater accountability, transparency and
prudence in the management of the Nation’s resources by the Federal Government,
Government-owned corporations or companies and agencies as provided for under
sections 13, 16 (1) and (2) and item 60 of the Exclusive Legislative List as
set out in Part 1 of the Second Schedule to the 1999 Constitution of the
Federal Republic of Nigeria and provides incentives to encourage States and
Local Government pass similar fiscal responsibility legislation.” Signed into
law by President Umaru Yara’adua on 30th July 2007, the FRA along with the
Public Procurement Act and others yet to be enacted, is Scheduled corporations
are expected to establish a general reserve fund and to allocate one-fifth of
their operating surplus to the fund while paying over the balance to the Treasury.
expected to provide the statutory framework for the much needed reforms in
public finance and expenditure management in the country. The Act is divided
into fourteen parts, which are further broken into fifty seven sections with
Part One establishing the Fiscal Responsibility Commission and outlining its responsibilities,
powers and functions. Furthermore, the part provides for the establishment of a
fund for the FRC, composition of the FRC, tenure of office, cessation of
membership, emoluments of members as well as submission of the annual report of
the FRC to the National Assembly. In Part Two, attention shifts to the MTEF.
The Federal Government, the section states is to prepare this framework in
consultation with the states to cover a period of three financial years and
present same to the National Assembly. Details of what it should contain, such
as the macroeconomic framework, Fiscal Strategy Paper, expenditure and revenue framework
etc are also stated. The preparation of the framework shall be the
responsibility of the Minister of Finance and in preparing it; he is to hold
public consultations with interested stakeholders. In addition, he is to seek
inputs from the National Planning Commission, Joint Planning Board, National
Economic Commission, National Assembly, Central Bank of Nigeria, National Bureau
of Statistics, Revenue Mobilisation Allocation and Fiscal Commission and any
other relevant
Statutory
body. The Annual Budget is the focus of Part Three. It is to be derived from
the MTEF and it is to be accompanied by certain documents. These are the underlying
revenue and expenditure profile for the next two years, detailed performance of
the budget for the past 18 months, Fiscal Target Appendix, Fiscal Risk Appendix
etc. States and Local Governments are urged in preparing their annual budget to
adopt the provisions of this part with necessary modifications. Part Four
focuses on Budgetary Planning of Corporations and other related agencies and on
Budgetary Execution and Achievement of Targets respectively. Corporations and agencies
listed in the Schedule to the Act are to, at specified times submit schedules
of their projected revenue and expenditure to the Minister of Finance who is
expected to attach the estimates to the Annual Appropriation Bill to be sent to
the National Assembly. The scheduled corporations are expected to establish a
general reserve fund and to allocate one-fifth of their operating surplus to the
fund while paying over the balance to the Treasury. Part Five is on execution
and achievement of targets, the Accountant General of the Federation is to
prepare an Annual Cash Plan and based on this Plan, the Minister is to prepare
and publish a Disbursement
Schedule
not later than 30 days after the enactment of the Appropriation Act. This Part
also makes it the responsibility of the Budget Office to monitor and publicly
report on the implementation of the budget. Public Revenues is the subject of
Part Six while Savings and Asset Management is the subject of Part Seven. As
regards public revenue, the Act makes provision for its forecast and
collection. The forecast is to include monthly collection targets and measures
to combat tax fraud and evasion. The provisions for savings take care of
situations where proceeds from crude oil exceed the reference commodity price.
Such sums in excess of the reference commodity price are to be saved. In Part
Eight, attention shifts to Public Expenditures while Debt and Indebtedness is
addressed in Part Nine. Conditions for increasing government expenditure,
conditions for increasing personnel expenditure etc, are addressed in the
former while them Framework for Debt Management, Limits on Consolidated Debts
of Federal, States and Local Governments and Servicing of External Debts are
provided for in the latter. In the past, reckless borrowing used to be the norm
and the country has been paying and still continues to pay dearly for that
especially when the borrowed funds were not properly utilized or channeled into
sustainable and beneficial projects. This Act in its Part Ten puts a stop to
that
Practice
as it gives conditions for borrowing and verification of compliance with
limits. a 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. Unlike the other
sections of this Act which only urge states and local governments to emulate
the Federal Government by enacting legislations with similar provisions, the
conditions for borrowing are automatically binding on all the tiers of
government because these are issues on the Exclusive Legislative List reserved
for the National Assembly under the 1999 Constitution. Part Eleven is on
Transparency and Accountability and the Federal Government is mandated to
ensure that its fiscal and financial affairs are conducted in a transparent
manner and accordingly ensure full and timely disclosure and wide publication
of all transactions and decisions involving public revenues and expenditures
and their implications for its finances. The National Assembly is obliged to ensure
transparency during the preparation and discussion of the Medium-Term
Expenditure Framework, Annual Budget and the Appropriation Bill. The Federal
Government is among other things, to publish its audited accounts not later
than six months following the end of the financial year as well as a summarized
report of budget execution 30 days after the end of the financial year while a consolidated
version, showing implementation among physical and published not later than six
months after the end of a financial year. Part Twelve is on Enforcement and
this contains a revolutionary provision liberalizing access to the courts as follows
- a 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. Part Thirteen is on Miscellaneous Provisions
while Part fourteen is on Interpretations.
MAJOR
FEATURES OF THE FISCAL RESPONIBILITY ACT OR LAW IN NIGERIA
.
The fiscal responsibility law in Nigeria is structured after that of Brazil.
Since year 2000, when the law became operational in Brazil, it has diminished
chaos and corruption in the public sector management and the economy is on the
upswing .It is expected that Nigeria’s Fiscal Responsibility Law/act will
deliver the same benefits as that of Brazil, streamlining economic priorities
and manage the economy in a way that delivers significant benefit to the
Nigerian people. Finally Brazil is about the first black nation that operates
fiscal responsibility law and execution (Guardia and Sonder, 2004).
Public
Revenues: The creation, forecast, and effective collection
of all taxes levied by the federating units pursuant to the constitution are
basic requirements for the responsibility in fiscal management for Nigeria. The
laws stipulate that each tier of government shall get the share of
revenue/transfers after prompt remittance of collected revenue. Again, revenue
forecast revision by the legislature will only be permitted with proof of
technical or legal error or omission. At least 30 days before the deadline for
submission of their budget proposal, the executive branch of each tier of
government must place at the disposal of the legislature the revenue estimates
of the following year including net current revenue and the respective memorandum
items, again, while the Nigerian fiscal responsibility law/act says that the
revenue projections should be broken down into monthly collection targets by
the executives and, where applicable, a separate description of measures to
combat tax fraud and evasion and the implementation of tax relief which must be
included in the appropriation revenue forecast, the Nigerian law requires revenue projections to be broken
down into bi-monthly collection targets.
Public
Expenditures: Nigerian responsibility act specify conditions under which
any tier of government can increase expenditure. Important aspects of the
conditions state that each such increase in expenditure must come with:
i. An estimate of the budgetary or financial impact in the year it became
effective and, in the two subsequent years, a statement from the entity (or
ministry) requesting for the increase consistent with the budget and the
medium-term economic plan in Nigeria and multi-year plan (PPA) and budgetary
directive law in Brazil.
ii. Contract award must satisfy the due process procedure and
certification of contract; procurement and award of contract.
ii. Personnel expenditure must not exceed prudent limits set in the
budget.
iii. Violation of
these sections of the law is deemed as unlawful
Debt and the
Indebtedness: This section states that government should only be allowed to
borrow for human capital or other capital expenditure on the condition that it
shall be on concessionary terms or low interest loan with a reasonably long
payment period. It also states that public debt must be held at sustainable
level. Servicing of external debt shall be direct responsibility of the
government that incurred the debt.
Transparency
and Accountability: This section specifies that simplified
versions of the federal and the state medium-term economic plans, annual
budgets, appropriation act, rendering of accounts and prior statement of
opinion, summary budget execution report and fiscal management report are
widely publicized in the media. It also specifies that the legislative arm of
each government should ensure transparency by encouraging public hearings
during preparation and discussion of annual plans, budgets or appropriation
bills.
THE IMPERATIVES
OF FISCAL RESPONSIBILITY ACT IN NIGERIA
The imperatives of
well functioning fiscal responsibility law/act
are hinged on the following: Adherence
to the principle of transparency, accountability, fiscal discipline, due
process and good governance: The adherence to the principle of transparency
in the preparation of annual budgets by making the budget sessions public,
accountability in publishing the financial statements and accounts of the
various tiers of government and restrictions from extra budgetary spending,
will go a long way in strengthening this major fiscal policy tool. Also important
is the extension of the due process compliance to all levels of government.
Tax Structure:
The constitution already provides for tax assignment to the various tiers of
government. The federal government tax assignment dominates the tax system,
accounting for over 95 percent of total government revenues from this source.
This trend contributes to low revenue base at the lower tiers of government,
yet they are expected to perform major expenditure functions, presumed to be
bigger than their revenue base. There is a need therefore to ignite the revenue
potentials of these tiers of government by increasing their tax powers, with a
potential for greater economic growth and strengthening fiscal responsibilities
Eradication
of Corruption: Lord Keynes (1936) in his General
theory of employment, interest and money, provided robust evidence that fiscal
policy could be a very powerful tool for achieving macroeconomic stability.
But, in practice, many obfuscating variables entered the picture such that a
wide spectrum of outcomes emerges, many of which are sub-optimal. First, using
the instrument of soft budget constraint to cure recessions or depressions
could be easily opened to abuse, especially in a world ruled by greed, obscene
corruption, and rent-seeking behavior. The evidence suggests that the soft
budget constraint has received its grotesque abuse in Nigeria (Agiobenebo,
2003). So the fight against corruption should really start from our homes among
the children, at primary and secondary schools and the tertiary levels.
Reduction
of Deficits/Method of Financing Them through Money Creation:
Nigeria has, since most of the 1970s to date, suffered from unsustainable
fiscal deficits in her annual budgets. These deficits are mostly financed by
the banking system through money creation by the central bank and/or draw-down
of external reserves which have the same effect as money creation. The effect
of this is persistent macroeconomic instability in the form of high inflation,
external debt overhang, high interest rate, unfavorable balance of payment and
exchange rate depreciation and increase money supply. If this phenomenon is
left unabated, it is bound to derail the objectives of fiscal responsibility.
However, low fiscal deficit is advocated or recommended with financing through
the non-bank public (bond financing).
Training
and Infrastructure: Federal, state and local government
staff should be properly trained to acquaint them with new techniques required
in budgetary processes with regards to the medium-term expenditure framework.
Appropriate, infrastructure such as the information and communication
technology (ICT) platform must be provided to every tier of government. This
will assist in easy transmission of data to the central point and coordination
of fiscal policy.
CONCLUSION
The
evaluation of the fiscal responsibility act will, no doubt, go a long way in
curbing most of the problems that militate against sound public sector
financial resource management. Proper compliance is essential in promoting
fiscal discipline, transparency, accountability and therefore foster macroeconomic
stability. It is therefore imperative that States and Local governments in
Nigeria should also embrace this law in other to enhance their fiscal prudence.
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