Wednesday 3 December 2014

A CRITICAL EVALUATION OF THE FISCAL RESPONSIBILITY ACT AND PRUDENCE IN NIGERIA


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.
REFERENCES
Agiobenbo, T. J (2003).Fiscal Federalism and Macroeconomic Stability. In Issues in Fiscal Management: Implication for Monetary Policy in Nigeria pp. 160-170.
Alade, S. O., Obajemito, J, Rapu, S.C and Tule, M. (2003). Fiscal Federalism and Macroeconomic Governance in Nigeria. Contemporary Economic Issues in Nigeria. (2004) O.J. Nnama, S.O. Alade, F.O. Udoko (eds), pp.47-51.
Alesina, A. and Perotti, R. (1999). Budget Deficits and Budget Institutions. Fiscal Institution and Fiscal Performance, ed. by Poterba, J.M. and Von Hagen Jurgen, Chicago, University of Chicago Press.
Central Bank of Nigeria (CBN) (2005) Brief series No 2004-5/10 p24
Ezeabasili, V. N. and Herbert, W.E. (2007). Fiscal Policy, Public Sector Management and Macroeconomic Stability in a Developing Country: The Expectations from the Fiscal Responsibility Bill in Nigeria. The National Accountant. Vol.15, No.1, pp.21-27.
Federal Ministry of Finance, Abuja (2004), Understanding the Proposed Fiscal Responsibility Law.
Guardia, T.R, Sander, D (2004). Fiscal Adjustment and Federalism in Brazil IMF/NIPFP Conference on Fiscal Policy in India Jan. 16-17.
Musgrave, R.A. and Musgrave, P.B. (1989). Public Finance in Theory and Practice. New York, McGraw-Hill Book Company.
Okunrounmu, T. (2000). Transparency, Probity and Accountability in Fiscal Operations as a Panacea for Economic Development. Central Bank Nigeria Economic Financial Review Vol.38, No.4.
Ter-Minassian, T. (1997). Intergovernmental Fiscal Relations in a Macroeconomic Perspective: An Overview. In Fiscal Federation in Theory and Practice, ed. by Ter-Minassian, Teresa, International Monetary Fund.
The Brazilian Fiscal Responsibility Law Supplementary Law 101 of May 2000.
The Nigerian Fiscal Responsibility Act 2007
Todaro, M.P. and Smith, S.C. (2004). Economic Development. Ed.8, India, Person Educational Ltd.S

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