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The Federal Government's Budget
The 1999 Constitution requires Mr. President to present the annual budget of the Federal Government to the National Assembly for its passage. The Budget gives details of expected revenue and expenditure, and presents the direction of Government's policies and spending priorities for a given fiscal year. Normally, this fiscal year runs from 1st January to 31st December; although this has sometimes been extended to 31st March in recent years.
Through the Budget, the Federal Government delivers essential public goods and services, such as education, healthcare, infrastructure and security to its citizens. The government needs to plan its financial activities and come up with detailed spending plans to provide these goods and services. The Federal Budget as a fiscal policy tool affects many aspects of our economy such as the general price level of goods and services in the economy, interest rates at which individuals and businesses can borrow money, the exchange rate at which the Naira trades against other currencies and the rate of growth of the economy. These 'macroeconomic variables', as Economists call them, affect the wellbeing of the entire economy and, indeed, the social and economic wellbeing of all Nigerians.

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  1. 1. A Citizens’ Guideto theFederal Budget
  5. 5. A-1. The Federal Governments BudgetA-2. WheretheMoneyComes From-andWhereitGoesThe 1999 Constitution requires Mr. President to present the annual budget of the Federal Government tothe National Assembly for its passage. The Budget gives details of expected revenue and expenditure,and presents the direction of Governments policies and spending priorities for a given fiscal year.st stNormally, this fiscal year runs from 1 January to 31 December; although this has sometimes beenstextendedto31 Marchinrecentyears.Through the Budget, the Federal Government delivers essential public goods and services, such aseducation, healthcare, infrastructure and security to its citizens. The government needs to plan itsfinancial activities and come up with detailed spending plans to provide these goods and services. TheFederal Budget as a fiscal policy tool affects many aspects of our economy such as the general price levelof goods and services in the economy, interest rates at which individuals and businesses can borrowmoney, the exchange rate at which the Naira trades against other currencies and the rate of growth of theeconomy. These macroeconomic variables, as Economists call them, affect the wellbeing of the entireeconomyand,indeed,thesocialandeconomicwellbeingof allNigerians.s depicted in Figure A.1 below, a typical Nigerian household would normally discuss its earningsAexpected over a period, how much to spend on shelter, food, clothing, transport, education, etc. andhow much to save for the rainy day.As is sometimes the case, where they do not have enough money tomeet their needs, they might discuss how they can spend less, such as by cutting back on some items likeattendance at the cinema, travels and so on. Alternatively, they might consider working more hours orseeking more lucrative ventures to earn extra income.They might even decide to borrow if they think theshortfallwould betemporary!However, where the expected income over the period exceeds the requirement to meet the needs, theymight decide to use some of the extra to improve their situation in critical areas like paying off debts builtupovertheyearsor makingsomecriticalinvestmentswithfutureearningstreams.Page 1Part A: An OverviewA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  6. 6. AgricultureOil ProductionHealthcareInfrastructureResearchMilitaryTechnologyFinanceExecutive and LegislativeEducationLike the household situation, the Government estimates how much money it expects to receive over afiscal year and the medium term,where such monies will come from,and how much of it to spend in orderto achieve goals set in theGovernments developmentalpolicy documents. These includegoals set for human capital develo-pment, infrastructural development,nationalsecurity,andso on.Unlike the household situation,however, the Government keeps inmind that it collects revenue onbehalf of its citizens. To this extent,the Government debates how its revenue and spending decisions will help grow the economy and boostthe earnings of citizens. The rest of this chapter is dedicated to a discussion, in some detail, of how theGovernmentraisesrevenuesandwhattherevenuesarespenton.oney spent by the FederalMGovernments Budget comesthrough three main sources ofrevenue. These are the FederalGovernment’s share of theFederation Account, the ValueAdded Tax Pool and IndependentlyGeneratedRevenue.A-2.1 Sources of financingthe BudgetFigure A.2 Government BudgetingPage 2Figure A.1: Household BudgetingClothingFoodHousehold Appliances TransportShelterEducationBillsA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  7. 7. TheFederationAccount &InteractionbetweentheTiersof GovernmentThe Federal Government, like the States and Local Governments, draws its main source of funding fromthe distributable revenue pool referred to as the Federation Account. Revenues are then shared amongthe Federal, States and Local Governments at monthly interactions at the Federation AccountsAllocations Committee meetings, in accordance with the existing sharing formula. Revenues, apartfromValueAddedTax, are distributed as indicated in FigureA.3.ValueAddedTax revenue is distributedasindicatedinFigureA.4.The States and Local Governments also providepublic goods and services, such as education,healthcare and infrastructure to citizens withintheir geographic areas. However, under oursystem of fiscal federalism as provided in the1999 Constitution, each level of government isresponsible for the management of its ownfinances. This is why this Citizens Guide limitsthediscussion totheFederalBudget.OILREVENUEOil Revenue is the most important source ofrevenue to the FederationAccount and it is madeup of (1) Crude Oil Sales, (2) Oil Taxes, and (3)Royalties.Crude OilSalesNigeria has significant crude oil and gasresources which the government exploitsFederalGovernment52.68%StateGovernments26.72%LocalGovernments20.60%Figure A.3: Federation A/C Distribution FormulaFederalGovernment15%LocalGovernments35%StateGovernments50%Figure A.4: VAT Pool Distribution FormulaPage 3A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  8. 8. through a number of business arrangements with oil producing companies. The Nigerian NationalPetroleum Corporation (NNPC) represents the governments interests in these businessarrangements.The most important ofthese arrangements is theJoint Venture, underwhich oil companies, inpartnership with NNPC,work to find and producepetroleum. Here, the oilcompanies and NNPC(through the Budget)contribute money tooperate the business, andthen share the crude oilthat is produced. Themoneys contributed arereferred to as JointVenture Cash Calls. NNPC takes the Governments share of the crude oil and sells this in theinternationalanddomesticmarketsyieldingamajorsourceofrevenuetotheFederationAccount.Gas Sales&OilTaxesSales of NaturalGas haveincreasinglybecomeanimportantsourceofrevenuefortheBudget.Added to this source are the Oil Taxes generated when the Government imposes taxes on the oilproducing companies. These taxes include (1) Royalties, (2) Petroleum Profits Tax, (3) Rents andOtherOilTaxes.Page 4Figure A.5: Breakdown of Annual Average Oil Revenues(2005 -2011)A CITIZENS’ GUIDE TO THE FEDERAL BUDGETSource: BOF & OAGF
  9. 9. 1. RoyaltiesOil producing companies are required to pay a fee for every barrel of crude oil they produce inrecognition of governments sovereign ownership of the crude oil. These fees are referred toas Royalties and are paid whether or not government shares in the crude oil produced.Presently the rate of Royalties averages about 20% of the value of crude oil produced, but theexact rate depends on the location of the field (i.e., whether onshore, offshore, deep offshore,etc).2. PetroleumProfitsTaxA tax of 85% is levied on the profits of oil producing companies under the Joint Venture andService Contract business arrangements while a tax of 50% is applied to profits under theProduction Sharing Contract arrangements. This constitutes the second most importantsourceof revenuetotheFederationAccount.3. Rentsand Other OilTaxesGovernment charges Rent as a fee for the use of the land (or oil acreages) from which oil isextracted. There are also other charges and levies (Other Oil Taxes) paid by oil companies togovernment including penalties for gas flaring and fees for the right to lay pipelines totransporttheoilproduced.NON-OIL REVENUEThe second category of revenue to the Federation Account is referred to as Non-Oil Revenue. Thiscovers revenue that is derived from sources other than oil. These include (1) Companies Income Tax (2)Customs and ExciseDuties(3)ValueAddedTax(4) Leviesand(5)Others.1. Companies’IncomeTaxPeople form companies to carry on various businesses which yield profits for them. Companies thatoperate in Nigeria but which do not produce oil still pay tax but at a lower rate of 30% of theirprofits.CompaniesIncomeTaxis alsoanimportantsourceofgovernmentrevenue.Page 5A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  10. 10. 2. Customs and ExciseDutiesWhen importers bring goods into Nigeria, their imports are also taxed. This charge is called ImportDuty and presentlyvaries from 0-35%of the value of thegoods. In order tos u p p o r t l o c a li n d u s t r y a n de n g e n d e remployment, theimportation ofcertain items liketobacco attractshigher duties anda d d i t i o n a lsurcharge whilethe importation ofitems like wheat flour, wheat grain, and rice are to attract additional levies ranging from 15% to 65%fromJuly 2012 inordertohelpdeveloptheagriculturalsector.3. ValueAddedTaxPoolMost of the goods and services purchased in Nigeria are also taxed at 5% on the value of thesepurchases. This tax is called Value Added Tax (or VAT) and is a consumption tax meaning that it isonly charged on actual purchases made. However, VAT is not paid directly into the FederationAccount but is collected in an account called theVATPool from where it is shared in accordance withthe formula indicated in Figure A.4. From Figure A.8 below, one can see that the FederalGovernment receives 15% of VAT revenues, out of which 1% goes to the Federal Capital Territory.Thebalanceof 85%goestoStatesandLocalgovernments.Figure A.6: Breakdown of Average Non-Oil Revenues(2005 -2011)Customs andExcise23%CompaniesIncome Tax39%Value-AddedTax10%Independentrevenue28%Page 6A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  11. 11. 4. Independent RevenueThe third major source of revenue known as Independent Revenue includes revenue which are notderived from either the Federation Account or the VAT Pool, but accrues directly to the FederalGovernment. These revenue sources include (1) Operating Surpluses of Federal Agencies andCorporations, (2) Dividends from Federal Governments investments in companies and (3) Othersundry revenue,suchasinternallygeneratedrevenueof FederalGovernmentMDAs.Figure A.7: Historic Annual Average Revenue (2005-2011)Source: Budget Office of the Federation (BOF) & Office of Accountant-General of the Federation (OAGF)As Figure A.7 clearly demonstrates, Oil Revenue is by far the largest source of revenue for the Federal,State and Local Governments, accounting for up to 66% of total Federal Government revenues over the2005-2011period.Figure A.8 shows how these revenues flow to fund the Budget.Oil66%Non oil revenue26%Independentrevenue8%Page 7A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  12. 12. Figure A.8: The Flow of RevenuesSource: Budget Office of the FederationCoping with theInternationalOilPricefluctuationsAs Nigerias oil and gas is sold in the international markets, their international prices determine howmuch money the Federal Government obtains from oil and how much it can spend to finance its Budget.Oil prices tend to be very unpredictable and as they rise and fall, oil revenue accruing to the GovernmentPage 8FEDERATIONACCOUNTVATPOOLLOCAL GOVT FGNSTATE GOVTCONSOLIDATED REVENUEFUND OF THE FEDERATIONINDEPENDENTREVENUESPECIAL FUNDSFEDERAL BUDGETBUDGETED OIL REVENUECIT13%DERIVATION20.60% 26.72% 52.68%15% ofVAT PoolVAT48.5% of FederationAccount4.18% of Federation Account14% of VATPoolOIL REVENUE(MARKET PRICE)EXCESS CRUDELOCAL GOVTSTATE GOVT35% of VAT Pool50% of VAT PoolFIRS4% Cost of Collection96% 96%Customs&ExciseNCS7% Cost of Collection93%NAT. RESOURCES STABILIZATION ECOLOGICAL FCT1.68%0.5% 1%1%1%SaleOfAssetsSurplusFromSOEDividendFromSOEA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  13. 13. also varies and makes planned spending unpredictable. Consequently, the Government has, in recentyears, implemented measures to protect its spending plans from the periodic swings in the price of crudeoil illustrated in FigureA.9.Instead of using thecurrent or forecast marketprice of oil as its basis forbudgetary planning, theGovernment uses a lower,notional price that isconsidered to be realisticand sustainable in thelong term. This lowerprice is referred to as theBudget Benchmark Price.If oil is sold above theBudget Benchmark Price,the extra revenue is savedin the Excess Crude Oil Account in the same way that individuals and households try to save money fortheir future. These savings are then available to finance future spending shortfalls in case the price of oillater falls below the Budget Benchmark Price or where other pressing spending needs arise. By doingthis, the Government can reduce the dependency of its spending plans on the periodic swings in oilprices.Furthermore, Government has been trying to diversify its revenue sources and reduce its dependency ontheoilsectorby developingthenon-oilsectorsoftheeconomy.ederalBudgetspendingmaybeclassifiedinto3 broadcategories:F?StatutoryTransfers;?DebtService;and?MDAExpenditure(recurrentandcapitalspendingby theMinistries,DepartmentsandAgenciesof Government).A-2.2 Major Heads of Budgetary Expenditure?Page 980100120140Source: International Energy AgencyOilPrice(US$perbarrel)Figure A.9: Periodic Oil Prices (2000-2011)DAILY PRICE OF BONNY LIGHT (2000-2012)A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  14. 14. Figure A.10: %age Distribution of FGN Spending – Average (2005-2011)Source: BOF & OAGFStatutory TransfersThe Federal Government is required by law to make certain mandatory expenditures annually in respectof (1) the National Judicial Council, (2) the Niger Delta Development Commission (NDDC), (3) theUniversal Basic Education Commission (UBEC), (4) the Independent National Electoral Commission(5) the NationalAssembly (NASS), and (6) the National Human Rights Commission. These mandatoryexpendituresarereferredtoasStatutoryTransfers.1. TheNationalJudicialCouncilUnder our laws, the National Judicial Council is responsible for the administration of thejudiciary. The 1999 Constitution makes it mandatory for the Federal Government to transfer tothe Judiciary, financial resources required for its operations. This practice is instituted to protecttheindependenceoftheJudiciaryas aseparatearmof government.Page 10Statutory Transfers6%Debt Service12%MDAS Expenditure82%A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  15. 15. 2. The Niger Delta Development CommissionThe Niger Delta Development Commission (NDDC) was established to promote thedevelopment of the Niger Delta region.The Federal Government is required by law to contributean amount equivalent to 15% of the amount received by oil producing States from the FederationAccount to fund the NDDCs activities. This money is spent on development projects in theregion and complements the work of the Ministry of the Niger Delta, which is also fundedthroughtheBudget.3. TheUniversal BasicEducationCommissionSince 2004, every child is required by law to compulsorily complete basic education. The lawrequires the Federal Government to set aside and transfer 2% of its revenues to the UniversalBasicEducationCommission(UBEC)tofinancethisfreeandcompulsorybasiceducation.4. TheIndependent NationalElectoralCommission(INEC)The Independent National Electoral Commission is statutorily responsible for the furtherance ofdemocracy in Nigeria through the conduct of open and transparent elections in the country. Topromote a high level of integrity, credibility, impartiality and dedicated service, the law requiresastatutoryprovisionof itsfinancialresourcesinordertomaintainitsoperationalindependence.5. TheNationalAssembly(NASS)Like the Judiciary, the National Assembly is a separate arm of the Federal Government and isresponsible for performing legislative functions at the federal level. The 1999 Constitution, asamended in 2011, makes it mandatory for the Federal Government to transfer to the NASS,financial resources required for its operations. This practice is instituted to protect itsindependenceasaseparatearmofgovernment.6. TheNationalHumanRights CommissionLike the INEC and NASS, the Commissions Act was amended in 2011 to protect itsindependence in ensuring the investigation and prosecution of human rights violations in thecountry.Italsoreceivesatransferfromthebudget.Page 11A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  16. 16. Statutory Transfers account for about 7.6% of spending by the Federal Government in 2012 down fromabout9.3%in2011,whenINECreceivedalargeramountduetotheelections.Whenever the Federal Government spends more money than the revenues it earns, it must find thefinancial resources to pay for this additional spending. Usually, the government borrows the money usedfor this additional spending. Moneys borrowed within Nigeria are referred to as Domestic Debts whilemoneys borrowed from outside Nigeria are referred to as External or Foreign Debts. When thegovernmentpays interestandprincipalonitsdebts,thisisreferredtoas DebtService.Although many years ago, the Government used to spend much more money than it earned, in recentyears, the Government has saved up money (in the Excess Crude Account) as its earnings from oilsources are based on a projected Budget Benchmark Price using moving averages. This is usually lowerthan the actual oil price in the international oil market. Lower public domestic borrowing is good for theeconomy as it leaves room for credit to private sector businesses that need loans. Furthermore, with acontrolled borrowing plan, funds that would have been spent on debt service would be saved or can beusedfortheprovisionofessentialpublicgoods andservices.Statutory Transfers and Debt Service currently make up on average about 18.73% of Federal spending.The balance of 81.27% is MDA Expenditure, that is, money spent by the Ministries, Departments andAgencies(MDAs) ofGovernmenttoprovidepublicgoods andservices.There are two main categories of MDA Expenditure, namely Recurrent Expenditure and CapitalExpenditure.RecurrentExpenditure:Salaries, Pensions &OverheadsThe Federal Government employs people to work in the various MDAs and pays them salaries inorder to maintain the administration of government and continue to provide public goods andservices. In addition to the pension contributions paid on behalf of workers under the ContributoryPension Scheme, the Federal Government continues to pay the pensions of existing pensioners underthe old Pay-As-You-Go System. Finally, the Government incurs overhead costs (such as payment forelectricity, water, telecommunications, office rent, office equipment and consumables, staff training,transportation,etc.)justlikeanyordinarybusiness.Debt ServiceMDA ExpenditurePage 12A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  17. 17. Capital ExpenditureCapital Expenditure is used to provide infrastructure such as roads, water and power; fundeducational services such as schools, colleges and universities; and provide healthcare facilities andservicesamongothers.Sharing Responsibility fortheBudgethe 1999 Constitution requires the President to submit an annual budget proposal to the NationalTAssembly for their approval (or passage). Once the National Assembly approves the budgetproposal (or Appropriation Bill) and the President assents to it, it becomes Law (or an AppropriationAct). In this way, responsibility for the Federal Budget is shared between these two of the three arms oftheFederalGovernment.TheExecutivesDevelopmentPlans:theNigeriaVision 20:2020 and theTransformationAgendaThe President gives directions to the Minister of Finance and the Budget Office of the Federation toprepare the Budget in line with the governments vision and direction for Nigeria. These plans explainhow the Government will develop the nation by building infrastructure, reducing poverty, generatingwealth and creating jobs. Presently, this vision is as indicated in Nigeria Vision 20:2020 and theAdministrations Transformation Agenda. The Federal Budget serves as a policy tool for achieving theimmediate, medium and long-term development goals in these policy documents as its preparation isbasedonthem.TheMedium-TermFiscalFrameworkThe Fiscal ResponsibilityAct 2007 provides detailed guidance about how the Budget should be preparedand what stages it needs to pass through before it is completed. Under this law, the Budget is to be basedon a medium-term fiscal framework. Fiscal frameworks are used by many countries to indicate how theyplan for their revenue, expenditure, borrowing and fiscal balance (deficit or surplus) for a few years inadvance. Fiscal frameworks normally include a Revenue Framework dealing with where the moneycomesfromandanExpenditureFrameworkdealingwithwhatthemoneyis spenton.A-3. How is the Federal Budget Prepared?Page 13A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  18. 18. The Medium-Term Revenue FrameworkThe Medium-Term Revenue Framework is part of the fiscal framework. It documents the aggregaterevenue to be received by the Federal Government over the following three years. To prepare thisdocument, the Budget Office consults with many of the Federal Governments revenue generating andcollecting agencies to forecast estimates of both oil and non-oil revenue. The underlying assumptionsare agreed and are then used to project the expected aggregate revenue that should accrue to theFederationAccount and the VAT PoolAccount over the following three years. Once the relevant sharingformulaeareapplied,theshareof revenuebelongingtotheFederalGovernmentisdetermined.TheMedium-TermExpenditureFrameworkOnce there is a clear idea of the expected revenue, the Budget Office prepares the Medium-TermExpenditure Framework which shows (1) the maximum amount that the Federal Government wishes tospend in the next three financial years (2) how these amounts are to be shared across the majorexpenditureheadsand(3) thedifferencebetweenavailablerevenuesandthetotalamountstobespent.The aim here is to balance the need to spend money to achieve Nigerias developmental goals and theneed to live within its means.The Fiscal ResponsibilityAct, 2007 provides a fiscal rule to guide this workwhich states that aggregate spending should not exceed aggregate revenues by more than 3% of GDP(Gross Domestic Product), except in certain situations, such as when there is a recession or threat tonational security. GDPis used by Economists to measure the total value of goods and services producedwithintheeconomyinanysingleyear.Once the total amount of money to be spent is determined, the size of the Budget Deficit/Surplus isascertained by subtracting total spending from total revenues. If total expenditures are greater than totalrevenues, there will be a Deficit and the Government has to decide how to finance this, usually byborrowing, sellingstateassets orrelyingon othersources.The Aggregate Expenditure Ceiling or maximum amount of spending is then shared among the threemajor expenditure heads, that is, Statutory Transfers, Debt Service and MDA Expenditure. This is alldocumentedintheMedium-TermExpenditureFramework(MTEF).Page 14A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  19. 19. StakeholdersConsultationsIn recent years, the Federal Ministry of Finance and the Budget Office have been working hard to makethe Budget process more open, transparent and accessible to ordinary citizens. This publication is one ofthe efforts taken to achieve this. Another activity is the presentation of the medium-term fiscalframeworks and the budget to different Stakeholders (including the National Assembly, the NationalEconomic Council, the Organised Private Sector, Civil Society and the Public Sector) for their input andbuy-in. These Stakeholders Consultations sometimes take the form of open and interactive sessions.The contributions and concerns of the Legislature are particularly important when preparing the BudgetastheyarethepeoplesrepresentativesinGovernment.MDAExpenditureCeilingsOnce the aggregate revenue and expenditure are determined in the medium-term fiscal framework, theMDA Expenditure needs to be shared among the numerous Federal Government MDAs. This work isdone by the Budget Office of the Federation under the supervision of the Honourable Minister ofFinance and is subsequently approved by the Federal Executive Council chaired by Mr. President. Indeciding spending ceilings, the Budget Office takes account of the size of each MDAs payroll and thepriority level accorded to the MDAs activities in view of the Governments policy programmes. AnExpenditure Ceiling is allocated to each MDAfrom which it must meet its needs and deliver services toNigerians. The allocation of these Expenditure Ceilings is to ensure that the total spending byGovernment does not exceed the total Expenditure Ceiling determined in the Medium-TermExpenditure Framework. Usually, Indicative Expenditure Ceilings are initially provided to MDAs andfinalisedlater.Medium-TermSectorStrategies(MTSS)/OngoingCapital projectsSince 2005, MDAs have been required to prepare Medium-Term Sector Strategies (or MTSS) by clearlyarticulating their goals and objectives against the background of the overall medium and long-termdevelopment goals of the Federal Government (i.e., the Nigeria Vision 20:2020 and the TransformationAgenda).The MDAs identify and document the key projects and programmes that they will execute overthe next three fiscal years, bearing in mind their overall goals and objectives and the resource constraintsof their Expenditure Ceiling. These initiatives (that is, the projects and programmes) are costed, phasedover three years and linked to expected outcomes. The results of this exercise are documented in MTSSReports which are then used as policy documents against which the MDAs budget submissions areevaluated.Page 15A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  20. 20. However, over the years, there has been a huge build up of ongoing capital projects in the MDAs. Thissituation arose largely from poor administration of MDAs capital projects implementation as a result ofMDAs picking too many projects and spreading the available scarce resources too thinly thereby makingit difficult to complete them. This underscores the need for MDAs to concentrate on the completion andexit from a few, viable ongoing projects rather than spreading resources thinly among several projects.Beginning from the 2012-2014 medium term, Government plans to strategically focus on theimplementationandexitfromviableongoingcapitalprojects.Approval of the Medium-Term Expenditure Framework & the Fiscal Strategy Paper by theExecutiveCouncilof theFederation&NationalAssemblyAn important part of Nigerias fiscal framework is the Medium-Term Expenditure Framework. Thisformal document includes the Fiscal Strategy Paper which summarises how the Federal Governmentproposes to carry out its fiscal affairs over the following three years. Under the Fiscal Responsibility Act2007, this Fiscal Strategy Paper and the Medium-Term Expenditure Framework are to be presented tothe Executive Council of the Federation for their consideration and approval, so that proposed spendingtradeoffs canbeproperlydebatedandagreed.In preparing the Fiscal Strategy Paper and the Medium-Term Expenditure Framework, input is soughtfrom key stakeholders such as the National Planning Commission, the Central Bank of Nigeria and theNational Bureau of Statistics among others. Once the Federal Executive Council approves the Medium-Term Expenditure Framework Report and the Fiscal Strategy Paper, these are then sent to the NationalAssembly for their consideration and approval. For the 2012 Budget, the Fiscal Strategy Paper and theMedium-Term Expenditure Framework were presented to the Federal Executive Council and then theNational Assembly in September 2011. Once again, the responsibility for the Governments medium-termfiscalplansissharedbyboththeExecutiveandtheLegislature.TheBudget CallCircular&Evaluationof Submissions by MDAsThe next stage of preparing the Budget involves the Minister of Finance issuing the Budget Call Circularto the MDAs. This Circular gives detailed instructions on how the MDAs should prepare and submittheir expenditure estimates within the limits of their Expenditure Ceilings and in accordance withgovernments priorities. The MDAs then prepare their budget proposals accordingly and submit this tothe Budget Office. The Budget Office then ensures that the MDAs have stayed within their allottedExpenditure Ceilings and that the budget proposals are consistent with the priorities of government andthe MTSS or their prioritized ongoing capital projects and programmes. During this process, there arePage 16A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  21. 21. additional Bilateral Discussions between the Ministry of Finance in collaboration with the NationalPlanning Commission and the Chief Economic Adviser to Mr. President, and the MDAs to align thespending plans with the goals earlier established. Once the Bilateral Discussions are completed, theBudgetOfficeevaluatesandconsolidatestheMDAs finalssubmissions andpreparesthedraftBudget.ThePresidentsApproval&Transmission of theBudget to theLegislaturePrior to the submission of the Budget, there are a series of consultations between the Executive and theNationalAssembly regarding the size and contents of the Budget. For instance, as the practice has beenin recentyears, thereare numerous meetingsbetweenthe Ministry of Finance,the MDAs and the variousCommittees of the NationalAssembly that have oversight over the MDAs to fine-tune the governmentsspending plans.This process helps to ensure that the Budget reflects the priorities of government and theaspirations of the people. Once it has been completed, the draft Budget is presented to the President forhis approval. Once the Presidential approval is given, the Budget and other supporting documents areformally presented by the President to the NationalAssembly for their consideration and appropriation.This is in line with the 1999 Constitution, which requires the Budget to be presented by Mr. President totheNationalAssembly.Approvalby theNationalAssembly &Assent by Mr.PresidentAfter the Budgets presentation to the National Assembly, it is debated by each House of the NationalAssembly in various standing Committees. The recommendations of these Committees are consideredand collated by the Appropriation Committees of the Senate and House of Representatives. TheseAppropriation Committees make final recommendations to each House. Once debates on theserecommendations are concluded, each House passes theirAppropriation Bills. If these Bills differ in thefinal numbers or assignment to expenditure heads, the two Houses meet to harmonise their respectivepositions. Once harmonized, the finalAppropriation Bill is then sent to the President for his assent. ThePresidentgiveshisassenttotheAppropriationBillandinso doing,passes theBudgetintolaw.As can be seen, the preparation of the Federal Budget is a long and collaborative exercise, involvingmany stages: first within the Executive, then between the Executive and the Legislature. It also involvesa lot of consultation with various stakeholders that are not within the Government such as the organizedprivatesector,civilsocietyandthemedia.Page 17A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  23. 23. B-1 The Administrations Policy Prioritieshe Administrations TransformationAgenda spells out the strategic focus onTwhich the 2012 Budget is based. In this respect,the government significantly scaled up theflow of resources to key areas of priorityincluding Infrastructure renewal anddevelopment (including power and roads),human capital development, physical securityand food security to give a more inclusivegrowth andattentiontojobcreation.TableB.1:KeyAssumptions.B-2 2012 Budget: The BigNumbersOil Production Benchmark (mbpd ) 2.48Oil Price Benchmark (USD/barrel ) 72.00Exchange Rate (Naira/US$) 155.00Inflation Rate (%) 9.50GDP Growth Rate (%) 7.20The 2012 Budget is based on the following keyassumptions:AssumptionsPage 19PART B: The 2012 BudgetBox 1: Pillars of the 2012 BudgetThe 2012 Budget was designed with thegoal of consolidating planned fiscal gains,achieving all round domestic economic growth andcreating employment. It was based,conceptually,on fourmain pillars:nEnsuring a stableenvironment through strong and prudentfiscal policies by eradicating revenueleakages and improving spendingefficiency.nThe Budget proposes bold, business-friendly structural reforms like the ongoingreforms in the ports, power and lately,the liberalization of the downstream oilsectorin ordertoattractinvestors.nStrengthening governance practices andinstitutions that engender ane nv i r o n m e n t t h a t p r o m o t e saccountability and transparency ingovernance.nThe Budget shores up investments inpriority sectors of the economy and takesthis as the most veritable way to boostinclusive growth. The budget wastherefore focused on supporting likepower, transportation, housing,security, and transforming theag ricultural sector, to meetmacroeconomictargets.macro-economicA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  24. 24. WheretheMoneyComes FromThe 2012 Federal Budget projects a TotalFederally Collected Revenue of N9,692.5 billionwhich includes Oil Revenue of N6,636.51 billionand Non-Oil Revenue of N3,055.99 billion. Thetotal revenue for the Federal Budget, as presentedinTableB.2,isforecastatN3,561.02 billion.Table B.2: Where the Money ComesFromREVENUE HEADS 2012bNbnGross Federally Collectible Revenue 9,692.50Gross Oil Revenue 6,636.51Gross Non-Oil Revenue 3,055.99FGN Budget Revenues 3,561.02Oil Revenue 1,943.88Customs 270.89Companies Income Tax 383.27Value Added Tax 107.90FGN Independent Revenue 446.78Others (unspent balance & special a/c) 408.28Source: BOF§Improving contribution from non-oilsources:As a deliberate step to managing the high level ofdependence on oil revenue to fund the annualbudgets while cushioning the effect of the vagariesof the international oil markets, Government hastaken bold steps to improve on non-oil revenuecollections.Box 2: Revising the Budget Proposal§The initial 2012 Budget and deregulation of the oildownstreamsector§Improving on revenue collection, making up for therevenuedrop:·The initial 2012 Budget proposal assumedfull removal of subsidy on petroleumproducts. This had to be revised followingtheadoption of partialderegulation.·A provision of N888.1bn was consequentlymade to cater for the subsidy which, as a firstline charge, is to be borne by the three tiersof Government with N309.33bn comingfromtheFederalGovernment.·This implied that projected FGN revenuewasreducedbythesameamount.·Projected receipt of Independently GeneratedRevenuewasincreasedbyN53.3bn.·Cuts to Recurrent Expenditure were made asfollows:àBasic Salaries of Political Office Holderspaywerecutby25%àTransferswerereducedbyN25.34bnàProvision for pensions was reduced byN0.85bnàService Wide Votes were reduced byN24.39bnàOverhead vote was reduced byN17.75bn.·Capital vote was reduced by N35.53bn as aresult of the removal of non-essentialadministrative capital items such asprocurementof fridges,vehicles,etc.Page 20A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  25. 25. As such, the non-oil sector is projected to contribute about 45% of the budget revenue (up from 34.5% in2011) through taking steps to improve on the efficiency in non-oil revenue collection while creating anequitabletaxstructureinthecountrywithimprovedtaxawarenessamongNigeriancitizens.WheretheMoneyGoesIn 2012, the Federal Governmentproposes to spend an aggregate ofN4,877.21 billion, made up of theregular budgetary expenditure ofN4,697.21 billion, and N180 billionbudgeted for the implementation ofprogrammes and projects under theS u b s i d y R e i n v e s t m e n t a n dEmpowerment Programme (SURE-P- please see Box 4). About 24% of thatmoney comes from taxes on theNigerian citizens – the more reason whyyour interest in its implementation iscritical.Page 21Oil Revenue55%Customs8%CompaniesIncome Tax11%Value Added Tax3%FGNIndependentRevenue12%Others (unspentbalance &special a/c)11%Figure B.1: Where the Money Comes FromSource: BOFTable B.3: Where the money goesA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  26. 26. The regular expenditure is comprised of N372.59 billion for Statutory Transfers N559.58 billion forDebt Service and N3,765.04 billion for MDAs expenditure (of which N1,339.99 billion is for CapitalExpenditureandN2,425.05 billionis for RecurrentExpenditure).Figure B.2 : Where the Money Goes (Regular budget)Source: BOFStatutoryTransfers7.9%11.9%CapitalExpenditure28.5%RecurrentExpenditure (Non-Debt)51.6%Page 22Debt ServiceFigure B.3: Distribution of Statutory TransfersNational Judicial Coucil20.1%National Assembly40.3%Niger DeltaDevelopmentCommission13.1%Universal BasicEducation Commission16.9%Inedependent NationalElectoral Commission(INEC)9.4%National Human RightCommission0.2%Figure B.3: Distribution of Statutory TransfersA CITIZENS’ GUIDE TO THE FEDERAL BUDGETSource: BOF
  27. 27. Page 23National Assembly52%National JudicialCouncil26%Presidency14%Federal ExecutiveBodies8%Figure B.4: Selected allocationsA CITIZENS’ GUIDE TO THE FEDERAL BUDGETSource: BOF
  28. 28. Box 3: Wage Bill Dominates Rising Recurrent Spending§RescalingGovernmentExpenditures:The General Trend:The growth and magnitude of public spending, in recent years, have tended towardstherecurrentsideand outstrippedthegrowthof spendingon capitalprojects.Following from the observed trend in aggregate spending, the share of capital expenditurehardly exceeded 30% of aggregate expenditure due to the growing magnitude of recurrentexpenditure which reduces the fiscal space available for spending on developmentalprojects. Over the 2005-2012 period, recurrent expenditure almost tripled from N1.2 trillionin 2005 to N3.4 trillion projected for 2012. It is noteworthy that 52% of the increase fromN2.1trillion to N3.2trillion occurred between 2009 and 2010 alone due largely, to a rise inthewagebill.Indeed, the wage bill has almost quadrupled from N443billion in 2005 to N1.659trillion in2012, with a significant jump of over 93% from N857billion to N1.659trillion between 2009and 2012. Personnel cost, as a percentage of aggregate expenditure, increased from 27% in2005 to about 35% in 2012 bearing in mind that aggregate expenditure has risensignificantly over the period as Figure B.5 indicates. In fact, expenditure on personnelremains the main driver of the growth in recurrent expenditure. Government is trying tomanage the size of the recurrent expenditure by making cuts in non-essential areas, but theissue of wage bill will take a bit longer since Government does not want to lay off workers. Inthe meantime, work is ongoing to complete the biometric verification of staff in order toremoveghost workers from thepayroll.Figure B.5: Behaviour of the Wage Bill (2008 -2012)Source: BOF and OAGF0%5%10%15%20%25%30%35%40%05001,0001,5002,0002,5003,0003,5004,0004,5005,0002008a 2009a 2010a 2011b 2012bYearFGN Expenditure PersonnelCapital Expenditure Wage Bill as % of Total ExpenditureRight Hand AxisBudgetExpenditure(N’bns)%ofregularexpenditureA CITIZENS’ GUIDE TO THE FEDERAL BUDGETPage 24
  29. 29. Box 3 (Continued)Personnel Cost:Historically,thesedrasticincreasesbecameglaring:·With the migration of all staff from the Harmonized Salary Structures to theConsolidated Salary Structures regime with its attendant increase in salary;and the increase in salaries of political, public and judicial office holderswhichresultedinagitationsforsalaryrelativitybylabourunionsallin2007.·These agitations resulted in an agreement in 2009, to significantly increasesalaries of academic and non-academic staff of Universities in the country.Predictably,theHealthsectoralsosecuredalargewageincrease.·On similar grounds, in 2010, shortly after concluding negotiations with theHealth sector, the FGN approved a 53.3% increase in the salaries of CivilServants, following heightened threats of industrial actions. This had theimpactofincreasingthetotalwagebillby75%between2009and2011.·In 2011, the Minimum Wage Act of 2011 was implemented, bringing totalpersonnelcostfrom N1.5trillionin2010toN1.659trillion.More recently, additional pressures have started to emerge, which can only make thesituation worse if granted. Available resources must be dedicated to criticalinfrastructureprojectsso as togrowtheeconomy.Page 25We must therefore check this progression,and consciously reverse the currentstructural imbalance in expenditure to one infavour of developmental expenditure, andinclusive economic growth.A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  30. 30. Box 3 (Continued)Way forward:The share of the recurrent spending in aggregate expenditure (excluding allocationto SURE-P– please see Box 4) , in line with the Governments plan, has now declinedfrom 74.4% in 2011 to 71.5% in 2012 while capital expenditure as a share ofaggregatespendinghas increasedfrom 25.6%in2011to28.5%in2012.The Government is working at correcting this structural imbalance in ourexpenditure profile thus ensuring that the share of funds allocated for economicdevelopment programmes progress year-on-year over the medium-term. In thisrespect:§A Committee is working toward the identification of areas of cross-cuttingfunctions among MDAs mandates so as to appropriately rationalize them inordertoeliminateareasofwastagesandduplication.Focus on Ongoing CapitalprojectsAs noted in Part A, surveys of the Governments portfolio of capital projects indicate a large number ofongoing capital projects and programmes, anumber of which had been abandoned.Figure B.6 gives an indication of the hugenumber of such projects in thirteen bigspending MDAs and the estimated capitaloutlay required to complete them. However,for factors including paucity of funds andother capacity issues, this requirementcannot be met in one swoop. Therefore, overthe 2012-2015 period, Government isdetermined to complete and exit viableongoingprojectsandprogrammes.Table B.6: Ongoing projects implementation levels (in 13 bigspending MDAs)401 projects @80%-99%341 projects @60%-79%273 projects @50% - 59%3,576 projects@ below 50%(Requires N3.55tn to complete)(RequiresN267 bn tocomplete)(Requires N552bn to complete)(Requires N370 bnto complete)Page 262,035 of these projects are atbelow 15% level ofimplementation.(About N236 bn has been sunkinto them as at March 2011)A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  31. 31. The capital budget in 2012 was therefore focused, to a large extent, on the completion and exit from thislarge portfolio of uncompleted capital projects and programmes which are in tandem with theTransformationAgenda.The total capital vote was increased from N1,146.75 billion in the 2011 Budget to N1,339.99 billionin the 2012 Budget. Of this, priority sectors, which include Critical Infrastructure, Security, HumanCapital Development, Land Reform and Food Security account for N1.01 trillion of total capitalspending (i.e., 87.3% of the aggregate capital budget) in 2012. These allocations are shown inFigureB.7below.§CapitalBudget:Peag 27CriticalInfrastructure50%Human CapitalDevelopment15%Security11%Land Reform & FoodSecurity13%Other Sectors11%Figure B.7: 2012 Capital Allocation (by Sector)Source: BOFA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  32. 32. Box 4: Subsidy Re-investment and EmpowermentProgramme SURE-P)Between 2006 and 2011, close to N4 trillion was spent on the payment of subsidy onpetroleum products. This large and rapid growth in payments became a major burden onGovernments finances affecting its capacity to finance key developmental projects andthreatening the countrys macro-fiscal stability. In the light of these pressures, aconsultation with key stakeholders was initiated in 2010. These payments assumed adisturbing and unsustainable dimension in 2011. Even more disturbing, as at December2011, the payments had risen to about N2 trillion! This amount represented 39% of thetotal budgeted FGN expenditure in 2011, 151% of the budgeted FGN Capitalexpenditure, and 4.18% of the Gross Domestic Product. In view of this, Governmentstepped up consultations towards the full withdrawal of the subsidy. However, in the lightof the public outcry, the Government listened to the Nigerian people and revised the plan tohaveapartialsubsidy removalfor now.Government plans to reinvest the funds saved from the withdrawal of the subsidy in acombination of programmes to stimulate the economy, alleviate poverty and generallyimprove the welfare of Nigerians. In addition, the SURE-Programme also has aninfrastructure component aimed at transforming the Nigerian economy and tackle theinfrastructure gap. About 80% of the re-investible funds will be put into key infrastructureprojects as presented in the Table B4. This plan, which was formally launched in January2012, was christened the Subsidy Reinvestment and Empowerment Programme (SURE-P)and to lend credence to Governments plans and give assurance that the “savings” will beused for the benefit of all Nigerians and invested in the designated programmes, a boardmade of eminent Nigerians with a proven record of integrity was subsequently constituted tooversee the fund and ensure that the programme improve the quality of life of Nigerians bymonitoring,evaluatingandreportingon theexecutionofthefundedprojects.Under the partial deregulation regime, the projection indicates that N426 billion would beavailable, of which the FGNs share is projected at N180bn. This has been passed alongsidethe2012 Budgetwithallocationsshown inTableB.4Page 28A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  33. 33. Table B.4: SURE-P Programmes and Projects2012A SOCIAL SAFETY NETS1 MATERNAL & CHILD HEALTH 15.942 PUBLIC WORKS FOR YOUTH 5.003 MASS TRANSIT 8.904 VOCATIONAL TRAINING CENTRES 8.60Sub-Total 38.44B NIGER DELTAAUGMENTATION FOR EAST-WEST ROAD(Sections I-IV )21.70C WORKS (Roads)1 ABUJA-LOKOJA 25.002 BENIN-ORE-SHAGAMU 22.503KANO-MAIDUGURI DUALISATION ( Setions I-V ) 20.004 PORTHARCOURT-ENUGU-ONITSHA 8.005 2NDNIGER BRIDGE (Counterpart funding ) 5.006 OWETO BRIDGE 5.00Sub-Total 85.50D TRANSPORT (RAIL)1 LAGOS-KANO 8.002 PORTHARCOURT-MAIDUGURI 15.363 KADUNA-ABUJA 10.00Sub-Total 33.36E SURE-PROGRAMME BOARDConsultancy and Logistics 1.00TOTAL REINVESTED FUND 180.00S/N CLASSIFICATION / PROJECTSAMOUNT(N Bns)Page 29Figure B.8: Share of Savings from the partial removal of subsidy on petroleum products13% DerviationN55.46bnFGNN180bnStatesN99.17bnLocal GovernmentsN76.45bnSpecial FundsN15.51bnA CITIZENS’ GUIDE TO THE FEDERAL BUDGET
  34. 34. § FiscalBalance:B-3 Budget Implementation & MonitoringimplementationB-4 Opportunities for Stakeholder Participation(www.budgetoffice.gov.ng) (www.fmf.gov.ng)info@budgetoffice.gov.ngThe projected fiscal balance for 2012 is a deficit of about N1,136.2 billion [or 2.85% of GDP]. Thedeficit will be financed from privatisation proceeds, FGNs share of signature bonuses, FGNsshare of distribution from the Stabilization Fund Account and domestic borrowing. The amountplanned for domestic borrowing for 2012 is N744 billion, which is lower than the N852 billion for2011,and ispartof Governmentsefforttoreduceitsdebtvolume.he government has placed special emphasis on tracking the deliverables promised by the MDAs inTrecent years. The Honourable Minister of Finance, through the Budget Office of the Federation, hasan obligation to report on the implementation of the budget under the present budget system. This isbecause, under the Fiscal Responsibility Act 2007, the Budget Office of the Federation is responsible formonitoring and evaluating the implementation of the annual Federal Budget. Quarterly budget monitoringand evaluation reports are required to be submitted to the National Assembly and the Fiscal ResponsibilityCommission. These reports are posted on the websites of the Budget Office of the Federation and theFederalMinistryof Financeon an ongoing basis.Towards strengthening budget monitoring, the BOF now involves Civil SocietyOrganisations and the Media in the monitoring exercise. This provides an independent and objectiveviewpoint to further enhance the Monitoring and Evaluation function of the BOF and encourage theMDAstodeliveron theirpromisestotheNigerianpopulace.he FederalBudgetis our budgetand the benefitsit promisesare for all Nigerians. Thereare several waysTfor Nigerian citizens to participate in the Federal Budget process including, sending observations onthe budget to the Budget Office of the Federation, and contributing to discussions during the budgetpreparation process. There are several published documents like this Citizens Guide and other reports thatare published on the websites of the Budget Office of the Federation and the Federal Ministry of Finance.Budget documents may be downloaded for free from the website of the Budget Office of the Federation, or that of the Federal Ministry of Finance . Your commentsand input may be communicated in writing to: The Director-General, Budget Office of the Federation,Federal Ministry of Finance, Central Area, PMB 251, Garki, Abuja, Nigeria or by electronic mail throughPage 30A CITIZENS’ GUIDE TO THE FEDERAL BUDGET