BUDGET | Acadlly

A budget may be defined as a financial statement of the total estimated revenue and the proposed expenditure of a government in a given period, usually a year.

FUNCTION / USES / IMPORTANCE OF BUDGETS

National budget is used to achieve the following objectives

It is used as a means of raising revenue
It is used to control inflation
It is used to as a remedy a depression (recession) or deflation.
It is used to correct a balance of payments deficit
It is used as a tool for economic planning
It is a means of enhancing public welfare and reducing income inequality in the country
Budgets are used to allocate resources between different sectors of the economy
It is used to control the economy with the arm of fostering economic growth and development.

TYPES OF BUDGET

Balance Budget: This is when the total estimated revenue is equal to the proposed expenditure of the government. This means that nothing will be left as reserve from the money collected in form of revenue
Surplus Budget: A budget is called surplus budget when the total estimated revenue is more than the proposed expenditure. In this type of budget, not all the estimated revenue is proposed to be spent in that year. That is, there will be reserve.
Deficit Budget: This is when the government total proposed expenditure for the period is more than the total estimated revenue. The shortfall in revenue is sourced through borrowings, printing of more currency, aids and grants etc.

ECONOMIC CONDITIONS WARRANTING THE ADOPTION OF THE DIFFERENT TYPES OF BUDGETS

A budget surplus is desirable in period of inflation because it reduces aggregate demand thereby reducing inflationary pressure in the economy
A deficit budget is used in the following instances

(a) To reduce unemployment by increasing aggregate demand.

(b) To finance a national emergency such as war

EVALUATION

Define a budget.
List the types of budget.

NATIONAL DEBT

National debt or Public Debt refers to the sum total of debts owed by the government of a country both internally and externally.

The debts may or may not be with interest

REASONS WHY GOVERNMENT BORROW

To finance deficit budget
To finance a huge capital project
To prosecute a war i.e. for the procurement of ammunitions and other war materials
To service existing loans
To manage an emergency situation eg flood, drought, epidemic, famine
To correct an unfavourable balance of payment

INSTRUMENTS OF GOVERNMENT BORROWING IN NIGERIA

Treasury Bills – used for short term borrowing i.e. 90 days
Treasury Certificates- used for medium term borrowing i.e. 1 – 2 years
Development Stocks – used for long above
Stabilization Securities
National Saving Scheme
Negotiation with External Financial Institutions
Municipal Revenue Bond

EFFECTS OF HUGE NATIONAL DEBT ON THE ECONOMY OF A COUNTRY

It reduces the availability of foreign exchange
It makes a country to be susceptible to the dictates of external creditors
It makes it difficult for the country to source fresh loans – i.e. it lowers a country’s credit ratings
A large domestic debt will influence the distribution of income in the country
The servicing of an external debt will involve an outflow of resources which can otherwise be used for economic development.
The servicing of a large national debt will limit the government’s ability to provide welfare / social services to the people

EVALUATION

What is national debt.
State five reasons why government borrow.

REVENUE ALLOCATION

Meaning of Revenue Allocation
Parts of Revenue Allocation
Revenue Allocation Formula.

MEANING OF REVENUE ALLOCATION

Revenue allocation refers to the sharing of the nation’s wealth among various tiers of

government or various units that make up the country. The various units include: Federal, State and local governments.

PARTS OF REVENUE ALLOCATION

Revenue allocation is grouped into two major parts namely:

Vertical Revenue Allocation
Horizontal Revenue Allocation

Vertical Revenue Allocation – in vertical revenue allocation, revenue accruing to the federal account is shared among the three tiers of government – Federal, State and Local government.

Horizontal Revenue Allocation – under the horizontal revenue allocation, revenue accruing to federation account is shared among the units within a given level of government. It involves certain principles based on some factors to be applied in revenue allocation. These principles include:

Population size
Land mass
Derivation, e.g oil producing areas.
Ecological problems.

REVENUE ALLOCATION FORMULA

This involves the weight assigned to various principles e.g. Federal government – 48.5%, State – 24%, Local government – 20%, special fund – 7.5%. These are just for the short time. It should be noted that there is no fixed revenue allocation. It changes from time to time. The Revenue Mobilization Allocation and Fiscal Commission (RMFC) is always at work trying to work out a proposal for a new revenue sharing formula.

EVALUATION QUESTION

Distinguish between vertical revenue allocation and horizontal revenue allocation.
Mention any three principles used in sharing the revenue accruing to Federation Account.

GENERAL REVISION QUESTIONS

Explain with examples the following types of production (a) primary (b) Secondary (c) tertiary
What is partnership?
Give two reasons why primary production pre-dominates in developing countries.
List the functions of money.
Define a bar chart.

WEEKEND ASSIGNMENT

Government impose taxes mainly to (a) punish the citizen (b) provide social amenities

Budget deficit can be financed by (a) reducing the level of taxation (b) printing more money (c) lending to financial institutions (d) employing more workers
A continuous fall in the general price level is called (a) recession (b) depression

Budget surplus implies that (a) expenditure equals revenue (b) expenditure is less than revenue (c) expenditure is greater than taxation (d) direct tax is more than indirect tax.
The greatest revenue earning industry in Nigeria is (a) construction (b) agriculture

THEORY

What is a balanced budget?
State two reasons why a government can adopt a deficit budget