By Christopher Okpoko
Nigeria, endowed with vast natural resources and a young, vibrant population, has faced persistent budget deficits over the last decade. This situation has raised serious concerns about fiscal management, economic stability, and sustainability. A budget deficit occurs when a government’s expenditures surpass its revenues, leading to the need for borrowing or other financial strategies to cover the gap. President Tinubu in the 2025 budget speech stated that his administration is targeting ₦34.82 trillion in revenue to fund government expenditure projected at ₦47.90 trillion, including ₦15.81 trillion for debt servicing. Thus, a total of ₦13.08 trillion, or 3.89 percent of GDP, will make up the budget deficit. The budget deficit has become a reoccurring phenomenon in Nigeria’s annual budget over the past ten years and has negative implications.
Source: Budget Office of the Federation and Author’s graphics
To understand the current state of Nigeria’s budget deficits, it is essential to examine the historical context that has shaped its fiscal policies. Following the global oil price collapse in 2014, Nigeria experienced a significant revenue shortfall. As a nation heavily reliant on oil exports for government income, the decline in oil prices severely impacted the federal government’s ability to fund essential services and infrastructure. Despite recovering oil prices in subsequent years, the government’s inability to diversify its revenue base left it vulnerable to future fluctuations.
From 2012 to 2024, Nigeria’s budget deficits ballooned, with the government consistently spending more than it earned. Data from the Central Bank of Nigeria reveals that the average budget deficit during this period was approximately 3.5% of GDP. Such a persistent trend raises questions about the effectiveness of fiscal policy and the government’s commitment to addressing underlying structural issues.
Several factors contribute to Nigeria’s ongoing budget deficits. One primary cause is the heavy reliance on oil revenues, which has stifled the development of other sectors such as agriculture, manufacturing, and services. The lack of diversification means that any downturn in the global oil market directly affects government revenues. Additionally, inefficiencies in tax collection have compounded the problem. Efforts to broaden the tax base and improve compliance have been slow, leading to an overall tax-to-GDP ratio that remains one of the lowest in the world. The recent effort by President Tinubu to overhaul the country’s tax system, simplify the tax landscape, reduce the burden on small businesses, and streamline tax collection has been resisted by a section of the country and is still being debated.
Another significant contributor to the budget deficits is rampant public expenditure. Nigeria has been grappling with high levels of corruption and mismanagement of funds, leading to inflated government contracts and wasteful spending. According to Transparency International, Nigeria ranks poorly on global corruption indices, reflecting the challenges associated with accountability and transparency in public finance. Despite strong sentiment towards a leaner government and calls for a reduction in the cost of governance, President Tinubu at a recent media briefing insisted on having a large cabinet with over 40 ministers and several other advisers and assistants.
Furthermore, political instability and poor governance have weakened the country’s economic foundations. Political considerations often dictate budget allocations, leading to lopsided spending in favour of regions or sectors that may not require immediate attention. Such practices have hindered effective resource allocation and prioritized short-term political gains over long-term economic strategies.
The implications of sustained budget deficits in Nigeria are multifaceted and deeply concerning. Firstly, chronic deficits lead to increased national debt. With the government’s borrowing needs rising to finance its expenditure gap, Nigeria’s public debt has escalated dramatically. By the second quarter of 2024, Nigeria’s total debt stood at over ₦134.3 trillion ($91.3 billion), raising alarms regarding debt sustainability and the potential for economic upheaval.
As debt levels rise, so do the costs associated with servicing that debt. The annual budget allocated for debt service has grown significantly, consuming an increasing portion of government revenues. For instance, in the 2025 budget, over 45% of total revenue will be directed toward debt service, leaving little room for investment in critical areas like education, healthcare, and infrastructure. This cycle traps Nigeria in a situation where it prioritizes debt repayment over crucial development initiatives. For example, the allocation to debt servicing is more than the combined allocation to Defence and Security (₦4.91 trillion),Infrastructure (₦4.06 trillion), Health (₦2.48 trillion), and Education ( ₦3.52 trillion)
Moreover, budget deficits can exacerbate inflationary pressures within the economy. To finance deficits, the government may resort to borrowing from the central bank, effectively printing money that can devalue the currency. This devaluation can lead to higher prices for imported goods, further straining households already facing economic hardships. With inflation rates soaring, the purchasing power of the average Nigerian diminishes, leading to increased poverty and reduced living standards.
Addressing Nigeria’s budget deficits requires a multifaceted approach that prioritizes revenue generation and expenditure reform. Firstly, the government must prioritize economic diversification. Reducing dependence on oil exports by investing in agriculture, manufacturing, solid minerals, and technology will create sustainable revenue streams. Encouraging private sector investment and fostering entrepreneurship can stimulate growth in these sectors, ultimately increasing government revenue without over-reliance on oil.
Improving tax collection mechanisms is also crucial. Modern tax administration systems can enhance efficiency and compliance while broadening the tax base. Moreover, the government should consider tax incentives for businesses that invest in local production and job creation. These measures will not only increase revenue but also boost economic activity and reduce unemployment.
In addition to boosting revenue, stringent controls on public expenditure are necessary. Implementing rigorous procurement processes can minimize corruption and ensure public funds are utilized effectively. Establishing independent oversight bodies to monitor government spending can enhance accountability and transparency, thus regaining public trust in fiscal management.
Furthermore, long-term strategic planning in budget formulation is essential. Policymakers must adopt a forward-looking approach that considers the socio-economic realities of the population. Engaging citizens in budget discussions can foster ownership and initiative among communities, ensuring that allocations reflect actual needs rather than political motivations.
In conclusion, Nigeria’s budget deficits over the last decade highlight critical challenges in fiscal management and economic sustainability. The interplay of reliance on oil revenues, inefficiencies in tax collection, rampant public expenditure, and governance issues has created a cycle of deficit spending that undermines the nation’s economic potential. As Nigeria navigates its fiscal challenges, it must embrace comprehensive reforms that prioritize diversification, strengthen revenue generation, and ensure accountability in public spending. Only through cohesive and collaborative efforts can Nigeria address its budget deficits and set a course toward sustainable economic growth and development.
