Towards a social democratic welfare state (1)

WelfareTHE vision of the incoming administration appears to be a social-democratic welfare state with a dynamic market economy. The All Progressives Congress (APC) ran and won the elections as a centre-left party on a platform of change. While the change manifesto is geared towards equitable prosperity for all, Buhari’s administration is inheriting a stalled economy plagued by several inefficiencies and lack of effective governance.

Equity
The envisaged social democratic welfare state aims to tackle the vicious circle of poverty and high misery index, and inequality in social mobility, income, wealth and economic opportunity. The new administration plans to create a social welfare programme to provide N5,000 monthly for the 25 million poorest Nigerians. It will provide unemployment allowances for unemployed Youth Corps graduates for 12 months; one meal a day for all primary school pupils; a National Identity Scheme (NIS) and a regional growth fund (RGF). According to BudgiT, the total cost of implementing these direct equity programmes is N2.15 trillion or $10.8 billion.

Closely related to the direct equity programmes are the education and healthcare programmes to enhance the productive capacities of citizens, costing another 662 billion naira or $3.31 billion. These programmes include new vocational schools; new six universities of science and technology; and world class hospitals. In addition, BudgiT estimates suggest that N8.8 trillion or $44 billion per year will be required as national health expenditure

Prioritization of all the equity programmes will be necessary, giving the total costing of N11.5 trillion or $58 billion. While the core social welfare programme can be initially scaled down by half, establishing six new universities or new world class hospitals cannot be of immediate main priorities. It is also difficult to meet over the medium term the targets of increasing by two-half times the number of physicians per 1,000 population from 19 to 50, and increasing national expenditure per person per annum five times to N50,000. The RGF may be targeted initially as a Marshall Plan for the North East, as the NDDC is essentially a RGF for the South-South. While the NIS is crucial to the effectiveness of the social inclusion programme, it should build on the ongoing Biometric programmes at the CBN, INEC, and NIMC and the e-wallet programme in the agriculture sector.

The expenditure on social inclusive equity programme should initially be targeted at N5 trillion or about 5% of GDP, and half of the current projected estimated spending. This benchmark is in line with cost of social protection programmes in Ethiopia, Kenya, and Tanzania. According to Cash Transfers Evidence Paper by DFID, the cost of Ethiopia’s Productive Safety Net Programme is estimated at 5.3% of GDP. Large middle-income countries spend less per GDP. India’s National Rural Employment Guarantee is estimated to cost 2.2% of GDP; Indonesia’s Safety Net Scheme, which covers 84 million people or a third of the population, is estimated to cost 0.7% of GDP. Brazil’s Bolsa Familia programme created in 2003 cost 0.36% of GDP and covers 46 million people or a quarter of the population and has lifted million of families from poverty. The Brasil sem Miséria established in 2011 has a fiscal cost of less than 0.6% of GDP at an average of $65 per family according to the IMF.

Effectiveness
The low hanging fruit to meeting some of the financing needs for the social welfare equity programme is ensuring governmental effectiveness. The cost of governance is very high. Recurrent expenditure accounts for 90% of total 2015 budget; with personnel cost accounting for nearly half while statutory transfers including the National Assembly, overheads and other service votes together accounting for a fifth, and servicing of about $60 billion in local and international debt accounting for the rest. The Federal Government has to borrow N473 billion, slightly over half of 2015 planned borrowing requirements, to pay salaries. A third of 36 states is unable to pay salaries of civil servants and several are heavily indebted.

An essential step to achieving a social democratic welfare state is the need to re-engineer the government through effective governance, accountability, transparency and value-for-money. A starting point for the incoming administration is to showcase its austere style by reducing the number of presidential aides, cars, and jets; and followed by pruning the jumbo salaries and allowances of legislators. Overall, reducing personnel cost by 15%, and statutory transfers, overheads and other service votes by a third will yield close to N1 trillion in savings. It has been estimated that a savings of over N700 billion could be realised from implementing Oronsaye’s report on civil service and parastatals.

Removing oil subsidy remains the elephant in the room, but can be achieved given the current low oil prices and the public trust of the incoming administration on integrity issues. The sum of N143 billion is in the approved 2015 budget for subsidy payments, which have benefitted mostly the oil marketers and the oligarchs in the oil industry.

As part of efforts to ensure effective governance and pluralistic economic management, the position of the Coordinating Minister for the Economy should be abolished immediately. The core treasury functions of resources mobilisation and revenue generation by the Ministry of Finance for the Federal Government have been overshadowed by the task of economic coordination, in addition to budgeting and policy functions. Budgeting is a programming function and should be combined with national planning or be directly under the Vice President. Economic policy coordination should be with the Chief Economic Adviser to the President, much as security coordination is with the National Security Adviser.

Economy
Enhancing effectiveness and simply reducing the cost of governance, which could yield savings of over N1 trillion will be necessary but not sufficient to financing the social welfare programmes over the short-to-medium term. Shared FAAC revenue, however, already slumped by nearly half in six months. The emerging deep fiscal holes is symptomatic of near-term vulnerabilities of a slowing economy, with a real GDP growth rate that decelerated by more than a third from the rate achieved in 2014 and oil exports projected to be 40% lower in 2015 compared to 2014, putting pressures on reserves and exchange rates, with a restrictive MPR of 13%.

• To be continued tomorrow
Dr. Temitope Oshikoya is CEO of Nextnomics Advisory

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