Nigerian Economic Shock: Austerity Measures All The Way?

Editor’s note: “The last administration winded up with political shock. The new administration, however, is grappling with an economic shock. Cutting down the cost of governance has become top agenda in several states,” the Naij.com columnist Tahir Sherriff writes in this week’s column for Naij.com, and asks: “Evidently, something must be done, but is introducing austerity measures the only option available?”

This article expresses the author’s opinion only. The views and opinions expressed here do not necessarily represent those of Naij.com or its editors.

It is clear: every nation needs a certain number of government employees in order to function. The underlying question is whether the Nigerian government should alleviate downturns in economic activity by cutting down its spending — or “investing” — funds on projects that will stimulate employment.

Political discussions regarding a cutdown in government spending had begun long before the polemic on the incoming senators’ wardrobe allowance hit the news. Long before the anxiety that culminated in a change of government, pundits have reflected on a ‘disconnect’ between the life of a senior Nigerian government official and the life of the average Nigerian. But cost reduction isn’t the only alternative to reviving the economy. It is not also the most pleasant one, even to the middle- and lower-class citizens.

Can the government really create jobs?

But can the government really create jobs? Or more directly, can it create enough workplaces to quell the social uneasiness that has begun to grow among job seekers who saw the change in administration as a biblical change in their economic status?

The government may be either a direct employer (as when it increases the numbers in our armed forces) or an indirect employer (as when it increases spending on highways which, in turn, increases employment in construction companies). If, by a policy shift, construction companies in Nigeria increase employment by creating 50,000 jobs due to a N3 billion government spending program to finance highway construction, then employment is 50,000 jobs ahead of what it might have been in the absence of the program. This is rather direct, but rarely does debate on a project like this focus on how employment in other sectors is affected when the government seeks the N3 billion necessary to finance its program. These effects are important but, unfortunately, less visible because they are spread among hundreds, if not thousands, of employers.

Government spending, including spending designed to stimulate employment, may be derived from two sources. The first is taxes. If individual income taxes are raised by N3 billion to fund our highway project, disposable income is reduced by N3 billion. Consequently, individuals will demand less clothing, fewer appliances, and so on. Private sector employers will notice and respond by laying off workers. If corporate taxes are raised instead of individual income taxes, they will eventually result in higher prices for consumers, lower real wages for workers and lower returns for investors. All of these will result in a decreased ability to buy clothing and appliances with the net result that unemployment increases, not decreases.

A second source of funds is government borrowing, but this increases the price of lendable funds, which reduces the amount of investment in the private sector. Consequently, fewer new factories, machines, and homes will be built. Not only does this decrease in private investment slow economic growth, it results in additional unemployment in these industries.

The political appeal of government spending stems from the perception that the jobs created will be noticeable to the average Nigerian, while the handful of jobs lost here and there are not attributed to the government spending program.

Do austerity measures poise risks?

The public may in principle accept the need to deal with high costs of governance, but it will remain apprehensive about its impact on public services and doubtful about the wisdom of moving so fast. If austerity becomes the slogan, then several government agencies that duplicate responsibilities and those that are simply cost centers may have to face disintegration or mergers. And this goes strictly against the new administration’s plans to create jobs.

A possible narrative is this. The very wealthy will be more likely to keep a low profile, at least in the early years. They will spend less on loud displays of wealth. They will spend their wealth in quieter ways; even better, education for their children, physical security for them and their families and holidays far from envious eyes. Middle-class income earners with jobs (even in non-functional agencies) will be happy to keep them; few will get large pay rises. But for the masses, it perhaps is going to become tougher.

In several states, taxes will rise and public services will become more cost-conscious. Belts will tighten and tempers will shorten. The masses will be furious at the mess the country is in, and will blame not only the past regimes for their failures, but the present one for its inabilities as well. This anger will manifest itself on fervid talk-shows, at protest rallies and in the coming 2019 elections. Whenever the opportunity comes, opposition parties will be quick to direct voters grudges against their new enemy: the incumbent government.

Possible political shocks

By and large, the public prioritizes job creation over deficit reduction. The statistics do not lie, a large percentage of voters in the last elections were the Nigerian youths, and close to 70% of this number have been documented as unemployed. When given the choice between spending money to invest in infrastructure or public sector hiring, like teachers and artisans, versus cutting spending to reduce the deficit, a larger percent would likely go for programs that could benefit their lives — as against those that affect the lives of others.

Public preference for job creation is not a recent trend. Reducing unemployment has been a campaign slogan of a number of political parties and significantly contributed to seeing the new administration into power. Although Nigerians are worried about deficits and the national debt as well as the huge costs of governance, addressing unemployment and improving the economy has consistently been a bigger priority for the public. This can also set a trigger for preferences in the 2019 elections.

Exploring feasible alternatives

The influence of money in our political system goes beyond the money spent on elections. Money also influences the policymaking process, as evidenced by how well the interests and priorities of the affluent class are represented in the Senate — even when they run counter to the wishes of most Nigerians. But as much as removing the outsized influence of the affluent in policymaking is necessary not only for the democratic process but to ensure that our economic recovery continues, looking towards options to integrate the real issues that affect ordinary Nigerians will get more credit.

The new administration has to welcome the help of business sages whose budgets have at times been bigger than that of several states combined, and who have somehow managed to engage Nigeria’s hostile business terrain and declare earnings for their investors. More importantly, even if the self-inflicted wounds that could be generated by austerity are somehow avoided, the narrow focus on austerity has another downside. It will divert attention from the broader reforms that the country needs.

Tahir Sherriff

Tahir Sherriff is a Nigeria-based researcher, writer and social commentator with a recent focus on governance and participation, regional development and social change.

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