Why Buhari will tax Nigerians to death
With a finality, the government cannot realise appreciable tax increases under the prevailing low economic growth trend.
President Muhammadu Buhari’s economic policy, nicknamed
Buharinomics, launched with fanfare in 2016 as expansionary budgeting. The policy entails aggressive use of deficit financing for infrastructure development. The capital expenditures aim to spur economic growth and job creation.
Accordingly, aggregate expenditure in the 2016 Appropriation Bill increased by 35 percent, from N4.46 trillion in 2015 (as proposed by the previous administration) to N6.06 trillion. The deficit in the 2016 budget grew dramatically by 191 percent, relative to the previous year. The administration maintained its audacious fiscal expansion over the next three years, such that by 2019 the budget had doubled to N8.92 trillion, compared with 2015.
Unlikely Success As I observed at the outset of the policy, the question was not whether expansionary budgeting was desirable. Nigeria’s infrastructure deficit was (and still is) wide, across road, rail, airports, seaports and power. Investing in these areas can, in theory, reduce the cost of doing business, attract private sector investment, spur economic growth, and create local jobs across the value chains.
The question was whether the expansionary fiscal policy could be successfully implemented by the administration. Even more, it was a concern as to whether the theoretical assumptions of infrastructure investment are practically deliverable in the Nigerian governance and fiscal contexts.
The early signs inspired scepticism. First, President Buhari had appeared unbusinesslike for his high-stakes economic policy. From when he assumed office in May 2015, it took him five months to constitute his cabinet that many observed to be lacklustre, just before announcing his crucial first budget.
Second, although the government wanted to finance fiscal policy through the financial market, the broader economic policy climate was anti-market. For instance, President Buhari’s public stance against devaluation of the naira in 2016 not only eroded the independence of the Central Bank of Nigeria, the CBN itself announced various measures of capital controls, which scared off foreign investors.
Third, there was no powerful front for making and implementing broader policies. Whereas the President delegated economic management to Vice President Yemi Osinbajo, the power to take key economic decisions lay elsewhere with the presidential “cabals.”
As feared, the country amassed approximately N13 trillion in new public debt in the last four years with little to show for it, in terms of growth, jobs and even projects delivered. Since the 2016 recession that greeted Buharinomics, economic growth has been anaemic while unemployment has worsened in the country. Equally foreboding, the country has now reached, or exceeded, its safe borrowing limits. Debt service, as a percentage of government revenue, has now exceeded 60 percent.
From Debt to Tax President Buhari, in his second term, is now pivoting to drastic measures to increase tax revenue, having not abandoned his fiscal expansion policy. The question again is not clearly whether it is necessary to increase government’s tax revenue, although it warrants quibbling over. Of course, increased tax revenue can be beneficial to the government and the citizens.
More government revenue should translate to provision of more infrastructure and better services by the government. With revenue being the opposite of debt in financing fiscal policy, money that would have been used for paying interest on government loans in the future would be available for funding public projects.
But, sadly, these theoretical assumptions have not been validated in Nigeria. There exists a wide gap between government revenue and provision of public amenities and delivery of public services. Despite paying their taxes, corporate and individual Nigerians are having to provide basic public services like security, roads, water supply and power by themselves. The poor state of public utilities has continued to take a toll on quality of life and the profitability of businesses.
Tax-to-GDP ratio It is often argued that Nigeria has one of the lowest tax-to-GDP ratios in the world. This is true, to the extent that “one of the lowest” is not confused with “the lowest.” In 2017, Nigeria’s tax-to-GDP ratio was 6.1 percent. It was well below the global average of 15.2 percent, according to data provided by the International Monetary Fund (IMF), World Bank and the Organisation for Economic Cooperation and Development (OECD).
But the Nigerian tax-to-GDP ratio was above the ratios for the United Arab Emirates (1.4 percent), Saudi Arabia (5.3 percent) and Kuwait (1.5 percent). Like Nigeria, these three countries are oil producers. They fairly share the same oilinduced economic structural rigidity. In both the UAE and Saudi Arabia, like Nigeria currently, the VAT rate is 5 percent.
The exception is that Nigeria’s fiscal policy failure is unmitigated. These other oil producers – indeed most long-term oil producers – have achieved much better infrastructural development and efficiency in public service than Nigeria. Moreover, whereas Nigeria has now amassed $81.2 billion in public debt – and with less than $4 billion in fiscal savings accounts – the UAE’s sovereign wealth fund (SWF) holds over $828 billion in assets under management (AUM); Saudi Arabia’s SWF has over $514 billion in AUM. As Nigeria has failed in managing its oil resources, so has it failed to manage its vast non-oil economy, notably agriculture. It shouldn’t have mattered that Nigeria produces less oil than these other countries, given its vast resource endowments and much larger population.
But on the opposite end of the tax-toGDP spectrum are rich and advanced countries. The tax-to-GDP ratio of the 28member European Union was 20.7 percent in 2017. The high average number was driven by the welfarist Scandinavian countries, including Denmark, Sweden and Norway. These countries are not merely taxing citizens for the present, they have some of the world’s most successful social safety nets for citizens as well as huge fiscal savings for future generations.
By predicating taxes on the welfare of all their citizens and the future generations, as opposed to helping few government officials to corner unfair large share of public resources like in Nigeria, these Scandinavian countries are taxing for altogether salutary purposes. Whereas Nigerian public officials are some of the highest paid in the world, the people they supposedly are working for belong to the world’s poorest.
Regressive Taxation The government now wants to increase the VAT rate from 5 percent to 7.2 percent. Although wealthy people would likely pay more into the VAT till, VAT is nonetheless regressive, at flat rate. Poor people will bear the incidence of the taxation more than the wealthy. Indeed, the VAT, all the more when increased, stands between Nigerian children from poor homes and their ability to get the nutrition that is adequate for their personal development, since the prices of milk, eggs, etc. will increase on higher input costs.
Using the VAT to increase government revenue is, therefore, unconscionable policy. Already, the biggest Nigerian businesses get tax incentives, and are able to legally and illegally avoid payment of their fair share of taxes. This is the opposite of a progressive tax system, whereby taxation is used as a mechanism for the redistribution of wealth to reduce
President Buhari’s public stance against devaluation of the naira in 2016 not only eroded the independence of the Central Bank of Nigeria, the CBN itself announced various measures of capital controls, which scared off foreign investors.
inequality from as high as it would otherwise have been.
To Tax or Not to Tax The real argument today should be whether the government should even be pursuing higher tax revenue in the shortterm, either from the wealthy or poor. There are formidable arguments in support of the notion that more money is best put in the hands of the people and businesses today than in the coffers of government. One, the government often utilises tax revenues foremostly for projects decided by political considerations (when not used for paying emoluments to public officials) than sound economic reason. The capacity of such expenditures to generate economic multiplier effect is limited.
Two, taxes have had very negative impacts on businesses in Nigeria. In many cases, businesses have been taxed out of existence. This means taxes collected today can hinder the ability to pay tomorrow and the ability of people to remain employed.
Three, with the epidemic poverty in Nigeria – which has been confirmed by President Buhari’s promise to lift 100 million Nigerians out of poverty in 10 years – the new drive for increased tax revenue is directly and indirectly an assault on the same impoverished people, making the avowed poverty eradication wishful thinking at best.
Four, tax administration in Nigeria is still riddled with corruption. More revenue arguably means more opportunities for corruption by tax administrators and government officials. From misappropriation of millions of naira of public funds in the past, public officials now embezzle billions of naira, according to various cases being prosecuted by the Economic and Financial Crimes Commission (EFCC).
Five, the competencies required to implement public policy efficiently are acutely lacking in Nigeria. This means that tax revenue can hardly be well channelled into projects that would be efficiently delivered.
Finally, and with a finality, the government cannot realise appreciable tax increases under the prevailing low economic growth trend. During the global financial crisis, the tax-to-GDP ratio of Australia plunged to 3.7 percent after it had risen to 24.2 percent from the early 2000s before the crisis. Even here in Nigeria, efforts to ramp up tax revenue are not new. The idea has been pursued since 2015 with very limited success. What is new now is the effort to force the issue by increasing the tax rate.
A different fiscal strategy The government needs to ditch its illusory fiscal expansion for reality. It needs to stop flogging a dead horse. The risk of inflationary pressure arising from increasing the VAT rate by the proposed 44 percent cannot be overemphasised. By insisting on unrealisable tax revenue increases, the government is distracting itself from pursuing more realistic policies.
The 2019 budget is twice the 2015 budget, yet the populace doesn’t feel the salutary effect of the expansion. Some have argued that the budgets have hardly increased since 2015 in dollar terms, because of the depreciation in the exchange rate since 2016. This argument does not hold water. The recurrent expenditure, which account for over 70 percent of the yearly budgets, is paid in naira. In any case, the budgets for capital expenditures are largely unfunded or implemented in unsystematic basis due to inadequate revenue.
The government also needs to reconsider its mantra of spurring growth and job creation with deficit financing. If the policy can work even in the Nigerian context, it’s potentials may have been exaggerated. Boondoggle infrastructure projects such as Nigeria is pursuing in some of the road and rail projects are noted for delivering less than they promised. A new infrastructure often means abandonment of the old. Even the new ones are soon to fall into disrepair, due to lack of maintenance.
Far more problematic is how lack of local capacity to provide financing, technology/expertise and materials for infrastructure projects have meant that the projects are costing far more than they should, and meaning that the country is overborrowing for the projects. Countries with local capacity to provide at least two of the vital inputs for their infrastructure projects would accrue far more economic benefits than Nigeria that lacks the inputs.
Now that President Buhari has constituted the Economic Advisory Council, it is vitally important that the EAC makes inputs into the making of the 2020 budget. This means that the policy estimates for the 2020 budget, which were recently approved by the Federal Executive Council, should be reviewed by the EAC. The advisory council would do well to ensure that it is not, like the CBN, essentially validating illconceived economic policies of the government. Jide Akintunde is Managing Editor, Financial Nigeria; he is also Director, Nigeria Development and Finance Forum Stop Press: After this article had been written but before it was published, the government announced its plan to reintroduce tolls on federal roads.
The government needs to ditch its illusory fiscal expansion for reality.