From ‘Reaganomics’ to ESB: Will Nigeria’s economic reforms deliver its people?

Nigeria is set to embark on a tax reform policy to eliminate multiple taxation through the Economic Stabilisation Bills (ESB). This reform seeks to amend 15 tax, fiscal, and establishment laws to foster economic stability and inclusive growth.

At its core, the ESB intends to consolidate taxes, lower business costs, spur investment, and promote price stability. However, whether this reform will deliver the desired growth remains an open question. To assess its potential impact, we can look back at history.

“Nigeria’s economy, however, faces its challenges. As of August 2024, food inflation stands at a staggering 37.52 percent, disproportionately affecting the most vulnerable segments of society.”

Reaganomics: A precedent for Nigeria’s tax reforms

A similar approach was implemented in the United States during stagflation in the late 1970s—a time of high inflation, unemployment, and stagnant economic growth.

When President Ronald Reagan took office in 1981, his administration introduced a set of policies that would later be known as “Reaganomics” or supply-side economics. The aim was to stimulate growth, reduce inflation, and embrace free-market principles by cutting taxes and loosening regulations.

Although revolutionary, Reaganomics was initially met with scepticism. Vice President George H. W. Bush, during his 1980 presidential campaign, famously referred to it as “voodoo economics.”

Despite the criticism, Reagan signed the Economic Recovery Tax Act of 1981 into law. The Act, a modified version of the Kemp-Roth proposal, slashed personal income tax rates and reduced the top marginal tax rate from 70 percent to 50 percent, while also cutting corporate taxes.

However, the immediate aftermath was a recession rather than a recovery. The U.S. economy contracted by 1.8 percent in 1982, largely due to the Federal Reserve’s decision to tighten the money supply, which led to higher interest rates and stifled investment. While inflation fell, the economy plunged into its worst downturn since the Great Depression.

Recovery eventually took hold in 1983, and by 1984, the economy surged by 7.24 percent, with sustained growth in the following years.

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Will ESB drive inclusive growth in Nigeria?

The ESB’s primary objective is to foster inclusive growth through inflation reduction and price stability, empower the Central Bank of Nigeria (CBN), and promote fiscal discipline and consolidation. The key changes include consolidating various taxes, amendments to the income tax laws, and reducing corporate tax over time.

Nigeria’s economy, however, faces its challenges. As of August 2024, food inflation stands at a staggering 37.52 percent, disproportionately affecting the most vulnerable segments of society.

In response, the ESB proposes the suspension of certain taxes on small businesses and vulnerable groups, such as road haulage levies and market taxes, with the goal of easing their financial burden.

Nevertheless, tax policy reform alone cannot guarantee success. “Unofficial taxation continues to plague Nigeria’s petty traders, farmers, and transport drivers. These informal levies often force businesses to pass additional costs onto consumers, further exacerbating inflationary pressures,” an economist said.

Ideally, tax relief should translate into lower prices for consumers, but as Adam Smith observed in The Wealth of Nations (1776), individuals act in their self-interest. This could mean that businesses, rather than reducing prices, might simply pocket the extra profits—a sobering reality that is endemic in Nigeria’s market behaviour.

Regulatory capture: A challenge for implementation

One of the key obstacles the Nigerian government may face is regulatory capture. The agencies responsible for enforcing the tax reform and fiscal discipline among government-owned enterprises might resist, given that they benefit from the very levies the bill seeks to eliminate. This could undermine the effectiveness of the policy and lead to another instance of government failure.

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The supply-side argument: Lower taxes for greater investment?

Supply-side economics posits that reducing corporate income tax rates gives businesses more cash to reinvest, thus boosting production and expanding capacity. Reducing government regulations, it is argued, will remove bureaucratic barriers, speeding up decision-making and incentivising investment.

However, investment decisions are complex and depend on many factors, one of which is the marginal efficiency of capital. According to John Maynard Keynes, businesses will only invest if they expect a sufficient return on their capital. If a company perceives that reinvestment won’t yield high returns, it may choose to engage in stock buybacks instead of funding new projects or hiring more workers.

This was evident in 2018, when U.S. corporations, following a wave of tax cuts, spent over $1.1 trillion on share repurchases rather than reinvesting in new plants or increasing wages.

While tax cuts spurred an economic recovery in the U.S., controlling how businesses utilise their excess funds remains a challenge.

Reforms alone won’t suffice: The need for institutional overhaul

For the ESB to be effective, tax cuts and incentives must be accompanied by institutional reform. One key aim of the ESB is to overhaul the Fiscal Responsibility Act, which is meant to guide government-owned enterprises in sharing surpluses and building reserve funds from their revenues.

However, past examples, such as the Nigerian National Petroleum Company Limited (NNPCL), show how far the government has to go in achieving this.

Despite being one of the few government-owned enterprises that generate foreign earnings, NNPCL has struggled to make consistent profits. Even in the rare instances when it did, no significant amounts were remitted to the government’s coffers.

This exemplifies the broader issue of institutional inefficiency, where surplus revenues are not properly managed or reinvested.

Without a stable and predictable business environment, no amount of tax relief will lead to the kind of investment needed to stabilise the naira or boost long-term growth.

Nigeria’s economic future hinges not only on the reforms themselves but on the government’s ability to enforce them and maintain regulatory integrity.

In conclusion, supply-side economics offers a theoretical framework for growth, but its real-world application depends on a range of variables, including the actions of businesses, the enforcement of regulations, and the overall stability of the economy. Whether prosperity will trickle down to the people remains to be seen.