A delicate fiscal balance

economy
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Our last week’s piece exposed the precarious position of Nigeria as everything appears to be out of balance – from the most miserable country in Africa to a high and growing unemployment rate to population explosion. Unemployment, brought about by sluggish economic growth and high cost of living are the chief purveyors of Nigeria’s miserableness. Economic growth is dwarfed by that of the population for years now. Coupled with the demographic nightmare – overrepresented by youths in a population with a median age of 18 – the challenge of delivering jobs and sustainable livelihoods has never been more cogent. Failure to do this will continue to exacerbate the insecurity levels that currently threatens to overrun the country from all flanks.

But the challenge of growing the economy and providing jobs has never been as difficult as it appears to be for the current government. The greatest hindrance to economic growth today is infrastructure. The country’s very poor record in ease of doing business over the years is largely attributable to infrastructure constraints. Firms have responded by voting with their feet. Economic activity is low and so is productivity.

Although infrastructure spend has been ramped up significantly since 2016, the bulk of the country’s annual budget is still spent on recurrent rather than capital expenditure. As a result, the rate of expansion of core infrastructure stock remains very low with the attendant drag on productivity. Nigeria’s core infrastructure stock stands at less than 20% of the country’s GDP against 70% World Bank’s benchmark for improved ease of doing business.

The recent infrastructure ramp-up in the budget is largely financed through borrowing which again weakens the fiscal position – almost 70% of independent government revenue now goes to servicing debts. Evidently, Nigeria’s economic system is not designed to depend on effective revenue mobilization outside oil rent. The fiscal regime imposed at the aftermath of the civil war in 1973 arguably dismantled all of the colonial structures of a tax-paying democracy. Our government has never drawn the bulk of its revenue from economic activities in the country and therefore, has no incentives to grow the non-oil sector. Government’s interest has always been on devising new ways of redistributing oil rents, which include expanding the army as well as the civil service and public works as employment programmes and ways to distribute favours, consolidate power, and exert total control over oil revenues. Such a neopatrimonial system did not offer citizens incentives to demand accountability and transparency from the government nor “the incentive to pay taxes to a corrupt government flush with oil money.”

But with oil fortune becoming endangered and its price volatile and unpredictable from day to day, in the face of expanding population and joblessness, there is no need for a fortune teller to announce that the doomsday is imminent. The evil chicken of Gowon’s fiscal consolidation has come home to roost! As Soludo, the CBN governor put it in 2007, “the umbilical cord that ties government and the private sector in most economies … got broken… government in Nigeria did not need the private sector for revenue, and because of government’s expansive nature, it depended very little on the private sector for job-creation.” Obafemi Awolowo, one of the architects of Nigeria’s independence, had warned about this dilemma:
…there is that broad, smooth road, with promises of no-taxation, and efforts to get money from other places, leading nowhere but to perdition, poverty, disease and economic enslavement; and there is the other road—people who go therein pay tax. They also have to apply self-help and self-sacrifice to get where they want. But this road…leads to success. (Awolowo, 1954)

It is clear that Nigeria has travelled on the former path for much of its history until its precariousness and unsustainability forced the current rethink. There is no doubt that the government’s ability to mobilise revenue especially, non-oil tax revenue, since the unreliability of oil revenue has become apparent, is critical for public goods provisioning to meet the Sustainable Development Goals. But the challenge is that you cannot reap where you haven’t sown. The private sector has been emasculated. Those who are unlucky to be caught in the tax net complain of multiple taxation. Those who are not there yet keep devising ingenious means of evasion. Some who can pay tax have seen a reversal of fortune that necessitates constant government bailout as in the case of the electric discos. The manufacturing sector cry for infrastructure constraints and prohibitive lending rates that have bankrupted many firms. Personal income tax still stands at 1% of GDP. These economic persons have also witnessed an inflation-induced budget decimation over the years that warranted the current minimum wage increase. So, from where does the government intends to extract this all-important tax?

The fiscus currently stands at just 6% of GDP (tax to GDP). Given the above scenario, getting the economy to respond to a fiscal revolution that privileges taxation is tantamount to teaching an old dog new tricks. But it seems that the government does not appreciate the depth of the current fiscal imbroglio. Yes, it is imperative that taxes be extracted to grow the economy — incentivize the growth of job-creating economic activities. But citizens cannot be coerced to pay taxes when there is nothing to show for taxes paid in the past. This is a typical catch 22 situation! People do not pay taxes because government does not provide services and government will not provide services because people do not pay taxes.

Asking people who are demanding minimum wage increase to pay taxes – whether VAT or quantity tax, is contradictory. Obviously, the new wage increase flies in the face of the imperative to grow the fiscus. Some argue that the 67% wage increase without productivity gains is simply a recipe for inflation and fiscal slippage. The total wage impact is approximately 3.5% of GDP and 18% of the broad money stock. Yet, no one can justifiable argue that workers are undeserving of wage increase – especially in the face of rising cost of living. But it still begs the question how the government wants to sustainably grow the economy.

There is no doubt that providing infrastructure is critical as an investment toward future job growth and revenue mobilisation potential. So also is optimising current tax system to increase tax to GDP ratio to 10% in the short run. These should be pursued to create an economy that supports private enterprise and reduces government’s ubiquitous presence in the economy. Specifically, government’s expansion of public sector jobs is a disincentive for economic growth. Over the years, we have seen that public sector jobs have increasingly become more competitive than private sector jobs. This cannot create the appropriate incentive system to grow the economy and enhance productivity in the system.

 

Bongo Adi

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