• Friday, April 12, 2024
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Tax-and-spend, spend-and-tax: Shaping Nigeria’s fiscal future

Tax-and-spend, spend-and-tax: Shaping Nigeria’s fiscal future

Nigeria’s leaders must manage—not own—the nation’s wealth—an undeniable truth echoed by the nation’s citizens. The era of wasteful governance must come to an end. The imperative for prudent handling of national wealth is evident, given the profound impact it has on the most vulnerable segments of society.

This stark reality is made all too clear by the staggering statistic that over 104 million Nigerians live in poverty, a sobering fact highlighted by the World Poverty Clock.

Against a backdrop of economic turmoil—characterised by currency devaluation, rising unemployment, increasing inflation rates, and budget padding despite revenue challenges—Nigeria stands at a critical crossroads.

“The divergence between monetary and fiscal policies poses a significant challenge to Nigeria’s economic stability; these policies, intended to align to achieve common macroeconomic goals, currently diverge sharply.”

The recent revelation of Nigerian lawmakers padding the 2024 budget with over N53 billion in questionable projects serves as a stark reminder of the urgent need for thorough scrutiny of national spending. Every Nigerian must heed this lesson and demand greater accountability and transparency in governance.

In response to these pressing issues, decisive action is imperative to reshape Nigeria’s fiscal landscape. With economic uncertainties looming large, the call for transparency, accountability, and effective fiscal policies has never been more urgent. Nigeria must chart a path towards sustainable economic growth and equitable resource distribution.

The divergence between monetary and fiscal policies poses a significant challenge to Nigeria’s economic stability; these policies, intended to align to achieve common macroeconomic goals, currently diverge sharply.

While the central bank aims to tighten monetary policy by increasing the Monetary Policy Rate (MPR) from 18.75 percent to 22.75 percent—a 400 basis point adjustment—to attract foreign investment and control inflation rates, the National Assembly expands the budget by over N53 billion. Despite these divergent approaches, the government continues to face challenges in revenue generation.

As a notable commentator rightly observed, there’s no economic magic when fiscal and monetary policies operate at odds; instead, economic woes worsen. The fiscal profligacy evident in the 2024 budget, including questionable allocations to projects like unnecessary upgrades of presidential lodges in the military barracks and exorbitant spending on government officials’ vehicles, underscores the urgent need for a new fiscal approach.

Thus, in reshaping Nigeria’s fiscal model, the contrasting approaches of “tax-and-spend” and “spend-and-tax” have emerged as focal points of debate.

The “Tax-and-Spend” model advocates for raising revenue through taxation for government spending initiatives, prioritising fiscal prudence and sustainable budgeting.

Conversely, the “spend-and-tax” model emphasises government spending to stimulate economic growth, with taxation implemented later to recoup expenditures.

Over the years since the advent of democracy in 1999, Nigeria has predominantly embraced the spend-and-tax model, resulting in significant infrastructure development. Investments in roads, transportation, energy, and telecommunications infrastructure have laid the foundation for national progress.

Recent allocations for road construction, totalling N837 billion for over 2,254 roads and bridges in the 2023 and 2024 fiscal years, reflect Nigeria’s commitment to enhancing connectivity, accessibility, and energy infrastructure. These efforts underscore Nigeria’s dedication to sustainable development and economic resilience.

Furthermore, strides in energy infrastructure development have been pivotal in addressing Nigeria’s power supply challenges. The Central Bank of Nigeria (CBN) introduced several interventions to enhance liquidity and capacity in the Nigeria Electricity Supply Industry (NESI) by bolstering distribution companies’ (DisCos) ability to meet financial obligations to upstream market participants, thus supporting service delivery and collection efficiency.

Moreover, significant attention has been directed towards bolstering telecommunications infrastructure to foster digital connectivity and innovation. Initiatives aimed at expanding broadband coverage, upgrading network infrastructure, and promoting digital inclusion have played a pivotal role in driving socio-economic development and empowering communities across the nation.

However, despite these strides in infrastructure development, much of Nigeria’s growth has been marred by joblessness. This gap can be attributed to the mismanagement of resources, which has inflicted harm on both the populace and the country itself. The persistent budget deficit and mounting debt pose significant threats to the future of generations yet unborn.

A decade of outlooks on the core indicators of the spend-tax fiscal model in Nigeria:

Nigeria witnessed a steady surge in government expenditure, signalling heightened investments across sectors. This aligns with the concept of ‘fiscal stimulus,’ where government spending injects money into the economy, spurring consumption and investment, theoretically leading to increased production and employment.

However, Nigeria’s experience has been different. Instead of fostering growth, this surge has resulted in jobless growth, failing to create employment or alleviate poverty. Experts argue that increased government spending often benefits individuals rather than the economy as a whole, a reality reflected in Nigeria’s high corruption perception index ranking among the most corrupt nations globally.

Over the past decade, Nigeria has experienced significant shifts in its revenue landscape. From 2014 to 2023, revenue figures fluctuated, mirroring the nation’s economic ebbs and flows. Starting modestly at 3.73 trillion naira in 2014, revenue surged to a substantial 7.17 trillion naira by 2018. This upward trajectory continued until 2022, reaching a peak of 10.74 trillion naira before experiencing a slight dip to 10.49 trillion naira in 2023.

These revenue fluctuations hold profound economic implications. While a surge in revenue could potentially fuel government spending in critical sectors like infrastructure, healthcare, and education, the reality in Nigeria paints a starkly different picture.

Despite the revenue influx, development remains stagnant, with numerous projects abandoned and essential infrastructure in disarray. Public refineries lie dormant, transportation networks are inadequate, and power supply struggles to meet demand.

Compounding the issue is the disproportionate allocation of resources, with a significant portion directed towards recurrent expenditure rather than capital projects.

Experts estimate that Nigeria requires an annual investment of $100 billion to $150 billion over the next 30 years to bridge its infrastructure gap. However, current funding falls far short of this mark, with the World Bank suggesting it would take 300 years at the current rate to close the gap.

In the 2024 federal budget, recurrent expenditures accounted for approximately 39.33 percent of the total outlay, leaving less money available for capital projects that could address the infrastructure deficit. This reality is reflected in Nigeria’s low rankings in global indices measuring infrastructure quality and development.

Nigeria ranked 24th in 2020 out of 54 African countries in the Africa Infrastructure Development Index with 23.26 points; Egypt was second with 88.3 points; and war-torn Libya was third with 82.9 points. The 2019 Global Competitive Index Report ranked Nigeria 130th out of 141 economies surveyed for quality infrastructure.

Conversely, revenue declines could constrain government spending, impacting essential services and investment initiatives. Therefore, a comprehensive understanding of revenue trends is vital for navigating Nigeria’s economic landscape and fostering sustainable growth.

The trajectory of Nigeria’s national debt paints a grim picture of fiscal vulnerability. Driven by borrowing for infrastructure projects and budget deficits, the nation’s debt burden escalates, straining future generations with the weight of repayment. Despite promises of debt sustainability, Nigeria’s debt profile teeters on the brink of insolvency, exacerbated by mismanagement and corruption, as evidenced by Nigeria’s position in the Global Corruption Perception Index (GCPI).

Debt servicing costs surged to 6.31 trillion naira in 2023, coinciding with widening budget deficits, reflecting systemic financial challenges exacerbated by corruption. This trend hampers essential services, hinders economic growth, and exacerbates poverty. Urgent reforms are needed to address corruption and prioritise prudent spending for sustainable development.

Over the decade, Nigeria’s Corruption Perception Index (CPI) ranking fluctuated, indicating persistent challenges in combating corruption. Despite sporadic improvements, the ranking remains high, reflecting ongoing corruption issues. This undermines investor confidence, hampers economic development, and erodes public trust in governance.

Tackling corruption through strong anti-corruption measures and promoting transparency is crucial for achieving lasting economic growth. Transparency International’s Corruption Perceptions Index sheds even more light on Nigeria’s fiscal struggles, ranking it as one of the most corrupt countries in the world. This corruption eats away at government finances, leading to wider budget deficits. This constant mismanagement traps the economy in a cycle of instability.

Regrettably, over the years, Nigerians have felt the weight of corruption in their daily lives. It’s not just a number on a global index; it’s the hospital that lacks basic equipment, the road filled with potholes, and the child unable to access quality education.

As one human rights activist aptly said, “Corruption robs ordinary citizens of opportunities and denies them a fair chance at a better life. It’s a betrayal of trust, leaving many disillusioned with their leaders and the promise of progress.”

In navigating Nigeria’s fiscal future, the spend-tax approach emerges as a double-edged sword, fostering mismanagement despite insufficient revenue and corruption diverting funds from essential services.

A paradigm shift towards fiscal prudence, transparency, and accountability is imperative for sustainable development. Hence, adopting the Tax-spend model, with its inherent qualities, is suggested for the Nigerian government.

Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).