Achieving fiscal sustainability in Nigeria

Nigeria’s fiscal policy has been a topic of debate since the new president announced plans to increase taxes. However, to understand why the policy has not resulted in growth, we need to examine its past challenges.

Nigeria’s fiscal policy has been marked by multiple taxation and untaxed sectors, which have discouraged foreign investment and hindered growth. The global recession and the fall in oil prices, which are the main source of Nigeria’s revenue, have worsened the situation.

President Tinubu stated in his speech that he wants to base the budget on the country’s needs and fund it by raising taxes. However, this may not be the best solution. Many corporations already pay high taxes, and more tax increases could deter investment and job creation. Moreover, Nigeria’s tax system is complex and full of loopholes, making it hard for the government to collect taxes.

To address these issues, here are some suggestions for the government:

• Ease of Doing Business Reforms: The government must have the will and capacity to overhaul the tax systems at all levels. Tax agencies and non-tax agencies often impose arbitrary or non-existent taxes and levies, leading to extortion. A comprehensive reform of the tax system, both legal and administrative, is needed. Additionally, investment in technology for taxpayer identification and profiling is essential.

• Cost Cutting: Nigeria has spent over 10 trillion Naira on fuel subsidies from 2006 to 2020, raising concerns about sustainability and efficiency. The government should target areas of waste and inefficiency, such as bloated salaries, inflated contracts, corruption, and excessive spending. Efficient resource utilization and reduced cost of governance can be achieved through performance-based budgeting. This approach links budget allocations to specific performance targets and results. The saved funds can then be directed towards critical areas such as infrastructure, healthcare, and education.

• Improving Tax Collections: Nigeria faces various challenges, including high interest rates, supply chain disruptions, rising energy and food prices, insecurity, rising debt, high inflation, low crude oil production, crude oil theft, labor issues, and flooding. The cost of borrowing has increased due to the COVID-19 pandemic and Russia’s invasion of Ukraine. The depreciation of the exchange rate has raised the cost of debt servicing and restricted spending on essential sectors.

While Nigeria has directed development spending to the right areas, it has struggled to collect the returns through tax systems. Improved tax collection is crucial to address revenue under-performance and enhance expenditure efficiency. Relying only on auditing compliant taxpayers and increasing tax rates is not sustainable.

Rwanda has achieved some success in improving tax collection and transparency from the informal sector. The country implemented reforms such as electronic billing machines, simplified tax procedures and forms, taxpayer registration campaigns, taxpayer service centers, risk-based audits, penalties for non-compliance, tax education programs, tax dispute resolution mechanisms, and annual tax revenue reports. These reforms resulted in increased tax revenue, reduced informal sector share of GDP, improved rankings in global reports, and enhanced transparency.