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.
The government can also derive more taxes by implementing policies that encourage tax compliance and closing loopholes that enable tax evasion. For example, policies targeting the informal sector could offer access to services such as healthcare that align with their income levels.
• Inclusive Growth: Achieving inclusive growth is essential for driving productivity. Projects that focus only on financial inclusion without considering economic inclusion may not translate into significant gains for target groups. To achieve inclusive growth, Nigeria needs different policies and strategies tailored to specific situations and goals.
Efforts should be made to improve government spending on education, health, and social protection. Savings from subsidies can be redirected towards more productive and pro-poor spending.
• Trust: Trust is a crucial element for implementing any of the above suggestions. According to the 2022 Edelman Trust Barometer report countries such as Argentina South Africa, Colombia, Spain, Nigeria, and Brazil have experienced declines in trust due to factors such as corruption mismanagement social unrest economic challenges.
To build trust especially in a time when subsidies have been removed, government needs to allocate more resources to social protection, informal sector, prioritize education, health, transportation. It also needs to deliver public services efficiently, while combating waste and corruption.
In conclusion, Nigeria faces significant challenges including government debt, external factors, inflation, and high unemployment to name a few. Implementing right strategies will take time before citizens see results as adjustments are necessary. However it is crucial for government transparently reduce spending and rebuild trust with public.
Nigeria’s fiscal policy has not led to growth and instead of relying on raising taxes government should focus spending cuts, investment in critical areas, and development of policies to encourage tax compliance. By implementing these measures Nigeria can move toward sustainable economic growth thereby reducing its reliance on oil revenue long term.
Ishie, is a business development manager at Nina Jojer, a firm that offers business solutions and advisory services to help businesses operate effectively and create a positive impact in Sub-Saharan Africa