Subsidy backlash, taxes and the banks By Sheriffdeen Tella

Vibrations from the sudden removal of petroleum subsidy will continue to impact positively and negatively on the Nigerian economy for some measured time. The government would see it as a relief as the fear of getting money to pay for the subsidy as and when due is no longer its business. The fear of getting money to buy fuel to take workers to workplaces between one payment day and the next is now the business of the workers. Where to get the next free flow of funds is now the business of the fuel subsidy scammers who have been feeding fat on government ignorance and consumers’ helplessness. For them, it is now business unusual in that sector! But the government should not underrate their ingenuity. They are still in the business of oil, in the oil theft section trying to perfect the act for long-term gains.

The inflationary trend that follows the fuel subsidy removal and unification of the foreign exchange market is not unexpected. When former President Muhammadu Buhari removed the subsidy around 2017, the inflation rate jumped to double digit and the economy entered recession such that the policy was tacitly reversed. The subsidy mafia was allowed to intervene to retain their control. We have to learn lessons from that and make sure the present policy is not reversed. The mafia must be kept in check. The government must let people know that it is aware that there must be inflation but it is being taken care of through new social and economic policies gradually being introduced with positive effects showing up in the next few weeks. That is the public relations aspect of policy which must be part of the government public policy implementation package in dealing with the public. There must be constant information flow on what the government is doing to make life bearable for the citizens. Otherwise, misinformation by various groups of political jobbers will fill the gap to the detriment of the government. What are the planned short-term palliative policies? What are the medium and long-term policies? When people are abreast of these policies through public information, it will be difficult for anyone to deceive and derail their support for government.

It is easy to inflict injury but it takes time for the pain to subside and longer period for the wound to heal fully. The same happens with government policies and the government would expect the public to understand. Fortunately for the Nigerian governments, Nigerians are resilient and cooperative. That is why, over time, Nigerian governments have always taken the public for granted. The present government must change this attitude by implementing outstanding subsidy palliatives quickly, transparently and effectively. The action of tax policy reversal taken by President Bola Tinubu last week is a policy of positivity.

That brings us to the issues surrounding taxes and revenue generation. I have explained in this column in the past that many advanced countries rely heavily on tax to finance their budgets but developing countries are being wrongly accused of collecting low taxes relative to total revenue because they are imposing low tax rates on citizens. There have therefore been arguments that these countries must increase their tax rates. The same thing is often said about low saving in developing countries and the need to improve on domestic saving.

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Both saving and tax are withdrawal from an economy. This makes them have negative impacts on the economy unless they are returned to the economy as investments and subsidies respectively. More importantly, both of them are derivatives of income. This implies that growing income will result in an increase in saving and taxes collected. Opposite occurs for low income such that when countries are referred to as low-income economies, we should expect low saving and taxes. It is imperative for governments in such economies to work on improving employment and income generation through appropriate policy formulations and implementation rather than imposing taxes and forcing savings. Let us discuss these issues further.

In advanced economies or industrialised states or high-income countries where saving and taxes collected are high, it is because of their high level of income and development. Willingness to pay tax is high, though they still have incidences of tax avoidance and tax evasion. The citizens see their taxes at work. The basic necessities of life have been and are being provided and maintained with public funds generated through taxes. Certainty as to how much an individual pays is never in dispute as a press on the computer keyboard after filling expected income, tells each taxpayer how much he/she is supposed to pay and tax collection is seamless. The whole processes of tax administration in those countries obey Adam Smith’s canons of taxation and its extension. Smith had told us that good tax collection must obey four principles namely; equity, certainty, convenience, and economy. The extensions of the canons are canons of productivity; elasticity; simplicity, and diversity. Tax administrators understand what these concepts mean.

The use of technology in tax collection; the small insignificance of the informal sector and the fact that those economies are dealing with an enlightened population make coverage of areas of tax collection easier in advanced economies. Since the tax rates are tied to income, it is not surprising that the values of tax returns are high and form a significant part of the revenues. Taxpayers in Nigeria, like their counterparts in other African countries, are the most taxed. We can say that they pay a small amount of tax that forms a small proportion of government revenue and that is also because they receive low income. In addition to the tax paid in cash or through deductions from their salaries, they provide the basic needs that are taken for granted in other climes. They spend lots of money maintaining their vehicles or paying for transportation because of the high cost of maintaining vehicles due to the poor roads that spread over the landscape of many cities, towns and villages. The same goes for businesses operating in these countries, as these are part of the reported high cost of production, beside the high price of diesel or electricity or exchange rates.

The citizens of most African countries rely on personally dug wells and boreholes for potable water for drinking and domestic use. People pay through their sweat to generate household electricity due to epileptic nature of public power generation and distribution services. Costs of food remain relatively high in many of the countries when compared with prices of food in advanced economies. All these payments take a large proportion of the poor pay of the workers. These are taxes that are not regarded as so when making statements on tax paid by citizens of developing countries including Nigeria. More taxes mean less money to meet basic needs or less money for consumption of goods and services. Less consumption in an economy will dampen production and negatively affect output and employment. Consequently, company and personal income taxes fall or revenue to the government from taxes also falls.

Hopefully, the new tax reforms committee set up by the President is conversant with these implications. The government had already explained that it is more concerned about widening the tax net than increasing tax rate. The committee, in addressing the issues at stake, should consider compliance of our tax collection processes and procedures with the canons of taxation and how to comply in areas of disagreement. Technological advancement in tax payments by businesses and households need to be improved and deployed. More importantly, tax payment and collection are one side of the equation. The use of taxes collected for public projects needs to be improved upon and publicised.

One is curious about the continuous reminder by the World Bank that some $800m is available to meet subsidy palliative expenses. The World Bank, in some of its reports and lately in the June 2023 report on Nigeria, explained that the country’s debt servicing consumed more than 80 per cent of the revenue and when added to personnel cost, exceeded the revenue. The implication is that the country has been borrowing to meet monthly obligations and the essence of the report is to caution the country from contracting more loans. Then why are they dangling loans before the government again? One suspects that the World Bank’s unexplained position was instrumental to the visit from the American Bank. Government should resist new borrowing by all means. We shall look into this soon.