The Nigerian economy is in serious need of a boost. There is an urgent need to stimulate economic activities across all sectors and restore hope to many Nigerians who currently feel abandoned or left out of the scheme of things.
This growth needs to be financed with money that must come from somewhere. This partly explains why President Bola Tinubu’s 2024 budget of N28.7 trillion carries a deficit of N9.18 trillion, which is about 32% of the total or 3.88 percent of Nigeria’s gross domestic product (GDP). A deficit this size has a lot of fiscal implications. Financing such a huge deficit at a time such as this will task the government. Already, the government has said it will look to such sources as borrowing (N7.83 trillion) and proceeds of privatisation of public assets (about N298.49 billion). It also hopes to secure about N1.05 trillion) from multilateral and bilateral loans for specific projects.
This size of the deficit is in line with the government’s Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) 2024-2026, which projected a deficit size of N9.05 trillion in 2024 and noted that the deficit will be financed by domestic borrowings, “considering the narrow window for external financing”. All of these explain the need for the government to pay more attention to taxes as sources of funds for its programmes.
Nigeria’s tax-to-GDP ratio of 10.86% is significantly lower than South Africa’s 27%, a country with a similar sized GDP on the continent. But even Ghana, Egypt and Kenya collect more taxes as a ratio of their GDPs than Nigeria, according to data by Agusto &Co. For this reason, it is expected that taxes will begin to feature prominently in government fiscal activities going forward.
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Already, the Finance Act 2023 contains a catalogue of new taxes or changes in existing ones applicable across various sectors of the economy. For instance, the Act introduced an additional 0.5% customs duty on goods imported from outside Africa. It also introduced excise duty on all services offered in the country. The President will set the rates of the excise duty through executive orders. The Tertiary Education Tax has also been raised to 3% from 2.5%, while the government has announced the inclusion of digital assets as chargeable assets for calculation of capital gains tax. According to the Act, assets included in this category include cryptocurrencies and non-fungible tokens, all of which will attract capital gains tax at the rate of 10%.
This is where the caveat comes in. Notwithstanding the need to generate more tax revenues, the government must exercise caution in doing this. This economy is already overheated, by all available indices. With inflation at 28.2%, a Monetary Policy Rate of 18.75%, and a high unemployment rate, there is very little room now for further cast escalation. These new taxes will lead to increases in the prices of affected items and this could lead to additional challenges considering the current economic situation.
In an economy already reeling from the burden of a record inflation rate, imposing more taxes on the business community will only worsen the impact of the current 28.2 per cent inflation rate on consumers, businesses pass on the burden of the taxes to the end users of their products and services. The government must also remember that most of the soaring inflation in recent months was caused by its own policies, particularly the sudden withdrawal of the subsidy on fuel and the flotation of the naira.
The government cannot in one breadth say it wants to simulate the economy, while simultaneously implementing policies that can strangulate it. There is a need, therefore, to avoid sequencing policies that can conflict with one another. As the MTEF seeks to “moderate inflationary pressures, provide critical infrastructure to lower the cost of doing business” in the country it is necessary to ensure that the objectives and the instruments for achieving these objectives do not work at cross purposes.
Finally, the second side of the public finance equation. While the government has the right to introduce new taxes, taxes must be seen to reflect on the quality of lives of ordinary Nigerians. Unfortunately, that side of the equation is largely missing in Nigeria.
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