On November 7, 2017, President Muhammadu Buhari presented the 2018 budget to a joint session of the National Assembly. The N8.6 trillion budget proposal was tagged, “Budget of Consolidation.” While it is commendable that the administration presented the budget earlier than when it presented its previous two budgets, my take is that the budget is not expansionary enough and it indicates a lack of visionary leadership.
Before I continue, let me quickly make a full disclosure. Prior to the 2015 elections, I was one of those who supported President Buhari. He appeared to be a man of great courage and that was one of the qualities that endeared him to me. It was the thinking of most of his supporters, including me, that his antecedents, as a former military head of state, would enable him have the strong political will required to accomplish big things for the country. As my mentor and expert in leadership, John Maxwell, said, “Everything rises and falls on leadership.”
Regardless of my disappointment in the current administration, I am, nevertheless, not giving up on the president. I still believe that with courage and strong political will, President Buhari has what it takes to make a great impact before the end of his tenure.
That Nigeria will be presenting a N8.6 trillion ($23 billion) budget for 2018 is not only shameful but one that indicates a lack of courage in leadership.For Nigeria to realise its full potential that has been talked about for decades, the government cannot afford to be conservative or pull punches with fiscal policy. From transport to healthcare; from education to national security, there are dilapidated infrastructures staring us in the face.
The International Monetary Fund (IMF), as well as various commentators and economists have argued that Nigeria’s rising debt profile is worrisome. Part of the concern over the country’s debt situation is with the ratio of available revenue that is being used to service the debt. The Ministry of Finance has come up with some initiatives, such as the Voluntary Asset and Income Declaration Scheme (VAIDS), which I wrote about in the August edition of Financial Nigeria. However, these initiatives are drops in the ocean. Common sense dictates that if public debt is rising, government revenue has to increase.
Perhaps the ambitious development projects that Nigeria needs to significantly improve the living conditions of the people and substantially increase economic output are not being considered because of insufficient revenue. Angola, with a population of about 29 million, earmarked about $44.22 billion as its budget for 2017. South Africa, a country of about 56 million people, budgeted about $115 billion this year. Despite having the largest population and the biggest economy in Africa, Nigeria’s 2017 budget is the equivalent of $23 billion.
The reason is not far-fetched. According to the Collaborative Africa Budget Reform Initiative (CABRI), general government total expenditure in 2016, as a percentage of GDP was 9.26% for Nigeria. The data for South Africa was 32.96%, while Angola’s government’s expenditure, as a percentage of GDP was 23.72%. Also in 2016, Nigeria’s general government revenue as a percentage of GDP was 4.83%. The data for South Africa was 29.43%, while that of Angola was 19.59%.
These indicators show where some of the problems lie: Too little revenue, too little expenditures. It was my expectation that this administration would use the opportunity of decreased oil prices to introduce bold reforms that would not only quicken economic growth, but would also increase the non-oil revenue base. The government has an ambitious projection to triple non-oil revenue to N4.2 trillion in 2018. While this is impressive, experts have argued that this projection is unrealistic, citing the revenue underperformance in previous budgets. The federal government’s share of the companies’ income tax and Value Added Tax (VAT) are projected to contribute about a quarter of the non-oil revenue forecast for next year.
It is not going to be an easy task. But the Buhari administration needs to critically look at more innovative ways to increase revenues. One of the surest ways of doing this is to increase the VAT and also raise taxes on the rich. Indeed, the Minister of Finance, Kemi Adeosun, did say the government plans on increasing tax-to-GDP ratio from 6% to 18% by 2020, and improving compliance with existing tax laws. And I did argue in my August column that expanding the tax net, which currently has about 14 million people out of a taxable class of about 69 million people, will go a long way to increase non-oil revenue.
The tax rate also needs to increase on certain types of taxes. A look at the percentage of VAT across the globe shows that Nigeria’s VAT, at 5%, is one of the lowest in the world. Australia is currently at 10%, Chile 19%, Brazil 12%, Denmark 25%, Germany 19%, Ghana 15%, and Mexico 16%. Canada has a federal GST of 5% with that of the provinces ranging from between 8-10%, increasing the total to almost 15%, depending on the province.
As South Africa struggled with slow economic growth, the government introduced some measures to increase revenue this year. One of such measures was to increase the dividend withholding tax rate from 15% to 20%. A new income tax rate of 45% was also introduced for those with taxable income above R1.5 million. Fuel levy was increased by 30c/litre, road accident fund was increased by 9c/litre. Excise duties for alcohol and tobacco saw increases of between 6% and 10%, all in the bid to raise additional R28 billion in tax revenues. Meanwhile, VAT in the country remained unchanged at 14%. In the country’s 2017 budget, relief was provided for the low-income segment through an affordable housing programme, increase in allowance for tax-free savings accounts, increase in medical tax credit as well as increase in child support grant.
Good and responsible governance is required to achieve a sustainably growing economy that benefits all, including the vulnerable in society. In Canada, the IMF has recommended that the country spends $8 billion a year over 11 years to provide affordable child care services for parents. This will enable educated mothers who are stay-at-home parents to re-enter the workforce. The IMF sees this as one of the most effective ways to increase productivity, grow the Canadian economy, while reducing the national average for child care fees by about 40%. In its opinion, the spending would be recovered when more parents work and pay taxes.
The importance of political will, which the Buhari administration has yet to bring to bear in the area of revenue generation, cannot be overemphasized. India’s Prime Minister, Narendra Modi, said, “For achieving good governance political will is necessary. Good governance is a political process. Though role of civil society is critical, without political will and political process, sustainable good governance cannot be achieved.”
During the great depression Herbert Hoover, America’s 31st President, a great believer in balanced budget avoided budget deficit by greatly increasing tax rates on the wealthy. To pay for government programs and to make up for revenue lost during the depression, Hoover signed the Revenue Act of 1932. The Act increased taxes for the rich to about 63% on their net income up from 25% when he took office. Under Hoover, a check tax of 2cents on all bank checks was also introduced.
George Washington, America’s first president appointed Alexander Hamilton another founding father as the first Secretary of Treasury. Hamilton embarked on an ambitious plan of economic nationalism. From 1790 Hamilton began series presentations of his bold reforms and plans to Congress. His plan contained seven central elements. These are payment of foreign debts (owed to mainly France, Netherlands and Spain), repayment of all domestic debts, the takeover of states’ debts by the federal government, Taxation (which recommended increase in tariffs), establishment of the bank of United States, establishment of the mint and lastly promotion of manufacturing. In 1793, under Hamilton’s tax regime, the federal government collected enough revenue to pay off interest on debts ($2.8million in 1793), fund the army and navy (over $1million in 1792) and still balance the federal budget
It is instructive to note that not all these policies or reforms where not popular at the time they were introduced, but if leaders rely on the popularity of their reforms at the time of introduction, nothing significant will be achieved
Bold reforms do not come easy. Visionary leaders and leaders who don’t care about the next elections, but whose preoccupation is the next generation have been known to take bold initiatives to put their countries on the right path. President Buhari should do the right thing. He should not be too mindful of the opposition. As Seneca said, “the pressure of adversity does not affect the mind of the brave man.” The Buhari administration needs to come up with ambitious plans that are achievable. And strong political will must also underlie these plans.