The Impact of Subsidy Backlash, Taxes, and the Banks on the Nigerian Economy

Feranmi Olaseinde

Feranmi Olaseinde

Jul 29, 20233 min read

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The Impact of Subsidy Backlash, Taxes, and the Banks on the Nigerian Economy

Introduction:

The sudden removal of petroleum subsidy in Nigeria has had both positive and negative effects on the economy. While the government sees it as a relief from the burden of paying for the subsidy, the inflationary trend that follows the fuel subsidy removal and unification of the foreign exchange market is not unexpected. It is crucial for the government to learn from past mistakes and ensure that the present policy is not reversed, keeping the subsidy mafia in check. In this article, we will explore the medium and long-term policies needed to stabilize the economy, the importance of taxes and revenue generation, and the implications of excessive borrowing from banks.

The Importance of Public Information:

To ensure public support for government policies, it is essential to keep the citizens informed about the medium and long-term policies being implemented. When people are aware of these policies, it becomes difficult for anyone to deceive or derail their support for the government. Transparency in public information is key to maintaining trust and preventing misinformation from spreading.

Understanding Taxes and Revenue Generation:

Contrary to popular belief, developing countries are not imposing low tax rates on citizens. They are often wrongly accused of collecting low taxes relative to total revenue. It is important to note that both saving and tax collection are withdrawals from the economy and can have negative impacts unless they are returned to the economy as investments and subsidies, respectively. Moreover, both saving and taxes are derivatives of income, meaning that growing income will result in an increase in saving and taxes collected.

Adam Smith's Canons of Taxation:

Adam Smith, the father of modern economics, outlined four principles that good tax collection must adhere to: equity, certainty, convenience, and economy. Tax administrators understand the importance of these principles in ensuring an efficient and fair tax system. Additionally, the canons of productivity, elasticity, simplicity, and diversity serve as extensions to Smith's original canons. By following these principles and extensions, tax collection can be optimized while minimizing negative impacts on the economy.

The Negative Effects of Excessive Borrowing:

In recent years, Nigeria has relied heavily on borrowing to meet monthly obligations, which has led to a significant increase in debt. Excessive borrowing not only burdens the country with debt repayments but also reduces the amount of money available for basic needs and consumption. This decrease in consumption can dampen production, negatively affecting output and employment. As a result, both company and personal income taxes may fall, leading to a decrease in revenue for the government. It is crucial for the country to resist new borrowing by all means to avoid further financial strain.

Actionable Advice:

  • 1. Maintain transparency: The government should prioritize transparency and public information to ensure that citizens are well-informed about the policies being implemented. This will help build trust and prevent misinformation.
  • 2. Optimize tax collection: Tax administrators should strive to adhere to Adam Smith's canons of taxation and their extensions. By ensuring equity, certainty, convenience, and economy in tax collection, the government can maximize revenue while minimizing negative impacts on the economy.
  • 3. Reduce reliance on borrowing: To avoid excessive debt and its negative consequences, the government should resist new borrowing and focus on improving revenue generation through effective tax policies and investments.

Conclusion:

The impact of subsidy backlash, taxes, and the banking sector on the Nigerian economy cannot be underestimated. It is crucial for the government to learn from past experiences, maintain transparency in public information, optimize tax collection, and reduce reliance on borrowing. By implementing these actionable strategies, Nigeria can stabilize its economy and pave the way for sustainable growth and development.

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