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

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 may see it as a relief from the burden of funding the subsidy, it has led to an inflationary trend and economic recession in the past. Learning from previous mistakes, it is crucial to keep the subsidy mafia in check and ensure that the present policy is not reversed. In this article, we will explore the medium and long-term policies surrounding the subsidy removal, the importance of taxes and revenue generation, and the risks associated with excessive borrowing.

The Impact of Subsidy Removal:

When former President Muhammadu Buhari removed the subsidy in 2017, the inflation rate skyrocketed, pushing the economy into recession. It is important for the government to address this potential inflation and reassure the public that new social and economic policies are being gradually introduced to mitigate its effects. By informing the public about these policies, the government can prevent misinformation and maintain public support.

Understanding Taxes and Revenue Generation:

Contrary to popular belief, developing countries are often wrongly accused of collecting low taxes relative to their total revenue. In reality, these countries impose low tax rates on citizens due to their low-income status. Both saving and tax collection have negative impacts on the economy unless they are reinvested as investments and subsidies. To ensure effective tax administration, countries must abide by Adam Smith's principles of taxation, including equity, certainty, convenience, and economy.

The Dilemma of Excessive Borrowing:

Increasing taxes may seem like a solution to generate more revenue, but it can also have adverse effects on an economy. Higher tax rates mean less money for basic needs and consumption, which can dampen production, output, and employment. Consequently, the government's revenue from taxes decreases. In such situations, countries often resort to borrowing to meet their monthly obligations, which can lead to a cycle of debt. It is crucial for the government to resist new borrowing and carefully consider the implications of contracting more loans.

Actionable Advice:

• 1. Implement Gradual Policy Changes: To mitigate the inflationary impact of subsidy removal, the government should introduce new social and economic policies gradually. This will allow the public to adjust and understand the long-term benefits of these changes.

• 2. Educate the Public: Providing clear and transparent information about medium and long-term policies is essential to prevent misinformation and maintain public support. By educating citizens about the reasons behind tax rates and revenue generation, the government can foster a sense of understanding and cooperation.

• 3. Prioritize Sustainable Revenue Generation: Rather than relying heavily on borrowing, the government should focus on sustainable revenue generation through efficient tax administration, encouraging domestic saving, and promoting investments. This will reduce dependence on external loans and protect the economy from excessive debt.

Conclusion:

The Nigerian economy continues to face challenges due to the removal of petroleum subsidy, tax policies, and excessive borrowing. However, by implementing gradual policy changes, educating the public, and prioritizing sustainable revenue generation, the government can navigate these challenges effectively. It is crucial to learn from past mistakes, keep the subsidy mafia in check, and resist new borrowing to ensure a stable and prosperous economy for the future.