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

Feranmi Olaseinde

Feranmi Olaseinde

Sep 24, 20233 min read

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

Introduction:

The sudden removal of petroleum subsidy in Nigeria has created a wave of positive and negative impacts on the economy. While the government sees it as a relief from the burden of subsidy payments, the inflationary trend that follows such a move is expected. Lessons must be learned from previous attempts at subsidy removal, and the government must keep the subsidy mafia in check. Additionally, tax policies and revenue generation play a crucial role in the economic development of any country. This article explores the interconnectedness of subsidy removal, taxes, and the role of banks in the Nigerian economy.

The Impact of Subsidy Removal:

When former President Muhammadu Buhari removed the subsidy in 2017, the inflation rate skyrocketed, plunging the economy into recession. This policy was eventually reversed due to the negative consequences. The fear of history repeating itself raises concerns about the current subsidy removal and the need for medium and long-term policies to prevent a similar downturn. The government must communicate these policies effectively to gain public support and prevent any attempts to derail their efforts.

Understanding Taxes and Revenue Generation:

Contrary to popular belief, developing countries are often accused of collecting low taxes relative to total revenue due to low tax rates imposed on citizens. However, it is important to note that both taxes and saving are withdrawals from the economy and have negative impacts unless they are reinvested or returned to the economy as investments and subsidies, respectively. Income growth plays a crucial role in increasing both saving and tax collection. Therefore, labeling developing countries as low-income economies implies low saving and taxes.

The Canons of Taxation:

Adam Smith's principles of taxation emphasize equity, certainty, convenience, and economy. Tax administrators in developing countries understand the importance of these principles and aim to implement them effectively. Increasing tax rates may seem like a solution to generate more revenue, but it can have adverse effects on an economy. Higher taxes lead to reduced disposable income, which, in turn, dampens consumption, production, output, and employment. This results in a decrease in company and personal income taxes, ultimately affecting government revenue.

The Role of Banks:

The report warns against further borrowing by the Nigerian government, as it has been borrowing to meet monthly obligations. The World Bank's unexplained position may have influenced the visit from the American Bank, which is dangling loans before the government. However, it is crucial for the government to resist new borrowing and focus on finding alternative solutions to meet financial obligations. Overreliance on loans can have long-term negative consequences for the economy.

Actionable Advice:

1. Implement effective communication strategies to inform the public about the medium and long-term policies put in place to mitigate the negative impacts of subsidy removal and unify public support.

2. Prioritize income growth through comprehensive economic policies that promote investment, job creation, and increased disposable income to enhance tax collection and saving.

3. Explore alternative means of meeting financial obligations instead of relying solely on borrowing, as excessive borrowing can lead to a debt trap and hinder economic growth.

Conclusion:

The removal of petroleum subsidy, tax policies, and the role of banks are interconnected factors that significantly impact the Nigerian economy. Lessons from previous experiences of subsidy removal should be learned to prevent a repeat of economic recession. Effective tax administration that adheres to the canons of taxation is crucial for maximizing revenue without burdening citizens excessively. Additionally, the government must resist the temptation of further borrowing and seek alternative solutions to meet financial obligations. By addressing these issues, Nigeria can pave the way for sustainable economic growth and development.

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