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

Feranmi Olaseinde

Hatched by Feranmi Olaseinde

May 25, 2024

3 min read

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

Introduction:

The sudden removal of petroleum subsidy in Nigeria has caused significant vibrations, both positive and negative, in the country's economy. While the government sees it as a relief from the burden of paying for the subsidy, the removal has resulted in inflationary trends and economic challenges in the past. It is essential to learn from these lessons and ensure that the present policy is not reversed, while also keeping the subsidy mafia in check. Additionally, the government must communicate its medium and long-term policies to the public to maintain their trust and support.

The Connection Between Subsidy Backlash and Taxes:

The issues surrounding taxes and revenue generation are closely connected to the subsidy backlash. Many advanced countries rely heavily on taxes to finance their budgets, whereas developing countries are often criticized for imposing low tax rates on citizens. However, it is crucial to understand that both saving and tax collection are derived from income. Therefore, increasing income will lead to higher savings and taxes collected. Low-income economies naturally have lower savings and taxes.

Adam Smith's Principles of Taxation:

Adam Smith's canons of taxation, including equity, certainty, convenience, and economy, provide a framework for effective tax administration. Tax administrators understand the importance of these principles in ensuring a fair and efficient tax system. However, it is essential to strike a balance between collecting taxes and allowing citizens to meet their basic needs and consume goods and services. Excessive taxation can dampen production, negatively impacting output and employment.

The Impact of Loans and Borrowing:

The Nigerian government has been resorting to borrowing to meet its monthly obligations, which raises concerns about the country's debt burden. Despite warnings against contracting more loans, there have been offers from international institutions like the World Bank and the American Bank. It is crucial for the government to resist new borrowing and carefully evaluate the consequences of increasing the debt burden. Overreliance on loans can have long-term implications for the economy.

Lessons and Insights for the Nigerian Economy:

  • 1. Maintain Consistency in Policy: The Nigerian government must ensure that the present policy of subsidy removal is not reversed, as inconsistency can lead to economic instability. By keeping the subsidy mafia in check and gradually introducing new social and economic policies, the government can mitigate the inflationary effects and gain public support.
  • 2. Communicate Long-Term Policies: It is crucial for the government to effectively communicate its medium and long-term policies to the public. When people are aware of these policies through public information, they are less likely to be deceived or swayed by misinformation. Transparent communication can help maintain trust and support for the government.
  • 3. Evaluate Borrowing and Debt Burden: The Nigerian government should carefully evaluate the consequences of contracting more loans and increasing the debt burden. Overreliance on loans can hinder economic growth and development. It is important to explore alternative strategies for revenue generation and prioritize sustainable financial practices.

Conclusion:

The impact of subsidy backlash, taxes, and the banking sector on the Nigerian economy requires careful consideration and strategic decision-making. By learning from past experiences, implementing consistent policies, communicating effectively with the public, and evaluating borrowing practices, the Nigerian government can navigate these challenges and foster sustainable economic growth. It is essential for the government to prioritize the long-term well-being of the economy and its citizens.

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