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

Feranmi Olaseinde

Hatched by Feranmi Olaseinde

Jan 29, 2024

3 min read

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

Introduction:

The sudden removal of petroleum subsidy in Nigeria has caused both positive and negative impacts on the economy. While the government sees it as a relief from the burden of paying for the subsidy, there are inflationary trends and economic challenges that follow such a policy shift. It is crucial for the government to learn from past experiences and ensure that the present policy is not reversed. In this article, we will explore the connections between subsidy backlash, taxes, and loans, and their effects on the Nigerian economy.

The Link Between Subsidy Backlash and Inflation:

When former President Muhammadu Buhari removed the fuel subsidy in 2017, the inflation rate skyrocketed, pushing the economy into a recession. This led to the tacit reversal of the policy, allowing the subsidy mafia to retain their control. To prevent a repeat of this scenario, the government must keep the mafia in check and assure the public that inflation is being addressed through new social and economic policies. By providing transparent information about these policies, the government can gain the support of the people and prevent any deceptive actions.

Taxation and Revenue Generation:

There is a misconception that developing countries impose low tax rates on citizens, resulting in low tax collection relative to total revenue. However, it is essential to understand that both saving and tax are withdrawals from an economy and can have negative impacts unless they are reinvested or returned to the economy as investments and subsidies, respectively. Moreover, saving and tax collection are directly tied to income levels. Higher income leads to increased saving and taxes, while lower income results in low saving and taxes. Therefore, referring to countries as low-income economies should be understood in the context of their tax collection and saving levels.

Adherence to Taxation Principles:

Tax administration in developing countries should adhere to Adam Smith's canons of taxation, which include equity, certainty, convenience, and economy. These principles ensure that tax collection is fair, predictable, and efficient. Additionally, the canons of productivity, elasticity, simplicity, and diversity are extensions of Smith's principles that contribute to effective tax administration. By following these principles, tax administrators can create a system that promotes economic growth and stability.

Negative Impact of Excessive Borrowing:

Excessive borrowing to meet monthly obligations can have severe consequences for a country's economy. When a country relies on loans to fulfill its obligations, it indicates a lack of financial stability and the potential for a debt crisis. The report cautions against contracting more loans, especially when the country is already burdened with debt. It is essential for the government to resist new borrowing and explore alternative solutions to meet its financial obligations.

Actionable Advice:

  • 1. Implement Transparent Policies: The government should communicate its medium and long-term policies to the public to gain their trust and support. Transparency in policy-making reduces the likelihood of deception and allows citizens to make informed decisions.
  • 2. Prioritize Economic Growth: Instead of focusing solely on increasing tax rates, developing countries should prioritize efforts to grow their income levels. Higher income leads to increased saving and tax collection, creating a more stable and sustainable economy.
  • 3. Resist Excessive Borrowing: Governments should resist the temptation to contract more loans, especially when the country is already burdened with debt. Exploring alternative solutions and implementing effective financial management strategies will lead to long-term economic stability.

Conclusion:

The removal of petroleum subsidy, taxation policies, and borrowing decisions have significant impacts on the Nigerian economy. Learning from past experiences, implementing transparent policies, prioritizing economic growth, and resisting excessive borrowing are crucial steps towards creating a sustainable and prosperous economy. By taking these actions, Nigeria can mitigate the negative effects of subsidy backlash, taxes, and loans, and pave the way for long-term economic growth.

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