Several ways to bake a larger fiscal cake

When we look to demonstrate the potential of boosting tax collection, we could do a lot worse than take the example of South Africa. In the first four fiscal years of majority rule through to 1997/98 (years starting 01 April), national tax collection increased by an annual average of 15.0 per cent. For taxes on net income, the largest single source of revenue, the average rise was 18.5 per cent. These rates of growth were not sustainable, easing to 7.8 per cent and 7.3 per cent respectively in 1999/2000.

We do not pretend that the election of Muhammadu  Buhari was as momentous as the advent of majority rule in South Africa. We are merely highlighting what can be achieved when a government channels new energies into revenue gathering. If the FGN is to make the capital investment it proposes as its contribution towards a remodeled economy, it has to transform its non-oil revenue collection. (The 2016 budget proposals do not assume a recovery in the international oil price.)

To recap, the proposals project total non-oil revenue of N5.72trn this year, compared with N4.06trn in the previous year’s budget and N2.46trn actual in January-September 2015. An extension of the nine months’ data on a pro rata basis for the full year suggests a target increase of 75 per cent in the proposals for 2016. Before we throw up our hands in despair, we note that there are far more low-hanging fruit to pluck in Nigeria, where total revenue collection (including oil) in 2014 amounted to just 11.3 per cent of GDP (rather than 23.5 per cent in South Africa in 1997/98).

At the same time, we note that the ambitious non-oil revenue target in the FGN’s proposals, subject to the go-ahead from the National Assembly, do not assume any rises in direct tax rates. The budget and planning minister did say last month, however, that he did not envisage a VAT increase “at the moment”, which we could interpret as a case of keeping fiscal ammunition in reserve. A doubling of the rate would generate close to N800bn over a full year for the three tiers of government, and would be particularly welcome with the embattled states (which receive 50 per cent of the pool according to the set formula).

Among the several grounds to explain the huge projected boost in non-oil collection, much rests upon the Treasury Single Account (TSA). The federal finance ministry argues that, now that public agencies can no longer hold balances with one or more banks, their operations will be open to official scrutiny at the CBN. The requirement to surrender 20 per cent of their operating surpluses to the federation account can be more easily enforced.

Along with the TSA, there are savings to be made from a review of the many tax waivers and exemptions granted over the years. A casual look at those shown on the ministry’s website highlights the potential of such a review. Additionally, the pioneer status granted to oil companies warrants ministerial attention.

Many other possibilities are open to the FGN, and we will highlight just three: a hike in the excise duty on beer, fines imposed by regulators and a broadening of the items covered by the taxes imposed by the previous administration on luxury goods and services. The business community was warned. The election campaign of the victorious All Progressives Congress did not hide its preference for stronger regulation.

Finally there are the efficiency gains. These cannot be quantified by definition. They require more dedicated and more transparent management at the Federal Internal Revenue Service and the other collection agencies. The private sector also has a role to play. A car showroom which has just closed a sale, for example, should not ask buyers whether they want to pay the tax due on the transaction. It would not be able to put this question if it knew that its books were closely examined by the authorities.

The achievement of substantial efficiency gains hinges upon a change in public attitudes toward paying tax. Across the world taxpayers are more willing to meet their obligations if they see some public benefit such as a new road, a modernized hospital or improved waste disposal. We are talking about a project that can be realised over several years.

We do not expect the authorities to achieve the estimated 75 per cent increase in non-oil revenue collection this year. Given the official neglect of gathering tax from outside the oil economy over four decades, it would be an unprecedented success. That said, we do not fear a deficit spiraling out of control. The projection of N2.22trn, equivalent to 2.2 per cent of forecast GDP, is to be financed by new debt of N1.84trn and by non-debt sources of N380bn.

We feel that the authorities have been conservative with the latter figure and we would be surprised if they cannot generate more than the forecast N350bn from recoveries. The FGN knows that the target for non-oil revenue is ambitious. Therefore it has let it be known that it has opened discussions with three sources of concessional external finance (the World Bank, the African Development Bank and China) on budget support packaged as project financing.

 

Gregory Kronsten