Financing Nigeria’s Annual Budget

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ooking at Nigeria, in comparison with other African countries, relative to her economic potential and the level of realisation, she is not a poor country. But when you look at her from another perspective in comparison with the advanced countries, she is a very poor country. In between these, Nigeria can be self-financing and sustainable within her huge population, talents and natural resources.

Were it not the unwarranted insecurity that the northern Muslims unleashed on Nigeria, today finance would have been the critical factor in the country rather than insecurity. However, finance affects all the segments of society with no exception. It has no political colouration. The issues today are how to generate enough revenue, safeguard it, spend some and preserve some, all without the need for the Government going cap in hand.

The budgeted expenditure of the Federal Government of Nigeria for the current year, 2012, is N4.648tr (£18.592bn) or ($ 29.05bn). The budgeted expenditure of the UK for 2012 is N170.75tr (£683bn) or ($1.067tr). Although budget expenditures cannot be used to accurately compare the two economies, they are good guide as to where Nigeria supposed to be by this time. Earning and cost of living in both countries are different but can be compared. For example, as things are today, for every £1 (N250) of the cost of a basket of essential items in the UK, such cost about 20p (N50) in Nigeria. That is the cost in Nigeria is 20% of the cost in the UK. Another, single, example is; the cost of a litre of petrol in the UK today is N350 and in Nigeria it is N97. Cost, in a country, is a reliable measure as it is the same for everybody regardless of income.

Therefore, equivalent UK budget expenditure in terms of cost in Nigeria is N34.15tr, that is (20% x N170.75tr = N34.15tr). This means at this stage in Nigeria the budget expenditure should be a minimum of N34.15tr. But Nigeria’s budget expenditure is only N4.648tr. With this, Nigeria compared to the UK is much under developed by 86 %, that is, by N29.502tr, (N4.648tr – N34.15tr). If Nigeria had been where she should today, in this comparative analysis, we would have been having fully free Education up to university first degree, fully free Healthcare, adequate infrastructure and a Police Force which is at least twice the number we have now. As the potential is there, the economy would have followed and grows accordingly. We are not where we supposed to be because of election rigging, corruption, weak leadership and wrong people in Government.

If we are to value Nigeria’s economic potential today, in term of comparative equivalent cost, she could just be about measuring up to the UK that is the sixth largest economy in the world. This means Nigeria is yet to realise at least 80% of her economic potential. When you have this huge untapped economy, a huge gold mine for investors, do you need to look elsewhere to finance the country? Do you need to borrow money especially from outside the country to finance your projects?

In a country where those earning real money pay tax, the residue of the budget expenditure of N4.648tr could be financed from taxation alone. Such residue is the budgeted expenditure less the desired expendable revenue. The feature of a national budget is after you have determined the total expenditure; what you need to do thereafter is to ascertain how much of your expected revenue you will spend and how much of the expenditure you will finance with taxation, which is seen to be fair. In a situation where non-taxation revenue is expected the tax payers bear the burden of the whole budget expenditure. But a country is never short of other sources of revenue.

However, the Government does not need to raise tax more than necessary. Taxation is not a chargeable fund meant for saving, reserve for future use, to be embezzled or wasted but only for financing the current year’s budget. This is why it is an annual event with public presentation ritual of document flaunting. Looking at the matter crudely, discarding the formality of tax allowances, within the 130m population of the country as at date, (please it is not 160m), there is about 70m active taxable populace in both the formal and informal sectors of the economy.

As the western world is no longer in the position to dictating the prices of commodities on take it or leave it basis, can Nigeria now plan her economy and prepare the budget with reasonable certainty? After the determination of the necessary budget expenditure for the fiscal year, the Government should be able to determine the sources of the revenue to finance it. So far, these are significantly from crude oil, less from all forms of taxation, duty and charge. As the minimum price of crude oil per barrel is today $100, the Government should be able to use at least $80 per barrel as the benchmark for the budget. The world economy now dictates that crude oil price is not expected to “recede” by more than $20 per barrel.

On the assumption that the 70m potential tax payers would bear the burden of the whole budget expenditure, the amount for each individual to pay is, therefore, N66,400 (N4.648tr/70m) per such payer. This does not mean every tax payer will pay this amount. The amount could be proportionately paid by those in this group. Within the formal and informal sectors of the economy, you have the cattle rearers, black market foreign exchange dealers, commercial farmers, traders, artisans, self-employed businessmen, employees, professionals in practice, incorporated entities, the individual heavy millionaire and billionaire categories that would each pay the N66400 in proportion of their income.

Given that the current year budgeted expenditure of N4.648tr could be crudely allocated to each of the potential 70m tax payers of individuals, businesses and incorporated entities in the country at N66400 but paid proportionately, the pattern of such payment could be as follow. The Government should be able to set a four scale of rates for personal income tax on gross emolument, without any personal allowances. As those that earn certain amount of income must pay tax, the scales could be 5% on each tax payer who earns between N216000 and N299999 per annum. The second scale could be 10% on a tax payer that earns between N300000 and N599999 per annum. The third scale could be 20% on a tax payer that earns between N600000 and N1999999 per annum. The fourth scale could be 30% on a tax payer that earns N2m upwards per annum.

The Government could extend the applicable scale to the amount that is found in a tax payer’s bank accounts and investments that were not accounted for but are tucked away in the country, abroad or safe haven sanctuaries, whose means are certain or uncertain. If they are found to be corruptly etc. acquired, the Economic Financial Crime Commission (EFCC) would move in to recover the net amount of Government appropriate tax. The yearly incremental of these could be so tax. These days the means for tracing and locating such otherwise hidden funds and investments wherever they are in the world are there. Today, many individuals and corporate bodies in the country are holding billions of Naira that could be taxed in these manners.

The alternative to this is a fair and simple change in corporation tax assessment. This could even do a better trick of financing the whole annual budget expenditure. Many incorporated entities, businesses etc. legitimately avoid paying fair and right amount of tax. Whose fault is this? It is that of the Government of the day who wants votes, makes rules, regulations and gives out undesirable tax allowances. The experts simply exploit them for their clients, pay a minimum tax and keep the Government cap in hand for further fund. As the Government is cash strapped from this, it simply goes on unnecessary borrowing spree.

If we look at the aggregate turnover from all the businesses in the country from the individuals to corporate entities, formal and informal sectors, it will be at least ten times the annual budgeted expenditure. You could imagine if ten per cent (10%) of this is taken as tax. Well, the Government could adopt 10% rate of corporation tax on ordinary businesses and incorporated entities turnover. That is tax on turnover rather than tax on profit. With these, there is no individual or business that would significantly evade or avoid payment of tax or payment of the right amount.

If the Federal Inland Revenue keeps adequate record, it should be able to have the aggregate annual figure of turnover of all those that bother to submit annual statement of account for tax assessment. An entity can tamper with its taxable profit but could less do so with turnover. In order to plug the legal loophole for tax avoidance and receive the right amount of tax, the Government can switch from taxing profit to tax on turnover, however, with the same fair but proportionate rate of taxation according to the need for the current year budget. This would yield the amount of fund the Government needs to finance its annual budget. Any entity that could not manage its business profitably or deliberately presents its financial statement to show a loss in order to avoid tax would only do such to itself. Such taxation on turnover, on every tax payer that trades, whether as individual or corporate entity could be conveniently assessed and collected quarterly in arrears. However, personal income, business and corporation taxes are all chargeable during the fiscal year not in isolation of the other.

Tax allowances are formality, academic and unnecessary. They make tax assessment and computation unnecessarily complicated and a monopoly of the experts. Tax allowances can be discarded all together. For example, the Government can get the same amount of tax if it applies a high rate of tax on the residue of gross income, after deduction of available tax allowances, with a low rate of tax on the gross income, without deduction of tax allowances. The low rate of tax on gross income or turnover can even yield more tax revenue. But the Government would argue that apart from the tax allowances that are common to every tax payer those whom further tax allowances are due would get them and those they are not applicable would not. With tax allowances you do not have to come to the Government for much further help. This is not always the true situation.

Where the budget is financed wholly from taxation alone, the revenue from crude oil, at any sales price high or low, other natural resources, investments, duties, charges etc. would be generally additional and surplus fund rather than the critical fund of the country, as at today. Within this, the rate of Value Added Tax and other indirect taxations that engender restricted spending and high cost of production could reduce considerably. The fund from these non-taxation resources would be partly kept in reserve and partly deployed to finance key projects and establish first the critical industries that propel the economy of a nation. These are full capacity plus Electricity, Landline Telephone, Oil Refinery, Petrochemical and Steel Industries. The rest of the economy flows or grows easily from these industries.

In order to have enough avenues for the generation of adequate revenue and the tools for the maintenance, we need to adopt a system of mixed economy. This is where the economy of the country is significantly controlled by the private sector and the Government collects taxes. Here, the mechanisms for nurturing and sustaining the economy, which are predominantly Education and Health, are heavily shouldered by the Government, in terms of funding. The near optimal ratio for the economy should be about 70% private sector and 30% Government control. In the 70% - 30% ratio, every sector finances and controls its allotment. Where necessary the Government would give a helping hand to the private sector (grant). With this there would be sufficient avenues to generating fund for the country.

I am not here talking about comprehensive privatisations or public private partnership (PPP) schemes, which is a conman’s system of finance. That is where some private individuals or corporate bodies use public fund to run their own businesses at public expense. The Government obtains or borrows money from the private sector at huge interest rate or put up part or the whole of its fund on establishments or projects and ask the same private sector to be managing or controlling them, grant waives, etc. Many individuals and corporate bodies in the country that today parade themselves as billionaires obtained their wealth in these manners. Public fund is converted to private fund in the guise of normal business transactions.

Nigeria should today be able to provide a fully free Education up to at least secondary school level. She should in addition be able to provide fully free Healthcare system in the country generally as found in the United Kingdom. These are possible even within the present level of economy of the country, only if revenue is pursued vigorously and raised proportionately. A well-educated and healthy society is a productive society, hence adequate revenue for the country. Within a mixed economy, the Government is always in a firm position to adequately watch the system for efficiency and productivity through Control Commissions.

If the Government is able to raising revenue in the above manners, the capacity which is no doubt abounding in the country, it would have a huge treasury. There would be sufficient fund to maintaining free Education and Health in the country. Fund would be available for the necessary grants and subsidies. This would enable businesses to sell at low prices, thrive and survive. This means fund that has been taken in the absence of the formality of tax allowances is given back in different forms to those that actually need it. Within the potential 70m tax payers of individuals, businesses and incorporated entities in the country today, with revenue from natural resources, duties and charges, the Government would always have fund to maintain a balanced or surplus budget annually. There will be no need for quantitative easing and jacking up lending minimum interest rate beyond 5% all that are inimical to the Naira and growth of the economy.

The question is who pay tax in Nigeria? For example, a cattle rearer who sells at least 20 cows a year on average of N60000 each, which is equals to N1.2m, how much tax does he pay? This is virtually zero. A black market foreign exchange dealer who exchanges millions of Naira in a corner shop with turnover in millions, how much tax does he pay? This is virtually zero. Under sections 84 and 124 of the Constitution, the President, Vice President, State Governors, Deputy State Governors, top Judges, Government appointees, top Civil Servants etc. cannot have their emolument reduced. Some people are now interpreting this to mean that these categories of people are exempted from personal tax payment on their total emolument. This is a very wrong interpretation of the Constitution. Personal tax is not a reduction of emolument but a contribution which every citizen and resident that earns sufficient income has obligation to make to society. The least emolument of every member of the National Assembly is about N200m per annum. The whole amount should attract personal taxation.

In the first place, issues about emolument and natural resources derivation payment should not be a Constitutional matter. These are matters of statutory laws which are within the remit of the National Assembly. The Federal Inland Revenue should not have any assumed legal encumbrance to fail to assess and collect personal income tax from the above group of people in society. Have this Federal Government the capability, confidence, courage and honesty to assess and collect fair tax from those it actually due?

Moreover, there is no basis for the decentralisation of taxation authority in the country. To this end, there is no need for each State Government area Internal Revenue Authority. The Federal Inland Revenue should be the sole taxation authority in the country with branches in each State Government or designated area. Taxation rule and regulation, assessment and collection are national issues thereby undisputed responsibility of the Federal Government.

As the total projected annual revenue of the country is stated in the budget, it is only wise for the Federal Government to incorporate the projected amount that would be paid out as derivation and allocation to the State and Local Governments in the annual budget, as items of expenditure. Here it is assumed that all the derivations and allocations from the Federation Account to the State and Local Governments are both Federal Government revenue and expenditure.

Derivation and fund allocation from the Federation Account to the three tiers of the Government should hence be paid quarterly in advance according to the budgeted amount rather than from actual revenue generated. The State and Local Governments would here be able to finalise their budgets as soon as the Federal Government budget is published. At the end of the last quarter of the fiscal year, the budgeted amount that was paid out as allocation and derivation would be reconciled with allocable actual revenue. The allocation and derivation account would be adjusted accordingly for the payment of the year to reflect actual revenue generated and allocable. Further, the State and Local Governments should not be allowed to obtain loan but could meet any of their cash-flow shortfalls through arranged bank overdraft. They should not be allowed to charge further multiple taxes in their areas but where necessary would only charge one local tax or rate payable on each building or business premises enough to balance budget.

After the allocation and derivation payment, the only amount that would be left in the annual revenue generated (consolidated accounts) would be the amount that was taken to national reserve, which is not anyway available for allocation but for specified national expenditure. With these, there will be no need for Excess Crude Oil Account or Sovereign Wealth Fund let alone the argument as to how the fund shall be shared or used.

On the assumption that certain national expenditures are met from consolidate fund directly, such as Education, Health, etc. during each quarter, the fund available for allocation should preferably be divided equally among the six geo-political zones. Each zone would then share its allocation among its State and Local Governments according to the federal revenue sharing formula. The argument about North and South fund allocation, State and Local Government creation inequalities will not arise. It will be then left to each zone as to the number of State and Local Governments it already has and allocation per each.

Public revenue need to be consolidated. To this end, the Federal Government needs to establish the Ministry of the Treasury. The main duty of the Ministry would be to receive public revenue, not in cash but in control. All the revenue that are generated by the wholly owned Government establishments such as the tax collected by the Federal Inland Revenue, turnover of the Nigeria National Petroleum Corporation, Nigeria Ports Authority, Central Bank of Nigeria, Customs and Excise and all the others public corporations would be sent on daily basis to the Ministry of the Treasury. The Ministry would record the banking and control of the fund at the Central Bank of Nigeria in different category of accounts such as Accumulated National Revenue Allocation Fund and Exclusive Federal Government Revenue Fund.

These wholly public owned establishments would not be allowed to spend a kobo from their turnover or balance their books before accounting for the residue to the Federal Government. Like the Federal Ministries, all their daily operational fund requirements would be allocated to them quarterly in advance in accordance with their individual budgets and cash-flow budgets by the Federal Ministry of Finance. With this they will not be able steal or misappropriate much of the public revenue turnover, undetected on time or at all. The Federal Ministry of Finance would have to maintain what is known as a National Cash Book with entry of each amount of the revenue it receives and pays out. Anyone would from here at a glance know approximately the financial position of the Government.

The Federal Government must stop its frivolous financial policies and primitive spending of scarce public fund. It is not the duty of the Federal, State or Local Government to be buying, for example, transit vans or vehicles and distribute such to the public and the organisations it pleases. This is purely the responsibility of the private individuals and their sector. The State Governments, where necessary, may be involved in transport only within their State jurisdictions and not inter State transportation. It is not the business of the Federal, State or Local Government to be giving public money out to any individuals or as loan to its employees for the purposes of buying cars or houses. The commercial banks, mortgage banks and hire purchase companies are there for these. The Legislators should not embark on spending public money to buying cars for themselves when their salary and allowances already cover transport. As religion is purely a private matter, the various Governments should not use public fund to financing any religious pilgrimages.

In order to have a firm control of the finances of the country, the offices of the Accountant and Auditor Generals should be abolished. All the Federal Government payments etc. should be maintained by the Federal Ministry of Finance. The Presidency, National Assembly, Judiciary, each Federal Ministry, Department and Agency should each operates as a separate entity with its own Accountants and Internal Auditors. The Federal Audit Commission should appoint private firms of Nigerian Chartered Accountants to conduct quarterly audit on the procedure, books and accounts of these establishments and those of the State and Local Governments. We are at the stage where the Government should no longer audit itself.

For Nigeria to have a stable and growing economy free from significant imported cost, have valued currency, to stop unnecessary and easy capital flight, the auction of the Naira should be stopped. The Naira should be re-denominated and restored as an independent and convertible currency in the foreign exchanges. With this all the currency exchanges and remittances from and into the country would go through the normal banking and foreign exchange system. Nigeria is big, strategic enough and has the foreign reserve to maintain her independent and convertible currency in the foreign exchanges. If these are in place, the realistic foreign exchange convertible rate of the Naira would be between N5 to N10 to one US dollar.

The Federal Government should abolish domiciliary bank accounts system in the country. In as much as the commercial banks can hold some of their funds in foreign currencies for cash transaction on the counter, the individuals and non-banking companies have not the actual need to holding bank accounts in foreign currencies. In addition to the foreign exchange round tripping abuses with these accounts, domiciliary bank accounts are the conduit through which the holders keep their corruptly acquired fund, transfer the money in the same foreign currency out of the country through internet banking to their overseas bank accounts. This is without the need for further foreign exchange. With accounts in the overseas branches of their home banks, the transfer is instantaneous without the need for the bank to handle the transaction for them on instruction to transfer fund.

The Federal Ministers should be able to control their Ministries, be on ground as to what happen in every department, that things are done accordingly, contracts are being performed and fully executed, especially those that generate revenue. For example, a revenue critical Ministry such the Ministry of Petroleum Resources should have a capable Minister. The Minister should be able to ascertain at all times the actual crude oil and gas that are extracted in the country on daily basis and that every single barrel of crude oil produced is accounted. The Minister should be able to see that those crude oil and gas are wholly sold by the Sales department. The Minister should ascertain that the sales proceeds are totally accounted for and remitted to the appropriate Federal Government department and bank accounts on daily basis. With these, there would be no need to be setting up committees upon committees to be doing the job which a Minister was first appointed to do and the President was elected.

With these how could Nigeria not be able to have a balanced or surplus and attainable budget annually? There will be no any need for the Government to go cap in hand, begging for fund, borrowing either in the form of loans or bond issuances. These are just the tip of iceberg of how Nigeria can finance her annual budget.

As I always say, what we need to do and the means to do them are at home with us, in human and material terms. But these are on the assumption that the self-made constraints of electoral illegalities, endemic bribery and corruption, weak leadership, poor management, regionalism, the drawbacks mainly from the North, over the years, are addressed.

Alfred Aisedionlen. (12^th March 2012)