Economic Confidential, January, 2009

TAX MATTERS

Fiscal Implication of the 2009 Budget

By Ifueko Omoigui Okauru, MFR

I          INTRODUCTION

The budget is a plan of action covering a particular period of time, specifying how revenue coming into a system will be spent or allocated. It is a periodic assessment of and programme for national revenue and expenditure, proposed by a government and presented to the relevant arm of government.[1] The budget is a powerful tool in hands of the government for the control and regulation of the economy. The regulations are carried out by policies which could either be fiscal policy or monetary policy.

Caveat: This presentation is based on proposals made by Mr. President to the National Assembly as published. Adjustments may need to be made after the 2009 budget is passed by the National Assembly and signed into law by Mr. President.

II         WHAT IS FISCAL POLICY

This refers to government attempt to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances).[2] It is the policy that guides the determination of appropriate level of taxes and spending. By contrast, the monetary policy assists to stabilize the economy via the control of money supply and interest rate.

The fiscal policy could also be viewed as the overall effect of the budget outcome on the economic activities in the country. It may be an expansionary policy, in which case the stance of the policy will evolve a net increase government spending, that is, government spending will be in excess of government revenue.

The policy could be contractionary, that is, where government spending is reduced either via higher tax revenue or less spending and injection into the economy.

The last in the line of fiscal policies is the adoption of a neutral policy or balanced budget, in which case, the government spending will be equal to expected revenue.

Whatever stance the government decides to take, the changes in the level and composition of taxation and government spending will usually affect certain variables within the economy. These variables are:

i)             Aggregate demand and level of economic activities;

ii)            The pattern of resource allocation; and

iii)           The distribution of income.

III       REVIEW OF THE 2009 BUDGET

Before I dwell on the impact of the fiscal policy on the above variables, it is important to look at the 2009 Budget as presented by Mr. President to the National Assembly.

The budget aims at reducing poverty significantly, it seeks to help attain the Millennium Development Goals, MDGs, the encapsulation of the government seven-point agenda and the enhancement of physical infrastructure through improved power, road transportation and capacity development in the non-oil sectors of the economy.

Gross federally collectible revenue for 2009 is put at N5.13trillion. This is made up of revenue from oil and gas, N2.94trillion, non-oil revenue of N1.97trillion and memorandum items will account for about N317billion. The average budget price per barrel of crude oil is put at US$45 (US$59 for 2008) and a daily forecast production of 2.292mbpd (2.45mbd for 2008) The Daily oil production and price estimates are lower in the current year.

In 2008, budgeted gross federally collectible revenue was N5.87trillion as against N5.13trillion in 2009. Total oil and gas revenue was N4.73trillion in 2008 and for the current year, revenue from oil and gas is N2.94trillion. The non-oil revenue in 2008 was N1.09trillion while for 2009 fiscal year, the figure stands at N1.97trillion. This in essence means that revenue from oil and gas would be reduced by as much as N1.79trillion that is about 61 percent and the revenue from non-oil would increase by N882billion or 81 percent.

For the Federal Government the aggregate expenditure for 2009 is N2.87trillion from the Consolidated Revenue Fund with the following breakdown:

Capital Spending is planned in five key priority sectors highlighted below:

The aggregate expenditure represents a 4.45% increase over the N2.748trillion initially appropriated in 2008 and an 8.42% increase over the 2008 amended Budget’s level of expenditure of N2.647 trillion. More crucially, the capital vote of N796.7billion is significantly higher than the actual capital expenditure of N491billion in 2007.  

The expenditure planned of N2.87trillion, relative to revenues derivable after allocation or distribution of the federally collectible revenue of N1.78trillion, implies a budget deficit of N1.09trillion[3]. The ratio of the deficit to the Gross Domestic Product, GDP, (N27.672tillion) is an estimated 3.95 percent.

The Federal Government intends to finance this deficit through the following:

-          Application of the unspent balance in the previous financial year: N330billion;

-          Federal government shares of signature bonus: N125billion;

-          Privatisation proceeds: N100billion;

-          Returns from the African Development Bank (ADB): N25billion

-          Domestic borrowing: N449.7billion

-          International bonds: N62.5billion.

In summary, despite the reduction in oil prices and buoyed by the early start in the reform of the tax system, the Federal Government intends to increase its level of spending albeit funded more by non-oil revenues than by oil revenues.

IV      FISCAL PHILOSOPHY AND THRUST UNDERLYING THE 2009 BUDGET

Fiscal policy is an instrument by the government to influence aggregate demand in the economy. If government spending increases aggregate demand is expected to increase because it is an injection into the economy. It is aimed at achieving price stability, full employment and growth. Keynesian economics suggests that adjusting government spending and tax rates are the ways to stimulate aggregate demand.[4] Since our economy is running below capacity with attendant high level of cyclical unemployment, the government must boost aggregate demand through the implementation of an expansionary policy, that is, to spend more than the anticipated revenue. This will result in a budget deficit which must however be well managed.

The philosophy and thrusts underlying the 2009 Budget can best be summarized as presented below:

1.    Maintain existing tax rates (except for Personal Income Taxation (PIT) in the event that the recommendation to reduce the rates is passed into law by the National Assembly) and significantly improve efficiency in tax revenue administration. The time is now to rise up even more to our statutory and civic responsibilities;

2.    Maintain the existing ECOWAS common external tariff as government’s commitment to expanding trade across the ECOWAS region, but curb areas of abuse and complement with policies designed to enhance local production and creating new opportunities for domestic industries.  In addition, trade related revenues should increase as the 48 hour cargo clearance reforms transform the efficiency of our ports;

3.    Increase Government spending in vital areas of the economy such as would ensure a better investment environment for industries, entrepreneurs and investors through substantial reduction in the cost of doing business;

4.    Pursue Public Private Partnership Policy such that private initiatives complement Government’s Interventions;

5.    Give priority to the completion of ongoing projects which will quickly deliver tangible results in service delivery. Rather than embarking on new projects, devote more resources to completing existing projects and discharging outstanding obligations from the 2007 and 2008 fiscal years, continuing to ensure that all new projects are well articulated, properly costed, and sensibly prioritized;

6.    Cut back on those areas that do not necessarily add to aggregate demand. To complement this thrust, a circular released by the office of the Secretary to the Government of the Federation on Cost Saving measures has the following directives:

a.    No new vehicles to be purchased for the next two (2) fiscal years;

b.    No construction, acquisition or purchase of new office buildings to be provided for;

c.    No provision for furnishing and equipment of offices to be made;

d.    International travel and transport to be reduced by at least 50%;

e.    International management training courses are suspended. Local Management and Capacity Building Institutions may be patronized to provide this service;

f.     Local travel is to be reduced by at least 25%;

g.    E-payment system for all payments is now mandatory;

h.    Efficiency savings should be obtained by reviewing and rationalizing arrangements for insurance, internet service and other overhead item expenses;

i.      A Presidential Committee has been established to monitor implementation of the 2009 Budget of Ministries, Departments and Agencies including those not funded from the Budget;

7.    Have an inbuilt deficit to grow overall demand but manage such deficits cautiously to avoid creating inflationary pressures that would ultimately derail the intended effect.

V          FISCAL IMPLICATIONS FOR TAXATION

Whilst one may be pleased that at long last, the rationale for the tax reforms commenced years ago and the call for all tiers of government to fully collaborate to grow the gross federally collectible revenue has finally come home to roost, the use of non oil revenues as a significant funding source was not by choice. It does however provide us with a fantastic opportunity to restructure the funding base such that even when oil prices revert, the foundation for diversifying revenue sources from oil would already have been laid and implemented.

In the words of Mr. President ‘non-oil revenues have performed better than anticipated due largely to increase efficiency of collection of the various taxes. Indeed the current oil price situation under scores the overdependence of the federal budget on oil related receipts’.[5] 

As government looks towards tax revenue for economic development in the next few years and beyond, these have consequences on the speed with which agencies such as the Federal Inland Revenue Service, FIRS, the Nigeria Customs Service, NCS, and the State Internal Revenue Service (SIRS), quicken the pace of implementing reforms geared at entrenching efficiency and effectiveness in their operations.

All the agencies must drastically increase their revenues if the 2009 budget must be successfully implemented. The downward trend in price of crude oil in the latter part of 2008 is unlikely to improve at least in the short run as the global financial crisis is taking its toll on the real economies of the world, resulting in significant decrease in the demand for crude oil and attendant decline in the price. (See figure 1).

Figure 1: Monthly OPEC Price of Crude Oil

This could be further undermined as countries, especially those dependent on importing crude oil, in seeking to address the security threats from such dependence, increase their efforts at discovering cost effective alternatives to crude oil.

Indeed, a continuous fall in oil price and production levels would derail the budget if we do not put alternative measures in place as a matter of urgency. We have a huge responsibility.   

The Federal Inland Revenue Service, FIRS, has a lot of work to do in the current year, going forward. It needs to improve its tax yield from both oil and non-oil taxes and especially significantly increase the non oil revenue beyond the levels collected 2008, which marginally was 30 percent. Revenue growth has to be driven by a significant improvement in the efficiency in tax administration.

With a total federally collectible revenue of N5.13trillion in 2009 and N1.78trillion to the credit of federal government, the balance of N3.35trillion will be shared amongst the component states, the local governments and special funds.  This underscores the need for the States and Local Governments to support the FIRS in its revenue collection drive as enhanced efficiency accrues to the States and Local Governments.

Beyond what is obtainable by way of allocation, the tax outlook of states reveals that Internally Generated Revenue (IGR) remains very low, apart from Lagos, Delta and Bayelsa State, the annual average percentage of the IGR to Total Revenue for the Sates fall below 20 percent, some are as low as 4 -5 percent. The breakdown of the IGR also revealed that the Pay-As-You-Earn source of revenue takes the chunk of revenue derivable from Personal Income Taxation in most states. Additional revenue growth can be achieved by improving on Personal Income Tax administration, shifting away from a dependence on the PAYE scheme to more direct means of assessing tax payers. 

In addition, it is hoped that the National Assembly, will provide a specific provision for tax refund in the budget as well as fast track the passage into law of the four outstanding bills – that cover Personal Income Tax, Petroleum Profits Tax and Acts that impose sugar levy, as these will assist in improving the level of compliance and overall tax yield.

The private sector; the manufacturing industry, the banks, property markets, construction companies, aviation industry, professional services, hotels and tourism, and all other sectors must brace up to the challenges ahead, for a better tomorrow.

The emphasis in 2009 has to be on increasing compliance within the tax system and getting the Service to ultimately collect the true and accurate federally collectible taxes. To achieve this required increase in 2009 the FIRS should focus on the quick wins that will dramatically increase revenue yields.

VI        THE SOURCES OF TAX GROWTH IN 2009 AND BEYOND

Tax growth in 2009 and beyond should come from:

1.    Realization that improvement in revenue generation is not so much about overtaxing citizens (more tax is actually a disincentive to investment) but rather realizing that revenues can be generated from an increase in services provided and generated through an expansion of the tax base, a review of fees, charges, penalties, interest income etc;

2.    Increased confidence in the way tax revenues are being utilized:- the higher the level of diversion of revenues from visible sectors the less confidence in the tax system: Information to the tax payer on how tax monies collected are applied should be regularly disseminated;

3.    Stimulus package to the Economy – to create jobs and local production base - part of which would have tax policy implications; the revised draft of the national tax policy document with inputs from Federal, State and Local Governments as well as other stakeholders is being finalized;

4.    Improved structure and focus on tax – not just as a source of additional revenues, but more importantly as an Institution – to build the required capacity and systems for sustainable and enduring change; use of non traditional means for revenue collection whilst looking attractive in the short run destroys credibility of the tax system;

5.    Improved efficiency resulting in tax base growth through:-

a)    Strict implementation of tax laws – overt and explicit support through referrals of major cases to tax authorities on a continuous basis and integration of tax “psyche” in the day to day business of government;

b)    Use of e-payment systems in all transactions;

c)    Use of technology and related systems in tax administration as well as in the way business is done – e.g. cash registers etc;

d)    Improved collaboration rather than friction – enhances tax yield – between and amongst Federal, State and Local Government authorities with respect to:

i)     National Tax Policy development;

ii)    Information sharing – For example, we suggest that every quarter, the Federal Executive Council (FEC), the National Economic Council (NEC) and State Executive Councils (SEC), should discuss matters pertaining to Taxation to cover quarterly progress reports on tax policy and administration matters and communiqués issued by the Joint Tax Board;

iii)   Prompt and timely remittances/payment of penalties and interest;

iv)   Taxpayer Education especially communicating the use to which tax monies are used;

v)    Joint review of tax clearance certificates for the identification of fake and forged certificates;

vi)   Country-wide adoption of the unique Tax Identification Numbering (TIN) system being coordinated by the FIRS for improved information sharing. Current practice of FIRS and every State having its own taxpayer identification number does not achieve the desired goal. Every taxpayer in Nigeria (corporate/individual/enterprise) is expected to be issued with a unique TIN. A national committee on unique TIN implementation is in place with federal and state representation.  States should support this platform through provision of funding, adoption of a common TIN framework and information technology infrastructure platform, as may be required. The TIN system has numerous benefits which include:

(1)  cost effectiveness, to achieve  lower cost of compliance for both taxpayers and tax authorities;

(2)  widening and deepening of tax base to enable proper assessment and the taxation of undeclared income;

(3)  common and unified system for identification of taxpayers nationally especially given the “tax shopping” practices, and mobile nature of tax payers.

The TIN project is not an attempt to centralize tax administration and is an imperative for an effective system for both Federal and State governments especially in understanding our true tax base and in improving the quality of assessment nationwide.

The FIRS will of course be continuing with its long term reform, the current recruitment drive as well as the implementation of an Integrated Tax Administration System (ITAS) to help modernize the core business processes of the Service. The real benefits of the ongoing reform will transcend the current period into the foreseeable future.

Overall, there is a clear need for substantial changes in how revenue is generated in 2009. The FIRS has now been firmly placed in the spot light in trying to help the Federal, State and Local Governments meet their development challenges.

By Ifueko Omoigui Okauru, MRF

is Executive Chairman Federal Inland Revenue Service

and delivered this paper at a Workshop organised by Chartered Institute of Taxation