When you increase taxes, you are squeezing household expenditure and squeezing business expansion.
Public sector reform should not just be the usual rationalization of the public sector but from the perspective of the capacity of the public servants.
The target should be to harmonize the taxes and expand the tax net using technology and a more efficient expenditure structure.
Dr. Yemi Kale, Chief Economist at KPMG Nigeria and former Chief of the National Bureau of Statistics (NBS), has raised concerns about the potential negative impact of additional taxation on household expenditure and private business expansion.
Speaking at the Nairametrics Q2 2023 Economic Outlook Webinar held on June 3, Dr. Kale highlighted the challenges of imposing higher taxes during a period of fragile economic growth.
Kale said he was excited with the public sector and public finances reforms agenda of the new administration of Bola Tinubu.
“In terms of public finance, I am one of the few people that does not believe in increasing taxes. I’m not one of the people that is a fan of pushing up taxes, particularly in a recession and when the economy is struggling with fragile growth,” he said.
Understanding Nigeria’s economic model
He noted that in the Nigerian economic model, household consumption expenditure and private investment are the two largest contributors to GDP.
“When you increase taxes, you are squeezing the household consumption expenditure, and you are also squeezing the earnings of business thereby squeezing business expansion and so on.
What happened in the last eight years is that the government model was public sector driven. They expanded government expenditure; they expanded government investment. That’s why you have so much infrastructure development. But they did not expand government investment and consumption because the economy was expanding, and they were getting more revenue.
They did that in two ways, one was to tax consumers and businesses, they squeeze their consumption expenditure, they squeeze the ability of private investment to grow and at the same time, they expanded the economy by debt. And then to repay the debt, again, they turn to squeeze consumers’ expenditure. ”
Increased public expenditure and investment by approximately 30% has led to a contraction of household consumption by about 3% and stagnant private investment.
Dr. Yemi Kale suggests avoiding tax increases and instead focusing on harmonizing existing taxes and improving public-sector efficiency, such as eliminating wasteful expenditures like fuel subsidies. He emphasizes the need for revenue agencies to exercise restraint in spending as revenue increases. According to Kale:
I’m not a fan of increasing taxes. I prefer harmonizing the multiple taxes that are out there, I’m a bigger fan of more efficient, public-sector expenditure. For example, getting rid of wasteful expenditures like fuel subsidies. When you look at the revenue agencies, you find out that as the revenue goes up, they will find more things to spend and increase the expenditure,” he said.
What FG must do instead
The Chief Economist advised the government that public sector reform should not just be the usual rationalization of the public sector but from the perspective of the capacity of the public servants.
He noted that no matter how good President Bola Tinubu’s ideas are, an efficient public sector is necessary for proper implementation.
“If the public service does not have the capacity to do it, or the interest in doing it, then nothing will be done. That’s why you have found in many other administrations where you have very competent and knowledgeable Ministers and heads of MDAs but very little is done. It has to do with either because the capacity doesn’t exist and more because the interest in changing things just doesn’t exist.
We have a situation where you cannot get rid of public servants, they can do whatever they want, and it’s difficult to get rid of them. and if you succeed in getting rid of them as soon as you go, they get back into the system. So, until such things are also fixed, where you get the public service to build their capacity and their mindset in terms of wanting these things to work, I don’t think it will work no matter how good and credible you are.
So, looking at these things is extremely important, and a lot of people are not focusing on that they are focusing on the brilliant minds that are going to come in, the strength of the president, this is not good enough because Tinubu is not the one that will implement all government policies.
I think the target should be to harmonize the taxes and expand the tax net using technology and a more efficient expenditure structure. If we were able to do this in terms of public finance. If we can reform the public sector, I think that’s when every other thing ties in properly. And will see some significant growth,” he said.
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