Peter Ejirika: The economics of Nigerian fiscal austerity
Recently, Nigerians woke up to learn through the news media their Once Sizeable Rainy Day Fund was on the verge of depletion. Interested citizens tried to understand what in the world the press was contending only to be informed the government will adopt fiscal constraints or austerity measures to cope with this sudden change in the fiscal health of Nigeria. In essence, what happened is that Nigerian economy is experiencing a period of decrease in its gross domestic product after a long period of steady growth due to the ever rising price of oil. This change in economic activity began with the downward spiral of oil prices which was occasioned by the combination of global melt down of 2088, saturation of supply, and the interplay of other exogenous market forces. Consequently, the economy began to contract as a result though Nigerian Economic Planners did not interpret the leading economic indicators appropriately hence they resorted, as a backup behavior to reactionary measures which is parallel to the archaic agricultural process of “slash and burn”. This reactionary approach included a number of austerity measures coupled with the increase in taxation. Besides, this strategy of coping with recession hampers economic growth, a contention that is widely debated by empirical and theoretical research.
In order to appreciate the impact of austerity measures it is imperative to understand this economic strategy in the context of Recession, which is the reason for the use of such measures. Simply stated, Austerity Measures are the steps taken by government to launch deficit budgets and to use a combination of slash spending or increase in taxes during a period of recession. The increase in taxes includes both personal income and corporate taxes. The best analogy of this approach to economic policy making is using fire to fight fire which is an acceptable practice in Texas Firefighting World but not in the Economic Arena. Recession is a subset of a Business Cycle which is the alternating increases and decreases in economic activity over a period of time. Thus a recession is a period of decreased business activity that lasts for at least two quarters. There are a number of reasons for the present recession in Nigeria but the primary reasons are two fold, the economic shocks and the downward trend of oil prices. The economic shocks include monetary factors, the Nigerian Naira went from exchange rate of 130 Naira to 190 Naira per dollar, the government involvement in physical transportation of millions of dollars of cash which instilled fear in the investors, presence of financial instability due to oil exploration dislocations, and the activities of Boko Haram which placed investments at risk. The sum total of hitherto enumerated invents induced shock to the economy and the other factor which created the recessionary climate is, of course, the downward spiral of oil prices.
Addressing the issue of coping with the present recession in Nigerian context the question of what happened to the rainy day reserve should be explored for France in 2012 used this fund to absorb the deficit in its budget thereby foregoing large budgetary cuts. In terms of taxes France focused on taxing the rich though arguably this might cause disinvestment. In the Nigerian situation the rich should be defined in terms of Income level, the military generals with oil blocks, all corporate entities including Asian Owned Companies, my experiences in America is that Asian Companies have a culture of tax evasion so good luck to Nigeria if is able to collect taxes from them. The most important entities that have been on tax holidays all these years are certain income activities of Religious Bodies, Churches, Mosques, Shrines, and Secrete Societies. The Unrelated Income of these Economic Entities need to be taxed as income of ordinary business. It amounts to tax inequity for two persons to be in involved in the same type of business one using corporate structure and the other using church, mosque or shrine structure. The person using corporate structure pays taxes and the other person who is using what I will call religious structure for want of a better term in Nigerian context does not pay taxes. It is unfair and should be stopped. The Income arising from unrelated business activity should be taxed, the Roman Catholic Church has been in existence for three thousand years and they are very familiar with this law all over the Western World. So Nigeria should tax business Income of these religious bodies but not Tithes and Offerings. As a Student of Keynesian Economics I would suggest for Nigeria to pump some Stimulus Funds to energize the economy as America did during the Great Recession. These funds should be pumped into Research and Development to stimulate the economy otherwise Nigeria will be in this recession for a long time. The extent to which these strategies can be used in coping with the present recession should be empirically determined to enhance the outcome. However, when choosing your leader ensure he or she has the ability to understand the concept of economics for this is what it will take to wriggle Nigeria out of the present recession.
Dr. Peter Ejirika, CPA
Higher Education Econometrician
University of Mary Hardin Baylor, Texas
pcejirika@mail.umhb.edu
In order to appreciate the impact of austerity measures it is imperative to understand this economic strategy in the context of Recession, which is the reason for the use of such measures. Simply stated, Austerity Measures are the steps taken by government to launch deficit budgets and to use a combination of slash spending or increase in taxes during a period of recession. The increase in taxes includes both personal income and corporate taxes. The best analogy of this approach to economic policy making is using fire to fight fire which is an acceptable practice in Texas Firefighting World but not in the Economic Arena. Recession is a subset of a Business Cycle which is the alternating increases and decreases in economic activity over a period of time. Thus a recession is a period of decreased business activity that lasts for at least two quarters. There are a number of reasons for the present recession in Nigeria but the primary reasons are two fold, the economic shocks and the downward trend of oil prices. The economic shocks include monetary factors, the Nigerian Naira went from exchange rate of 130 Naira to 190 Naira per dollar, the government involvement in physical transportation of millions of dollars of cash which instilled fear in the investors, presence of financial instability due to oil exploration dislocations, and the activities of Boko Haram which placed investments at risk. The sum total of hitherto enumerated invents induced shock to the economy and the other factor which created the recessionary climate is, of course, the downward spiral of oil prices.
Addressing the issue of coping with the present recession in Nigerian context the question of what happened to the rainy day reserve should be explored for France in 2012 used this fund to absorb the deficit in its budget thereby foregoing large budgetary cuts. In terms of taxes France focused on taxing the rich though arguably this might cause disinvestment. In the Nigerian situation the rich should be defined in terms of Income level, the military generals with oil blocks, all corporate entities including Asian Owned Companies, my experiences in America is that Asian Companies have a culture of tax evasion so good luck to Nigeria if is able to collect taxes from them. The most important entities that have been on tax holidays all these years are certain income activities of Religious Bodies, Churches, Mosques, Shrines, and Secrete Societies. The Unrelated Income of these Economic Entities need to be taxed as income of ordinary business. It amounts to tax inequity for two persons to be in involved in the same type of business one using corporate structure and the other using church, mosque or shrine structure. The person using corporate structure pays taxes and the other person who is using what I will call religious structure for want of a better term in Nigerian context does not pay taxes. It is unfair and should be stopped. The Income arising from unrelated business activity should be taxed, the Roman Catholic Church has been in existence for three thousand years and they are very familiar with this law all over the Western World. So Nigeria should tax business Income of these religious bodies but not Tithes and Offerings. As a Student of Keynesian Economics I would suggest for Nigeria to pump some Stimulus Funds to energize the economy as America did during the Great Recession. These funds should be pumped into Research and Development to stimulate the economy otherwise Nigeria will be in this recession for a long time. The extent to which these strategies can be used in coping with the present recession should be empirically determined to enhance the outcome. However, when choosing your leader ensure he or she has the ability to understand the concept of economics for this is what it will take to wriggle Nigeria out of the present recession.
Dr. Peter Ejirika, CPA
Higher Education Econometrician
University of Mary Hardin Baylor, Texas
pcejirika@mail.umhb.edu
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