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Why FG must not reduce VAT, see the Saudi example

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By Dele Sobowale

Saudi example

Readers of this page would have noticed that part two of last week’s article should have been published today. But, a more urgent matter has arisen. The Federal Government announced what was called the 2020 Revised Budget. Keen observers would have noticed that there is little difference in the aggregate figure from the original budget.

The major changes were made to the benchmark and the estimates for foreign borrowing. For the most part, the Buhari administration remains wedded to its “BORROW-AND-SPEND” instead of “EARN-AND-SPEND” economic management strategy. It is an economic paradigm destined to bankrupt Nigeria – sooner or later – because there is no discernible plan for repayment of debts which does not depend on crude oil prices rebounding. The economy, at the end of 2020, will be less diversified than at the beginning. Our dependence on crude will be more self-destructive. I shed tears for Buhari’s successors – whoever they might be.

However, one non-oil source of raising revenue remains on the table – VALUE ADDED TAX, VAT. It is seriously threatened by Labour, academicians and the herd of “Know-Nothing” commentators on media. The FG must resist all pressures and refuse to reduce or suspend VAT as many people have suggested.

READ ALSO:FEC approves amendments of 2020/2022 Medium Term Expenditure, 2020 budget

“Saudi Arabia triples VAT to support coronavirus-hit economy”.

BBC NEWS, BUSINESS, MAY 11, 2020.

The news report went on to explain why Saudi Arabia, a nation many Nigerians assume has no financial and economic problems, has turned its attention to increasing the Value Added Tax, VAT, as an option for achieving macro-economic stability in the next three to ten years.

“Saudi Arabis is tripling its value added tax (VAT) as part of austerity measures to support its coronavirus-hit economy….Saudi Arabia’s state news agency said VAT will increase from 5%  to 15% as of 1 July…These measures are painful but necessary to maintain financial and economic stability over the medium to long term.”

The news report from Saudi came at the right time because a day after, the FG released its revised 2020 Budget. Nothing specifically was said about VAT. The budget which increased the budget deficit to almost 50 per cent of the expected revenue simply because the International Monetary Fund, IMF, and other global lending institutions are willing to be generous reminds me of a poor man who loves drinking but cannot restrain himself. He is too happy to meet with those who declare unlimited supply. He invariably wakes up in the gutter the next day. With the new bundle of foreign debts to which Buhari is committing Nigeria, the nation is certain to end up in a debt trap worse than we escaped in 2004/5 under President Olusegun Obasanjo. Our children and grandchildren’s future have been totally mortgaged by a President whose understanding of economics is frightening. We will pay dearly for having Buhari as President at a time like this.

Despite the overwhelming sense of despair concerning the management of our economy, one is still constrained by love of the country to notice that there is a good chance that we can at least earn some of the money government intends to spend instead of begging and borrowing every kobo.

VAT represents one glimmer of hope that we might learn that a nation, like an individual should not spend more than its legitimate income. And like the private citizen, should only borrow to invest in projects that will repay the loan and be self-sustaining. Buhari’s government has since 2015 been incurring debts to fund recurrent expenditure and to help pay salaries. The new debts acquired will most likely go the same way. The Economic Advisory Council, headed by Dr Salami might as well not have been appointed. Their professional advice would have amounted to attempting to put something on nothing. It will not stand. Nobody in the FG understands that you cannot borrow indefinitely and squander the funds on recurrent expenditure.

“The National Bureau of Statistics had said that the country generated a total of N1.1tn as Value Added Tax revenue in the 2018 fiscal period.”
IBRAHIM B BABANGIDA 1985-1992: LETTING A THOUSAND FLOWERS BLOOM, page 43.

But, VAT remains at 7.5%; and it is my fervent hope that the FG will not allow itself to be heckled or bullied by the usual opposition to suspend or repeal it. I have been waiting prayerfully for an opportunity to educate the vast majority of Nigerians that VAT, after the initial rise in prices becomes a positive influence on the economy because it provides a dependable source of revenue for government –unlike crude oil which has now failed us.

Dr Kalu Idika Kalu, KIK, Babangida’s Minister of Finance was the father of VAT in Nigeria. The US-trained, former World Bank economist introduced VAT during the period of Structural Adjustment Programme, VAT. It was during a period when Nigeria was struggling with crashing crude oil prices. KIK and his disciples were in a distinct minority when the first reports of the proposal went public. Labour leaders, Socialists in universities, populist politicians and even some religious leaders were adamantly opposed to it. I was in total support of VAT for reasons too numerous to detail here.

Surprisingly, against all odds, President Babangida, to his everlasting glory, approved it. If IBB had not developed the instincts of a true leader who knows that the noisy majority is not always right, Nigeria would not have had N1.1tn of its own money to spend in 2018. KIK deserves a monument.

The point we were trying to make to the opposed to VAT  then as well as those still against it has been simply stated by the Saudi government which earns more than we do from crude and which has a Sovereign Wealth Fund, SWF, several hundred times our own. Unlike Nigeria, they did not set out primarily to borrow. The priority was to look inwards; to get the people to understand that hard times are here and everybody alive must contribute towards economic revival. A Nigerian government, especially this one, would have raided the SWF and, if need be liquidated it. Not the sensible Saudis who recognise that they owe their children a great deal of responsibility not to leave them with a huge debt burden.

It is not only the sense of responsibility of the Saudi economic policy managers that one finds commendable. While Nigeria increased from 5% to 7.5%, the courageous Saudis went from 5% to 15%. The President of Nigeria had been under attack for a mere 50% VAT increase; the Saudi leader will most probably not receive any abuse by economic illiterates and academicians because the people are better educated, more patriotic and can see the temporary inconvenience as part of the price they have to pay for 200% increase.

Last Line
“No government deficit can create inflation unless the quantity of money goes up.” G. Haberter, VANGUARD BOOK OF QUOTATIONS, VBQ, p 103.
One of the fallacies promoted by opponents of VAT is that it increases inflation. That is not strictly true. The classic definition of inflation means too much money chasing too few goods. VAT merely re-allocates the money in circulation and gives more to government. Total money supply is not affected. Initial aggregate price increase reduces demand and stimulates the search for greater efficiency in management. Buhari should ignore the no-sayers and collect more VAT revenue. God knows we need it.

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