Fiscal reforms argument: Let’s try again
Many economists see incentives as one of the underpinings of economic behaviour, and certainly the behaviour of markets. But overtime, the analyses have been extended to public behaviour as well.
Without explicitly stating it, my arguments last week were that incentives play a central role in all forms of economic behaviour. And the poor fiscal incentives, both at the federal and state levels, certainly undermine our growth and development. The dependence of the states of the federation on the federal government is as a result of the incentivisation of the fiscal policies of the last forty years. Invariably therefore, if we are to change the behaviour, we must change the incentives.
I then specifically mentioned some fiscal measures, if implemented, could begin to change the incentives in our polity, change behaviour and lead to sustainable growth and development of the country. I suggested that states collect all Value Added Tax (VAT) receipts in their states. I also suggested that the states collect a fraction of the corporation tax (and these should be competitive among the states). At the moment, VAT is collected by the federal government and shared amongst the states as part of the Nigeria’s folly sharing formular. The corporate taxes are the exclusives of the federal government.
As sales tax, the collection of VAT by the federal government means that the federal government controls the scale, operations, and the sustainability of a tax largely determined by local issues and has local dimensions. It is a poor dimension of the funny Nigerian unity argument: it must be collected by the federal government and shared. Any wonder why the collection is dismal? What is the fiscal incentive for the State to assist in collecting VAT, knowing that it would be shared?. What is the fiscal incentive for a state to develop local markets, knowing it could get VAT by doing nothing? However, if the incentive is to collect VAT, the state will develop the markets for the purpose.
Two days ago, the National Bureau Statistics (NBS) released GDP figures for Q3 2016, which shows that for the third quarter in a row, the economy contracted again. This time, by 2.24 percent. So far, since the deteriorating economic conditions started, following decline in oil prices, the response of federal government has been based on reducing corruption, prudence, and expanding expenditure on infrastructure. These are good, but grossly inadequate for fulfilling the slightest of our potentials. We need reforms that will fundamentally change the incentives and behaviour and in the process change the framework for our future growth and economic development.
Let me quickly provide some glaring examples of how growth and development can quickly arise if States have serious responsibilities for the growth and development of their local economies. In Kogi state, there is Dangote cement at Obajana and there is International breweries ltd (makers of Trophy larger beer) in Ilesa and in Benue, you have Benue Cement Company but the hosts of these companies do not benefit besides payroll taxes.
However, the growth and development of a country, local economies are dependent on the cooperation between firms and relevant government. But that support depends on expected fiscal revenues. So, the incentives are clear, and the behaviours will be predictable. In all the current structure that we have, what is often missing is the analysis of giving power to state governors, given them revenues from FAAC every month, but no responsibilities.
Later this week, Ondo state is expected to go to the polls. Same procedure for all the states in Nigeria. During these elections, and federal elections for that matter, there is a preponderance of promises that show that the incentives is power, and power for the purpose of enriching self, cronies and possibly the pursuit of ethnic and sometimes religious agenda. The plan is to receive and spend federal allocations.
Is there any wonder that there is no connection between the policies in these states (oh, sorry … are there actually policies????), and the businesses, jobs, and prosperity in the states? If a government has to work really hard for its revenues, it would be incentivized to spend it wisely. And if the citizens pay their taxes, they would be incentivized to monitor expenditure and demand results.
Now imagine that every state has its distinct local economy, underlined by distinct set of industries, companies etc. Imagine that the state and the state governor at any point in time have responsibilities that include formulating policies that contribute to the prosperity of these companies. This is the nature of responsibilities that come with the power as a state governor.
When you have that kind of responsibilities, 25 of them will not gather in any political rally, like they did in Ondo last weekend. And they will not come in their official capacity, and they will not come expending state’s resources. For instance, coincidentally, I was in Akure and I saw a particular governor in a convoy of 15 cars. That same governor has not formulated a single policy to lift the people of his state since he became governor. I thank you.
Ogho Okiti