President Buhari presented the 2016 budget before a joint session of the National Assembly on 22 December 2015. It is the first time in recent years that the budget is presented in person by the President. The budget can be appropriately dubbed a non-oil budget as only 13% of the budget outlay is expected to come from oil.
Please note that this is not the budget of Nigeria but that of the Federal Government (FG). Some people always miss this point. The State Governors present their respective budget while the President presents that of FG. Of course, both tiers of Government tie their budget to the federally available revenue. Proceeds from sale of oil, petroleum profit tax are paid into the Federation Account and shared amongst the three tiers of Government. FG recognises its share together with other independent revenue to prepare its annual budget.
The FG has proposed a budget of N6.08 trillion for 2016, with a split of 70:30 between recurrent and capital expenditure. There is a bold step with the increase in capital expenditure from N557 billion in 2015 to N1.8 trillion in the 2016 budget. Capital expenditure, about 30% of the budget, represents an increase of 223% over prior year budget.
Projected revenue for 2016 is N3.86 trillion resulting in a deficit of N2.22 trillion. The deficit, which is equivalent to 2.16% of Nigeria’s GDP, will take Nigeria’s overall debt profile to 14% of GDP. We will focus our attention today on the deficit and how government intends to raise the shortfall.
First, the projected revenue of N3.86 trillion is higher than the budgeted revenue for 2015 of N3.45 trillion. That’s about an increase of 12% year on year. You may recall that in 2015, benchmark oil price was $53 per barrel with expected daily production of 2.28 million barrels per day. The massive decline in crude oil price dealt a major blow to government oil revenue projections for 2016.
Considering the current realities, the budget is based on a benchmark price of $38 per barrel. Crude oil production is estimated at 2.2 million barrels per day for 2016. It is important to stress quickly that the benchmark price is higher than the current price of crude. This is the first time that this will happen as far back as I could remember. The debate in past years has always been how close the benchmark should be to the price of crude.
Excess crude account was created in prior years to warehouse the difference between the benchmark and actual price. This is no longer the case as Government now have to plan with expectation that actual crude price will rise back to benchmark. Perhaps, one of the immediate cushion will be the balancing that may come from exchange rate. Official exchange rate is currently N197 to the Dollar.
Based on current realities it in unthinkable to expect that Naira will get stronger than N197 against the Dollar. The potential impact of any further weakening of the Naira may help to cushion the impact of crude price falling below the benchmark.
It is therefore understandable that Government will have to focus on non-oil revenues by broadening tax sources. That’s exactly what this budget depicts. Efforts will be directed at improving the effectiveness of the revenue collecting agencies. FIRS has already indicated its focus on widening the tax net. This is aimed at bringing in those that are not currently tax registered. Efforts in this direction are said to have been yielding results with new taxpayers being registered each day.
Some provisions of the tax laws that are also not being enforced previously have also been dusted with a view to enforcing them. Examples are the provisions requiring companies paying interim dividends to pay provisional tax. There has also been a review of the basis of tax filing by non-resident companies. NRCs are now expected to file tax returns based on actual profits against prior practice of deemed profit.
Monitoring and enforcement mechanisms are also being strengthened to drive compliance and collection. The Customs Authority also just announced a record monthly revenue collection and indicated in a recent chat that it had already met its December target. These are just examples of steps already being taken in this direction.
So, welcome to the new era non-oil budgeting. In 2016, oil related revenues are expected to contribute only N820 billion. This represents 21% of the expected revenue of N3.86 trillion and 13% of total expenditure of N6.08 trillion.
A total of N1.45 trillion, about 38% of the projected revenue will come from taxes. These are company income tax, share of VAT, customs/excise, and other taxes due to FG. Additional N1.51 trillion, (about 39% of projected revenue) is expected to be raked in from other independent revenues. This is already strengthened with the full implementation of the Treasury Single Account by all Ministries, Departments and Agencies (MDAs) of Government.
To finance the deficit, government intends to borrow a total of N1.84 trillion from within and outside the country. Domestic and foreign borrowings are projected at N984 billion and N900 billion respectively. All of the borrowings are said to have been earmarked for financing capital projects. There is a reduction of 9% in non-debt recurrent expenditure, from N2.59 trillion in 2015 to N2.35 trillion in 2016. With N300 billion for Special Intervention Programs, non-debt recurrent expenditure amounts to N2.65 trillion.
A significant portion of the recurrent expenditure is devoted to institutions that provide critical government services. Education N369.6 billion; Defence N294.5; Health N221.7 billion and Interior N145.3 billion.
One of the interesting parts of the budget speech is the proposed reduction in tax rates for small businesses. It was said that the objective is for job creation which will be private sector driven. The incentive will be a reduction in tax rates for smaller businesses. There is also subsidized funding for priority sectors such as agriculture and solid minerals. Details of the proposed tax reduction was not provided. We expect the details in the coming days.
Suffice to say that there is an existing provision in the Companies Income Tax Act (CITA) on small business taxation but with limited scope. For example, while the standard income tax rate is currently 30%, small businesses in specific critical sectors of the economy are taxed at 20%.
Eligible businesses are those engaged in manufacturing or agricultural production, solid minerals or export oriented business. The annual turnover of eligible business in this category are capped at N1 million. This appear small based on present realities.
Companies in this critical sector enjoy special tax rate of 20% within their first 5 assessment years. This benefit is extendable for additional 2 years, to bring the total number of year to 7 subject meeting certain conditions. The company must show evidence of good record keeping, sound management and remain in this critical sector of the economy to enjoy extension.
It is my expectation that the promised special tax regime for small businesses will focuse on this critical sector of the economy as provided in CITA. This expectation is informed by Government’s focus on agriculture, solid minerals and manufacturing sector for job creation.
The policy thrust of the budget proposal is to stimulate the economy, that’s why the deficit could be that large. Focusing on infrastructural development and aligning expenditure to long-term project for sustainable development. This explains why the increase over N1 trillion in capital expenditure is earmarked for the critical sectors of the economy. Works, Power and Housing – N433.4 billion, Transport- N202 billion, Special Intervention Programs – N200 billion,
Defence – N134.6 billion and Interior – N53.1 billion.
Government must now ensure that resources are managed prudently and utilized solely for the intended public good. Part of the process for achieving this is the adoption of zero-based budgeting approach. One thing appear clear from the budget – there is an alignment between the policy focus and the budget. Government says it want to provide security, jobs and infrastructure and fund have been prioritized in this direction.
Let’s hope that the budget will deliver on its promise of economic revival, inclusive growth and job creation. Let’s hope that there will be macroeconomic stability and a real GDP growth rate of not below 4.37% as promised. The unemployed graduates are eagerly waiting to be part of the 500,000 that will be employed as teachers in public schools. The market women, traders and artisans, and their cooperative societies are waiting for the financial training and loans.
The very poor and vulnerable are waiting for the conditional cash transfer program to be anchored by the office of the Vice President. I heard there is already an ongoing compilation process, hope they get to my village before the register got filled up.
It’s a wrap for today, please feel free to get back with commends and feedback. Share, retweet and like.
Note:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday, 23 December 2015. Every Wednesday at 17:00 WAT (CUT+1), I run a one-hour “tweetax” session with hashtag where topical tax issues are discussed. The tweets are subsequently posted as an article and posted on my website www.yomiolugbenro.com, facebook.com/YomiOlugbenro and LinkedIn.com/YomiOlugbenro.
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