…On The ‘Quick Wins’ Report By The Fiscal Reform Committee

Fiscal reform committee yesterday submitted a policy document to the president. The document contained recommendations and was tagged “QUICK WINS” report.

Some of the recommendations include: Increase personal income tax exempt threshold and personal relief allowance, Tax break for private sector in respect of wage increases to low-income earners, transport subsidy and net increase in employment, Suspension of VAT on diesel and tax waivers on CNG, CNG conversion, and renewable energy items, Comprehensive review of tariffs on the 43 items unbanned from accessing forex in the official market and fiscal policy review of other items prohibited for imports, just to name a few.

What the above policies signify is that the Fiscal reform committee has adopted a conservative approach to increase revenue generation while also favoring “consumption led expansion/growth of the economy”.

What do I mean ?. The removal of subsidy and the attempt at forex unification has caused “Economic shocks”. With further increase in inflation, we see the erosion of the “purchasing power” of Nigerians. This in turn has led to “reduction in demand for goods” which ultimately led to the “reduction in consumption”.

Again always remember that the formula to calculate GDP = Consumption + Investment + Government Spending + Net Exports.
With reduced consumption, we are witnessing an economy slowly grinding to a halt, hence something must be done.

One way to increase consumption is by increasing purchasing power. To increase purchasing power we can either, increasing income( minimum wage), increase savings or reduce tax burden.

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What is consumption and why is consumption led growth favored ?

Consumption in itself refers to the value of goods and services bought by people. Consumption is the “largest component of GDP”. Most economists judge the economic performance of a country mainly in terms of consumption level and dynamics(GDP per capita).

A GDP component as it is, consumption has an immediate impact on it. Studies have it that, an increase in consumption raises GDP by the same amount, other things equal.

Moreover, since current income(as determined by GDP) is an important determinant of consumption, increase in consumption increases GDP. An increase in GDP will increase income, and an increase income will further lead to increased consumption which will further increase GDP. This positive feedback loop between consumption, income and GDP was described by John Keynes as “Keynesian multiplier”.

Consumption is also determined by an economic concept called “Effective Demand”.

Effective demand refers to the willingness and ability of consumers to purchase goods at different prices. It shows the amount of goods that consumers are actually buying supported by their ability to pay.

John Keynes asserted that lack of effective demand is why we have unemployment because according to his macroeconomic theory, effective demand is the point of equilibrium where aggregate demand = aggregate supply. According to Keynes, output(supply) is always determined by effective demand. So if you think output is low, it is always because of ineffective demand. Why?, Because High consumer spending(effective demand) leads to business expansion, resulting in greater employment opportunities. Higher levels of employment creates a multiplier effect that further stimulates aggregate demand, leading to greater economic growth.

Investors also make decisions on investment by forecasting future demand(consumption) and by comparing it with present production capacity. An increase in consumption always often than not induce new investments. In particular, soaring consumption raises the production capacity utilization with positive effects on profits; it improves expectations on future demand; this further improves the financial conditions for funding investment both through profits and loans.
Remember that investment is also a major component of GDP.

It’s easy to raise revenue by taxing the likes of Dangote 80% for PIT and CIT, but at what cost ?. What will be the opportunity cost?.

So with the tax waivers and the tax burden reduction proposed by Mr Taiwo, he is using one policy to achieve Economic growth, absorption of economic shock, investment spur, voluntary tax compliance, inflation control, employment opportunities and making the government popular.

He has favored a conservative approach to increase revenue by blocking loopholes with technology and widening the tax net, than an aggressive mobilization of revenue which may be regressive.
The only drawback to this for me is the persistence of Fiscal Deficit and debt burden. But what we may lose to debt burden, may be gained through economic growth, new investments, job opportunities and poverty alleviation. It all depends on how we manage our fiscal deficit.

So when you hear PBAT talk about living wage, consumers credit, conditional cash transfer- The end goal is to raise consumption

Let me stop here, class dismissed.

Good morning..

#OPEOLUWA