The 2016 Federal Budget: Is the era of non-oil budgeting here to stay?
President Buhari presented the 2016 federal 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.
The Federal Government proposed a budget of N6.08 trillion for 2016, with an interesting split of 70:30 between recurrent and capital expenditure. This 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 is not just 30% of the budget, but represents an increase of 223% over prior year budget.
Projected revenue for 2016 is N3.86 trillion, with a deficit of N2.22 trillion. There has been divided views on the appropriateness of the size of the deficit. It may be appropriate to state that the level of borrowing is not the real issue but the purpose for which the debts are procured and judicious utilization. The deficit is about 2.16% of Nigeria’s GDP and will take Nigeria’s overall debt profile to 14% of GDP.
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.
Despite the reduction in projected daily crude production and crude oil benchmark price, 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. Considering the current realities, 2016 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.
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 the good old years to warehouse the difference between benchmark and actual price. This is no longer the case as Government now has 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 is 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. This appear to be the direction of the budget. Efforts must now be directed at improving the effectiveness of the revenue collecting agencies. FIRS has already indicated its focus on widening the tax base. This is aimed at bringing in those that are not currently tax registered. Efforts in this direction are said to have started yielding results with new taxpayers being registered each day.
Some provisions of the tax laws that were also not being enforced previously are now being dusted with a view to enforcing them. An example is the provision 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). 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 being taken to increase non-oil revenue.
So, welcome to the new era of non-oil budgeting. We may begin to wonder whether the era of non-oil budgets is here to stay. 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.
One of the interesting parts of the Budget speech is the proposed reduction in tax rates for small businesses. The incentive will be a reduction in tax rates for smaller businesses as well as 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 Companies Income Tax Act (CITA) on small business taxation but with limited scope. 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 businesses in this category are capped at N1 million. This appears 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 years to 7 subject to meeting certain conditions. The conditions are that the company must show evidence of good record keeping, sound management and remain in this critical sector of the economy. It may be safe to expect that the promised special tax regime for small businesses will focus 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.
The policy thrust of the budget proposal is to stimulate the economy. This explains the rationale for the level of deficit. Focusing on infrastructural development and aligning expenditure to long-term projects for sustainable development. The increase in 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.
The same trend is reflected in the recurrent expenditure. 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. 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.
Government must now ensure that resources are managed prudently and that the budget is fully implemented. 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.
Expectations are that the budget will deliver on its promise of economic revival, inclusive growth and job creation.