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Government needs to support SMEs to improve trust in its fiscal policy 12 Dec 2019

Nigerian Minister of Finance, Budget and National Planning, Zainab Ahmed

At the height of the Cuban Missile Crisis in October 1962, the United States was requesting a vote at the United Nations Security Council for the withdrawal of nuclear-armed Soviet missiles from Cuba. In the middle of this, U.S. President, John F. Kennedy, sent former Secretary of State, Dean Acheson, to Paris to meet the President of France, Charles de Gaulle.
    
Acheson's mission was to inform President de Gaulle in advance about the measures the U.S. was planning to take against Cuba, including naval blockade. When the former diplomat tried to present evidence of the Soviet missiles in Cuba, the French President responded sharply: “The word of the American President is enough for me.”
    
Those were the days when trust existed amongst the Western allied powers, compared to today when they even trade accusations against each other. Mistrust among the Western leaders came to the fore when it was discovered that U.S. President George W. Bush had rallied the country's allies to invade Iraq in 2003, based on bogus intelligence. Since then, we have seen growing polarisation in the leadership of the Western countries, giving rise to populism in recent years. The 2016 Brexit referendum, and subsequent elections in the United States, Italy and Germany – to mention a few – have shown that the citizens have developed deep-seated mistrust for the power establishments in these countries.
    
In Nigeria, it is fair to say that the trust gap between the government and the people is widening. Many commentaries in the traditional and social media suggest that the social contract has been undermined by the government. This has become a justification for illegitimate tax avoidance, even as the administration of President Muhammadu Buhari continues to struggle with improving tax revenues to fund its budgets, which include huge allocations for investment in infrastructure.  
    
Lack of trust in government by Nigerians did not start with the Buhari administration. But it is perhaps the biggest challenge the current government faces. Lack of trust can potentially handicap any government. It's good intentions – or even rational policy decisions – may fail, simply because of lack of popular support. This is more so, for bad policies and when government does not match its words with its actions. From its support of the messy monetary policy of the Central Bank of Nigeria, to the partial international land border closure, the trust gap in the current administration seems to continue to widen.
    
In its Economic Recovery and Growth Plan (ERGP), the Buhari administration emphasises the need to grow the economy through various supportive business policies. But Nigerians are faced with a different reality. Without prejudice to the reforms that are aimed at improving doing business in the country, which made Nigeria to rise 15 places in the 2020 Doing Business ranking of the World Bank, businesses continue to operate in the very harsh Nigerian environment of multiple taxations, lack of infrastructure, and public sector graft.
    
In every economy, there are always more businesses to be started and more jobs to be created, where there is an enabling business environment. But the environment created by the federal government and state governments makes starting and running a business in Nigeria difficult undertakings. For instance, the federal government's unrelenting focus on generating revenue has created an environment whereby the few people paying taxes are burdened by an increasing number of taxes. It is like killing the chickens that have been laying the golden eggs.
    
To augment revenue received from the federation account, many state governments also try to generate additional funding by charging multiple taxes and levies that are detrimental to businesses. They do this at the expense of nurturing a pipeline of viable businesses that will help generate the revenue of the future. Even so, new businesses are discouraged from taking off. Many existing small and medium enterprises (SMEs) that are already in the tax net are overburdened by taxation and are, therefore, unable to thrive or survive.
    
The foregoing is not an attempt to underemphasise the importance of taxation by governments at all levels. But in an environment where public trust is absent, especially where there is rampant corruption, consent and support for fiscal policies of government can be difficult to muster.
    
However, the Nigerian government can garner public support if it urgently rolls out policies that will usher in an era of entrepreneurial explosion. If government policies can, instead of being extractive, help nurture the entrepreneurial aspirations of the Nigerian youth, the government will be able to achieve its revenue goals, which also includes improving the welfare of the people.
    
In this regard, I would like to advise the federal government – in collaboration with the states – to produce an SME strategy document that will itemise how new businesses are to be supported. The strategy should include tax holidays and other regulatory exemptions. There has to be a concerted effort to promote SMEs in Nigeria in an intentional and deliberate manner. This strategy will encourage more citizens to not only start new businesses, but do so formally.
    
The government should also reserve a proportion – maybe 20 per cent – of its procurement contracts for SMEs. The extant requirements for government procurement programmes and contracts unwittingly exclude start-up businesses and many SMEs. For instance, the requirements for providing previous multi-year accounts, tax clearance certificates, etc., favour only established businesses. The rules for bidding for government contracts need to be changed to preserve a specified proportion of contracts for SMEs, reflecting their light documentary portfolios.
    
Top among the reasons for the low tax revenue of governments at all levels today is insufficient portfolio of taxable businesses. Previous governments did not nurture start-ups. Sadly, the current governments (states and federal) are not breaking this feedback loop, ensuring future governments will equally suffer from the same malady.
    
The relentless race to generate immediate revenue by adding to the already high burden of SMEs is counterproductive. The governments need to put in place sound SME incubation policies to help nurture businesses before taxing them. Also, the tax regime should be simplified to avoid undue burden from the over 300 taxes and levies businesses face in Nigeria at both state and federal levels. Harmonisation of taxes and a proportional taxation policy framework will help both businesses and governments.
    
The inability of governments to promote SMEs does a disservice to the government. And increasing the tax burden on citizens and businesses not only increases tax avoidance; it also evaporates any goodwill and trust that is necessary for regulatory compliance. The government needs to move away from enunciating one tactical policy solution to another, and instead, focus on formulating strategic, coherent and deliberate policies for promoting future economic growth.
    
It is a given that the government means well with many of its policies and initiatives. But intentions do not grow an economy; policies do. Ultimately, good intentions have to be supported by good policies if good outcomes are to be guaranteed.
    
If the government were to promote pro-growth and more inclusive policies, perhaps the trust gap that currently exists between the government and the people will begin to reduce. With increased public trust, the government can begin to be seen as a genuine partner in progress by entrepreneurs and, collaterally, all Nigerians.