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.