GLOBAL STABILITY, REVENUE GENERATION AND ECONOMIC GROWTH A PAPER PRESENTED BY
THE CHIEF SERVANT, DR. MU'AZU BABANGIDA ALIYU, OON, (TALBAN MINNA) THE GOVERNOR OF NIGER STATE
AT
THE 2013 CITN ANNUAL TAX CONFERENCE HOLDING AT TINAPA LAKESIDE HOTEL, CALABAR
ON
TUESDAY 7TH TO SATURDAY 11TH MAY, 2013
GLOBAL STABILITY, REVENUE GENERATION AND ECONOMIC GROWTH
1. BACKGROUND
1.0 Global Stability
1.1 Essence of global stability Global stability is the absence of excessive fluctuations in the global macro economy, which results in sustained output growth and minimum inflation rate over a period of time. A stable global economy reflects efficiency in the allocation of resources, proper assessment and management of financial risks, adequate employment opportunities and minimization of relative price movements of real and financial assets towards stable monetary and economic levels. 1.2 Aftermath of global economic crisis 2009 witnessed a gradual return to normalcy, and the first signs that some of the leading economies were coming out of recession. But confidence remains fragile. By the end of 2009 signs of recovery were visible: markets were improving and bankers’ bonuses were on the rise again. Unemployment was expected to peak in many countries, during 2010. But there were fears of aftershocks from the great financial earthquake of 2008. Confidence was still brittle, and the cost of the financial bail-outs and stimulus packages were very high. In many countries the banking crisis had begotten a fiscal crisis, and in some of the worst affected states this fiscal crisis had threatened to become a sovereign debt crisis as well. Fears of a new financial collapse, leading to a double-dip recession, remained strong, particularly since many of the features of the international political economy that gave rise to the crisis in the first place had not been addressed. Guaranteed international agreements on reform of the global financial architecture were yet to be secured. Disaster was staved off at the end of 2008, but it was not yet clear that the groundwork had been laid for a sustained recovery. 1.3 How big was this Crisis? The magnitude of the crisis can be measured in a number of ways. There is firstly the scale of the events themselves, particularly the number of major financial institutions that got into difficulties. This was not an isolated bank or even a group of banks; it was all the major players. The crisis struck in the heartlands of the financial system, not on its periphery, and it had ripple effects which meant that no state or region was entirely immune.
A second indicator was the response of governments. There was a blizzard of initiatives, which included bail-outs, nationalizations, fiscal stimulus packages, zero interest rates and
quantitative easing. Neo-liberal orthodoxies were cast aside, and the state returned with a bang. As in previous crises there were dramatic interventions and policy innovations. The pressure of events forced responses that would have been dismissed as unthinkable a short time before. As with previous crises of the international political economy, this crisis had some common, international features, but it was experienced primarily as a series of national crises, and had been defined through a variety of national debates, narratives and solutions. In the United Kingdom, for example, the banking crisis of 2008 had been transformed into a fiscal crisis by the end of 2009. The very success of governments in intervening to prevent depression and a repeat of the 1930s meant that the worst was staved off, but only by saddling the taxpayer with a new and intractable set of problems. Governments had to manage much higher levels of domestic and external debt, while at the same time trying to avoid jeopardizing prospects for an early resumption of growth, because only if growth does resume will the debts incurred be bearable. How growth might resume and in what form are matters of concern in many countries. There is uncertainty over whether the growth model of the 1990s with the leading role it assigned to financial services can be resuscitated or whether it has been damaged beyond repair. The final judgment on the scale of the crisis will be its political consequences. These were still unfolding. This was not an easy time for incumbents and already several countries had changed their government, including the United States, Japan, Iceland and Greece – others are certain to follow. More fundamentally, a crisis on this scale raises a basic question of politics – who gains and who loses – in an acute form. Struggles over distribution of resources, taxes and public spending are likely to intensify. Some countries had not experienced much real pain yet, but that sure came in few years, and as in the 1930s and 1970s the conflicts that develop will be the source of new political movements and new policies. There are also lasting consequences for the international order as a result of the crisis. Many observers already predicted a significant shift in the balance of power between east and west, with the emerging economies of India and China becoming much stronger, and Europe weaker. The chosen forum for debating the crisis and possible solutions to it has not been the G7 but the G20, and some envisage the need in the future for a G2: China and the United States. 1.4Policy Frameworks
The last two (2) major crises of the international political economy, in the 1930s and 1970s, led eventually to the overthrow and discrediting of the established policy framework and the emergence of a new one. In the 1930s it was Keynesianism and ideas of an extended role for Page 4 of 12
the state that triumphed; in the 1970s it was neo-liberalism and ideas of contracting the role of the state that came to dominate. Some observers expect that this crisis will lead to the rehabilitation of the state and the return of Keynes. But that is far from certain. There has been an initial move in that direction, but whether it is sustained will depend on the political battles that will be fought over the next few years. Since 1929 the international political economy has passed through two cycles, one emphasizing market failure, and the other state failure. Both approaches have been tried and partially discredited, but there is no alternative idea at present as to how economies might be co-ordinated in a better fashion. There will be a period of experimentation with new policies and new ideas, as well as with many old ones, and the struggles around them will determine the shape of whatever order eventually emerges. The first phase of these struggles to define what the crisis is and how best to resolve it has already seen a clash between market fundamentalists and market realists, the former arguing that the crisis should be allowed to take its course, with no bail-outs for banks or anyone else, allowing markets, not governments, to make the necessary adjustments. Market realists have backed government intervention to prevent deflation and a slide into depression, and to protect jobs and income and restart bank lending. So far the market realists have prevailed. A second clash is emerging between regulatory liberals, who seek new ways of governing finance, trade and currencies as well as more eco-friendly growth policies, and economic nationalists, who are suspicious of international agreements that limit their freedom of action to protect their own citizens and pursue their interests as they perceive them. More radical ideas for reforming and reorganizing existing capitalist societies on both right and left have also begun to emerge, although so far only in a rather muted form. Much of the focus in the public debate at present is on how to go back to the international political economy that existed before the credit crunch. If these efforts are successful, then a patched-up version of the old order may well survive. If there is another crisis, however, it will intensify the political struggle at all levels of the international political economy, and at that point more radical solutions may come to the fore. 1.5The road to recovery
The global recession of 2009, which followed a financial market crisis, was the deepest of the four recessions and the most synchronized across countries. Some worried that the world Page 5 of 12
would relive the Great Depression of the 1930s. Luckily, and through often aggressive and unconventional policy actions, that did not come to pass. Since 2010, the global economy has been on a path of recovery, albeit a fragile one. How different is the current global recovery from the earlier ones in the post–World War II period? How do prospects differ between advanced and emerging economies? And what are the risks to the global recovery? While arriving at a definition of a global recession takes some work, defining a global recovery is easier. It is simply the period of increasing economic activity that follows a global recession. The slow path of economic recovery since 2010 has been quite similar to the path, on average, in the aftermath of the three other global recessions. In fact, if the projections of average global income—world per capita real GDP—are realized, recovery from the Great Recession, as it is often called, will have been faster than after the three previous global recessions. But the path of global income masks a very critical difference between advanced economies and emerging economies. The recovery in advanced economies has been very sluggish compared with past recoveries. Average income in some economies have not yet rebounded to its pre-recession level and is not forecast to do so even by 2014. The weakness in income growth is reflected, on the spending side, in both consumption and investment. Consumption has been held back as households return to safer debt-to-income levels (“deleverage”), and investment in structures has been weak in the aftermath of the housing boom in many advanced economies. In sharp contrast to developments in advanced economies, average incomes in emerging economies are generally back on the fast track they were on before the Great Recession. Income growth in these economies has already outpaced the growth seen during previous global recoveries, and is projected to continue to do so in coming years. The robust growth is widely shared among emerging economies. Notable exceptions are the emerging European economies, which are on a recovery track similar to that in advanced economies. Equity markets have performed better on average during this recovery than in previous ones. This may be because corporations are increasingly operating globally. And global activity as a whole—thanks to emerging market economies—has recovered better than after previous recessions. Although the world economy has recovered and another Great Depression has been staved off, the recovery remains subject to risks. Financial turmoil in Europe is an obvious risk. Currently, high risk premiums on sovereign debt are inflicting similar or even worse damage to fiscal balances and growth. In both cases, the lack of a timely, credible, and coordinated policy strategy heightened the financial turmoil. There has been slow growth in domestic consumption and investment driven by the legacy of the financial crisis—households and companies with high levels of debt have scaled back their activities to reach safer levels of debt. Another risk to the global recovery comes from oil shocks—possible disruptions in oil supplies and the associated spikes in oil prices. Oil-importing countries have taken numerous steps to reduce their vulnerability to oil shocks. They have increased the number of sources from which they import oil, making them less vulnerable to disruptions from any one source, and have used other sources such as natural gas and renewables—for example, solar and wind—to substitute for oil. In both advanced and emerging economies, there have been increases in energy efficiency; the amount of energy needed to generate a dollar of income has fallen steadily. And central banks have become much better at establishing an anchor for inflation expectations by communicating that oil price increases do not alter longer-run inflation prospects. Hence the public in many countries is much less fearful that oil prices will have inflationary consequences than was the case in the past. Increased oil prices no longer feed a wage-price spiral, as they did in the 1970s. Nevertheless, while countries have built up some ability to withstand oil shocks, they remain vulnerable to severe supply disruptions or to the uncertainty induced by extreme oil price volatility. Estimates suggest that a 60 percent increase in the price of oil could reduce U.S. incomes by nearly 2 percent over a two-year period, with somewhat larger effects in Europe, Japan, and emerging economies in Asia. The ongoing global recovery is similar in various dimensions to previous episodes, but it also exhibits some significant differences. The divergence of fortunes of advanced and emerging market economies has been one of the most surprising outcomes of the current global recovery. Emerging markets have enjoyed their strongest rebound in activity and become the engine of world growth during this recovery. In contrast, the current recovery is predicted to be the weakest one of the postwar era for the advanced economies. 1.6 Role of Taxation inGlobal Economic Stability Taxation, according to Cicero, is the sinews of the state. This underlines the critical role it plays in global economy. However, aside from its use as a means of raising government revenue, taxation is also often used as an instrument of regulating the economy, redistributing wealth and inducing preferred modes of behaviour, particularly consumption patterns and investment choices.Thus, while global economic stability can be perceived at both the macro and micro levels, taxation could be an important instrument of achieving or consolidating the gains of economic recovery. An economy such as Nigeria’s which is so foreign capital dependent and which has suffered tremendously from capital flight and a domestic cash crunch might need to revise its tax regime encompassing incentives such as capital or investment allowances, tax credits, write-offs and tax holidays in a bid to attract more direct foreign investment and encourage a return to the capital market by otherwise disillusioned local and foreign investors. In an economy that has suffered depreciation in value by more than 60 percent in both its money and capital markets, government must do the needful in order to arrest the current horrendous hemorrhage. The near comatose state of the manufacturing sector could use a well-articulated stimulus package which can bring about the recovery of this all-important sector of the economy. While the banks and insurance companies continue to churn out paper profits, it is conventional wisdom that growth in the real sector is the panacea for containing the downturn in the economy and translates growth into development. Accordingly, it might become necessary to overhaul the entire gamut of taxes-personal income, companies’ income, capital gains tax, petroleum profits, value added, custom duty and excise duty-in order to elaborate a comprehensive coping strategy in the face of a clear and present danger of collapse posed by the invidious character of the recent global economic meltdown. This is especially so in an economy such as ours which still manifests incredible leakages in the area of tax collection and ineffectiveness of the tax regime generally.
Unlike the advanced industrialized countries which possess near fool-proof tax nets, able to clip the wings of company executives and managers of collapsing business enterprises who relish in paying themselves fat bonuses and jumbo golden handshakes, aside from other unconscionable practices, the buccaneer mentality of the mangers of our economy and the general lack of effective corporate social responsibility compel the country to re-examine our tax law and practices with a view to stemming the tide of pervasive corruption and reckless acts of malfeasance which have held the economy by the jugular. The infusion of over 600 billion naira into the banking sector as a bail-out arrangement is apt to come to naught without plugging the holes through which humongous sums have found their ways into private pockets. If such unjust enrichment had been invested in the domestic economy, taxation could have helped put a lid on the insatiable appetite for graft by our managers and their collaborators. There is also the need for a paradigm shift in the way and manner we have been applying tax laws in combating the existential problems of our economy. Of course, taxation is not and can never be a hold-all in terms of solutions of the difficulties confronting us as a people. Yet, it would be foolhardy to ignore the crucial role taxation can play in an underdeveloped economy such as ours enduring as probably no other economy the deleterious consequences of the world economic crisis.Accordingly, tax practitioners have to inculcate a global perspective in order to properly situate their activities within an international matrix; otherwise, their efforts might become little more than clipping the local tentacles of what is actually a global octopus. This would inevitably entail the adoption of a multilateral treaty on international good corporate citizenship which would help curb the propensity of transnational corporations to jay-walk through the maze of often conflicting legislation across the world. At the domestic front too, we would have to tighten our tax laws in order to plug all existing loopholes and ensure good corporate practices by all actors. Heavy sanctions would have to be imposed on defaulters if we intend to make progress in the task of resuscitating our collapsing economy. 2.1 Lessons from the global economic and financial crisis There is a popular saying that ‘after a storm comes calm’.So, to better appreciate economic stability, it will be helpful to take a look at the possible lessons to learn from the global financial crises, its impact on revenue generation and economic growth. It is true to say that stability is gradually returning after the global financial crisis. But first of all, what are the factors responsible for this global disaster? The global financial crisis started with the US subprime mortgage crisis. The crisis was caused by a combination of complex factors, including easy credit conditions which led to high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: