National or public debt refers to the debt a country owes to its citizens or other countries or organisations such as the International Monetary Fund (IMF) and the World Bank. The debt which a country owes its citizens is known as internal debt while the debt owed foreign governments and organisations is known as external debt.
Instrument or sources of government borrowing in Nigeria
The government of Nigeria can use the following instruments to borrow money. These include:
- Treasury certificate: These are securities for medium term borrowing. They are for a period of one to two years and they carry higher rate of interest than treasury bills.
- Treasury bills: These are securities used for short-term borrowing for about 90 days. This carries low rate of interest.
- National savings scheme: Government can also borrow money from the national savings scheme to finance its projects.
- Development stock: These are referred to as government stock and they are used for long term borrowing of up to five years and above.
- Negotiations: The government can borrow from external financial institutions such as the Paris Club, International Monetary Fund (IMF), World Bank, etc.
Reasons Why Government Borrows
- To finance budget deficit: When a government suffers deficit budgeting, it may borrow money in order to finance such budget.
- To finance huge capital projects: Money can be borrowed by government in order to enable it finance some huge capital projects.
- To meet cost of national emergencies: Government can embark on borrowing to enable it meet the cost of national emergencies such as war, drought, famine, hurricane, etc.
- To reduce economic burden on tax-payers: Government can decide to reduce the economic burden on tax payers by borrowing money to execute proposed projects.
- To meet balance of payment disequilibrium: Government can also borrow money to enable it correct or execute balance of payment deficit.
- To provide employment opportunities: Government may equally borrow to establish certain projects capable of generating employment opportunities for the people.
- To service some loans: Government can borrow money in order to service another loan earlier taken, either from internal or external sources.
- To control fluctuations in national income: A fall in expected income may warrant a government to borrow in order to meet up the required fund to finance its projects.
Some terms associated with budget
- Debt servicing: Debt servicing refers to the payment of interest on loans taken by the government and the repayment of the capital sum at a future date.
- Debt management: Debt management refers to a process or situation whereby the government structures the country’s debts, which are denominated in foreign currency, with the fundamental aim of reducing the total external debt stock.
Burden of national or public debt
The extent of the burden of national or public debt is determined by the type of debt, whether internal or external, the purpose of the debt and the period of repayment.
A huge national debt can affect the economy of a country in the following ways:
- The servicing of an external debt will involve an outflow of resources, which can otherwise be used for economic development.
- It can reduce the availability of foreign exchange in the form of depleted foreign reserves.
- The servicing of a large internal debt will limit government’s ability to provide social capital and services for the people.
- A large domestic debt will influence the distribution of income in the country.
- If a large internal debt is sustained by a high rate of interest, it will reduce private investment on capital goods.
- A large external debt can make a country to be susceptible to the whims and caprices of external creditors.
Revenue Allocation in Nigeria
Revenue allocation refers to the sharing of the nation’s wealth between the component parts of the nation, that is, between the federal, state and local governments.
Revenue allocation is grouped into two major parts. These are:
- Vertical revenue allocation: This involves the sharing of the revenue accruing to the federal account among the three tiers of government – federal, state and local governments.
- Horizontal revenue allocation: This refers to the sharing of revenue accruing to the federation accounts among the units within a given level of government. It involves certain principles based on some factors to be applied in revenue allocation. These principles include population size, land mass, derivation, ecological problems, etc. It also involves the formula which refers to the system of relative weight assigned to various principles, e.g. federal government – 40%, state – 20%, local government – 15%, mineral producing area – 10%, ecological problems – 5%, special fund – 5%, others – 7%. These are just tentative figures.
The revenue allocation formula used in 1992 by the government from the federation account include:
Federal government’s share = 48.5%
State government’s share = 24%
Local government’s share = 20%
Ecological problems = 2%
Mineral production areas = 3%
Special fund = 7.5%
Others = 2.5%
It should be noted that there is no fixed revenue allocation. It changes from time to time. The Revenue Mobilisation Allocation and Fiscal Commission (RMFC) is always at work trying to work out a proposal for a new revenue sharing formula. For example, the oil producing states are currently getting 13% oil derivation from the federation account. As of July 2005 during the Political Reform Conference, the oil producing states agitated for 25% of the federation account and if this is approved by the National Assembly, the entire formula will be changed. The government offered them only 17%.
Mathematical Approach to Taxation
Certain calculations are done in taxation and for proper understanding of it, it is very important to take note of the following terms:
1) Tax base: The tax base refers to the item or the object which is taxed. This includes personal income, imports and exports, company profits, properties, goods for sale, etc.
2) Tax rate: Tax rate refers to the percentage (or proportion) of tax base or tax object which is to be paid as tax, e.g. 10% of income. An ad valorem tax, for instance, is expressed as a percentage. On the other hand, it could be a flat rate of tax, e.g. N100 per adult male.
Disposable income: This is the type of income derived after tax has been deducted from gross income. In other words, disposable or net income is total income less tax disposal income = Income – taxation or tax base – tax paid
The table below shows the tax payments of three income earners in a year. Use the information in the table to answer the questions that follow:
Determine the percentage rate of taxation paid by (a) (i) Mr. Okafor in column X and Y (ii) Kolawole in column X and Y (iii) Alhaji Tanko in column Y.
(b) (i) Identify the systems of taxation employed in columns X and Y (ii) Which of the income earners has the least burden under column Y
(c)(i) If the government increases its rate of taxation to 20% flat rate, how much revenue will be generated from the payees (ii) At 20% flat rate of taxation, calculate the disposable income of Mr. Okafor, Alhaji Tanko and Mr. Kolawole.
(b)(i) The systems of taxation employed in column X and Y is:
Column X = Proportional system of taxation
Column Y = Regressive system of taxation
(ii) The person with the least burden is Mr. Kolawole with (5%) tax rate.