Tax, Inflation, and Still Broke: The Economic Divide

When the government tightens monetary policy; hikes taxes, and removes subsidies, all in one breath, you would expect the economy to breathe easier. But in Nigeria, the air seems to feel thinner.

Over the past few years, Nigeria has embraced a series of bold economic reforms; floating the Naira, removing fuel subsidies, and pushing revenue generation targets. These actions can generally signal fiscal discipline and long-term growth.

For example, the Nigerian government reportedly saved N3.6 trillion from subsidy removal in just the second half of 2023, but beneath the policy headlines lies a quieter story: one where debt servicing, inflation, taxation, and informal charges collide to create an invisible burden on everyday transactions.

Yes, between visible taxes, invisible inflation, and unofficial levies collected by everyone and no one, low-income Nigerians allegedly seem trapped in a system that squeezes them from every direction.

Let me digress for a second, but I’ll bring it back in a bit, I promise.

At first glance, taxation and inflation may seem like two separate forces: one a fiscal tool, the other a macroeconomic consequence. But in Nigeria’s current climate, they’re colliding in real time, shaping the daily experience of citizens and businesses alike.

The Taxation Puzzle

Nigeria’s tax-to-GDP ratio remains among the lowest globally; just 10.86 per cent as of 2022, according to the Federal Inland Revenue Service (FIRS). That’s well below the 15–25 per cent global average, and even lower than the African average. Yet, the informal economy, which contributes nearly 58 per cent to GDP, bears much of the untracked tax burden through local levies and fees.

This mismatch reveals a chronic revenue problem and this challenge becomes even more critical when you consider the growing cost of debt. But borrowing isn’t inherently bad; in fact, strategic debt can stimulate growth if channelled into things like power, roads, manufacturing, or digital infrastructure, projects that have a way of boosting the economy.

In an interview with Arise News, the CEO of Sterling Bank, Mr Abubakar Suleiman, said, “If you are not collecting enough revenue to service a debt, that is a problem”. But it is even worse when you’re not using that debt for productive, economic reasons; that’s a structural problem.

Then I ran the numbers, in 2022, Nigeria reportedly spent a large per cent of its revenue on debt servicing. That means most of what we earn do not go to schools, hospitals, or industrial development, they go to paying back interest. That’s like living on a credit card and using it to buy lunch, not build a business that would make profit.

In 2023, 64.5 per cent of the federal government’s total revenue was used for debt servicing, according to a BusinessDay analysis of data from the Budget Office.

Although this was higher than the 48.5 per cent in 2022, it was still less than the 71.8 per cent in 2021. In 2023, actual revenue was N11.88 trillion, slightly above the predicted N11.05 trillion, while actual debt service costs were N7.66 trillion, 16.9 per cent higher than the projected N6.56 trillion.

In comparison, Nigeria’s revenue for the fiscal year 2022 was N7.76 trillion, falling short of the N9.97 trillion projection. The fact that debt servicing increased to N3.76 trillion from an anticipated N3.69 trillion in spite of this shortfall shows that debt obligations are an unavoidable burden even in cases where revenues are below budget.

This pattern emphasizes how little financial flexibility the government has, particularly when it comes to financing infrastructure or social projects.

By September 30, 2024, Nigeria’s total public debt had climbed to N142.3 trillion, reflecting a N8.02 trillion increase from N134.3 trillion in June 2024. This 5.97 per cent rise was attributed not only to additional borrowing but also to the depreciation of the Naira, which significantly inflated the naira value of external debt.

The surge in debt has not been matched by a proportional increase in productive investment, raising questions about the sustainability and strategic intent of government borrowing.

Adding to the concern, the total debt service cost reached an estimated N3.57 trillion in just the third quarter of 2024 alone.

With limited income from formal taxation, the government allegedly struggles to adequately fund infrastructure, education, healthcare, and essential services.

In response, efforts are underway to:

However, increasing tax pressure and its enforcement especially now can be politically unpopular and economically dangerous. Why? Because inflation is already eating through household budgets.

The Inflation Squeeze

Nigeria’s inflation rate has remained stubbornly high, largely driven by the rising cost of food prices, currency depreciation, removal of fuel subsidy and Monetary policies like floating the Naira.

As of early 2024, inflation was between 28–30 per cent, with core inflation also climbing. This diminishes buying power, worsens poverty, and increases the expenses of conducting business.

Essentially, inflation operates as an unnoticed tax, one that hits the vulnerable the hardest, especially low and middle-income earners whose wages aren’t keeping pace.

One key statement caught my attention in recent times, “We must choose between Taxation or Inflation.”

At first, that sounded a bit extreme. But the more I thought about it, the more it made sense.

Taxation is visible, structured, and can be progressive. Inflation, on the other hand, is unpredictable and regressive, a silent thief that spares no one, but affects the poor more because they have less to spend.