Fiscal Policies in Nigeria

Fiscal Policies in Nigeria

History of Fiscal Policies in Nigeria Pre-Independence

Between 1900 and 1945, the Nigerian government had been using fiscal policy to achieve some of their objectives specifically, it was in the northern Nigeria that the fiscal policy direct taxation was practiced. Before the coming of the Lord Lugard who in turn adopted it in his administration.

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This was first introduced to the Oyo province of south western Nigeria in 1998 under the native revenue (southern province) ordinance No.27 of 1918 which was then called income tax and was calculated on the basis 272% of the gross income of the ordinary farmer with special types of property. By 1922, the direct tax policy had been extended to most provinces of south-west in Nigerian but there was a tremendous opposition to its introduction in south-eastern province of Nigeria because of the non-existence of any tax system. By 1928, direct taxes were collected for the first time largely with the aim of warrant Chiefs. It is the problem of this native revenue amendment ordinance that led to Aba women Riot of 1929 by 1930 direct tax has been introduced throughout Nigeria with subsequent amendments. For the first time, a law on tax evasion (income tax ordinance No. 17 of 1937) was enacted. Also in 1937, the 1927 income tax ordinance was amended by the British along their doctrine to provide for company tax further amendment that took place in 1939 included.

  1. Introduction of 25.6d in the non company profit
  2. Local income tax rate increase from 1% to 1½% in cases of all income up to and above #50.00
  3. All income derived from Nigeria were taxed whether the recipient was resident in the country of not.
  4. Introduction of excise duty on the cigarette industry which started production in 1933
  5. Introduction of export duties on cash crops

The fiscal policy formulation and implementation problem that are encountered include tax evasion because of “Taxable adult” definition and the absence of registration of births except in Lagos

Government expenditure by 1945 increased considerable with the cost of administration consuming between 30 – 40% of total revenue public works accounts for only 10% agriculture and education each took about 5% each while the most were remitted to the |British government as administration fees. Do allocation was made for the development of commerce and industry throughout that period i.e 1910 – 1945

From 1946 through 1960 import duties increased and in some cases doubled while some were out-rightly banned import duties were varied to protect the few local industries especially cement. Other fiscal policy changes were

–         Export duty increases from oil and palm kernel

–         Ad valorem system of tax was introduced in assessing export duties on cocoa, palm kernel, groundnut at 6%

–         Introduction of the production sale tax on cocoa and palm oil in the western region, groundnut, cotton, Soya beans in the north and all agricultural products in the eastern Nigeria.

–         Arrangement with the British government to avoid double taxation

–         Increase in company tax in April 1946. the revenue and expenditure volume increased considerable from #13.2m in 146 to #88,824m in 1960 and #10.63m in 1946 to #81,749 in 1960 respectively.

Post Independence

Early 1950s and 1960s, agriculture was the main stay of the Nigeria economy, employing over 80% of the work force. By 1970 petroleum became the principal revenue earn of the country. Foreign exchange accruing from oil by mid 70s accounted for nearly 82% of  revenue. The so – called oil boom made possible massive growth in the national economy which led to the expansion of government result from relatively loose federation of 5 (five) units – consisting four (4) region and a center in 1962 to a much more centralized system of 36 states and Abuja as the federal capital territory. Nigeria development programmes since independence have been very well articulated although their implementation have been bedeviled with itches, bald measures or abandonment caused by either the civil war, political instability, economic statements and also experienced different tax regimes, alterations in public expenditures pattern and government’s direct and indirect involvement in projects. Nigeria’s public finance management had been at the center of Nigerian policies since the amalgamation of 1914. this has often been referred to as economic politics which dictates who gets what, when and how much to be received. Tax legislation confers tax imposition and collection powers on the different tiers of government according to the magnitude of social and economic obligation expected of it. Therefore, junsdiotion    over collection of taxes have been divided among the federal state and local government (see table)

In modern times, fiscal policies are not formulated in isolated i.e. they are formulated and implemented simultaneously with monetary policies, foreign policies etc. by government with the aim of having a synchronized approach in tackling economic problems. The generally accepted goal of fiscal policies is the attainment of greater economic stability i.e. the maintenance of a reasonable stable state of economic growth with relatively  low level standard of living on the other hand. The federal government operates a federation account which represented a pool of funds that the federal government collects on behalf of other tiers (state and local government) of government which they are entitled to the formula of distribution of allocation from the federal account is known as the revenue sharing formula which g=has been subjected to series of changes for instance.


  Former Current
Federal government

State government

Local government

Special funds












Major Taxes and Taxes Power Devolution in Nigeria.

























Capital gain tax (CGT)

Capital transfer tax (CTT)

Company income tax (CIT)

Entertainment tax

Excise duties (ED)

Export duties (replace)

Land registration and survey fee

License fee in TV and wireless radio

Market/trading license and fees

Mining heats and Royalties

Motor vehicle and Drivers

Personal income tax

Personal income tax: armed forces, all residents of FCT, external affairs officers and Nigeria police force

Petroleum profit tax (PPT)

Pools betting and other betting taxes

Property and rating taxes

Stamp duties

Value added tax.

























Federal & state

Federal & state























Source: constituent of federal  Republic of Nigeria by G. Mbanefo (unpublished lecture)

Definition and Meaning of Fiscal Policies

According to Oxford Advanced Learners Dictionary, the word “Fiscal” refers to “Of or relating to public money especially taxes”  while policy is referred to as “A plan of action, statement of ideals, etc proposed or adopted by a government, political party, business etc. bringing the two words together, it vive forth a phase fiscal policy which according the definitions above refer to as a plan of action adopted by government. This definition however does not make reference to the aim and objectives it tends to achieve. Fiscal policies is reference to the role they play in the development of the economy direction amongst different interest groups in different perspectives – politicians, academicians, financiers, businessmen etc. among all these groups appears a common string running through all of them that is it is a tool used in regulation of the economy within the network of other economic policies. However, Uzoagu (1981:72) in his opinions views “fiscal policy as the erection of tax structures and direction of government expenditure for the purpose of attaining specific objectives such as balance of payment or avoidance of inflation”. According to Nwankwo (1958 –1979:108) define fiscal policy as “The measure of a combination of measures to influence, regulate and control the flow of income revenue expenditure, spending and saving production and distribution”. Despite these definition above another line of thought is expressed by Alom Hasm – fiscal policy involves the management in terns of taxes (as one of the primary sources of revenue and of its expenditure, incorporating subsidization of activities, giving it purpose and direction with overall aim of regulating the economic activities that ought to lead to stability and prosperity, if properly implemented” also according to Ojo (192:305) “Fiscal policy is the use of government revenue and expenditure policy to influence the level of economic activity”

Having seen these definitions expressed by different writers, the researcher deems it wise to bring in her own idea. She sees it as the manipulating instruments in the hand of government to achieve desired macro-economic objectives. Finally fiscal policies, regardless of how articulated they are may or may not have a response to implementation problems if done in isolation i.e even if well implemented, the desired result may never manifest. Therefore they are formulated along with other new already existing social and economic policies in other way round, fiscal policies may appear as straight forward as possible but are very delicate and complex in terms of national survival. Their complex characteristic are as a result of different purposes they intend to achieve and the effect each line of action has on the economy as a whole. Together with the standard of living of the citizenry in particular. These therefore call for a balance in the pursuance of government policies through fiscal policies and the effect such policies would have on the lives of citizens and business communities in the country.


Difference between Fiscal and Monetary Policies.

The era before world war II, government used monetary or credit policy techniques in attempt to lessen economic instability and control the economy effectively. The attempt was directly aimed at issuing functions in investments and spending through control over interest rates and bank credit stabilization measures through its influence over bank reserves and the total money supplied. In time of depressions open market purchase of government  bond was adopted as a measure of reducing big money in circulation. Then there was an assumption that monetary policies were an all cure portion in economic hardship field and save way to fiscal policies.

The introduction of fiscal policies there and then was haunted by criticism and objected by hard – lines conservation (those that preferred the traditional balance budget style). It however, began top manifest its potentials in fighting unemployment, inflation etc. through articulation, combination and manipulated direction of taxes and government expenditures.

Understanding of monetary policies becomes pertinent as a step towards differentiating between the two fiscal and monetary policies. Uzoagu (1981:85) explains monetary policies to be “the management of the expansion and contraction of the volume of money in circulation for the specific purpose of achieving certain declared national objectives in his own wisdom, Furness (1979:31). Saw it as “one which aims to influence economic activities by variation in the supply of money, in the availability of credit or interest rates” from another angle Olakoi views it as a deliberate action on the part of monetary authorities (Central Bank and Ministry of Finance) to control money supply and several credit availability as well as the levels of cost i.e. interest rates for the monetary policy”. As being out earlier in this chapter by Prof. Nweankwo “as all measures or combination of measures designed  to influence or regulate the volume price and direction of money and credit to achieve rationality stipulated objectives” from these definitions, monetary policies deal specifically with monetary affairs, credit control as its distinct means of achieving economic progress.

Apart from definition differences, practical differences also exist in terms of the case which fiscal and monetary policies may be applied. Monetary policies can be adjusted at extremely short notice and it will have more general impact on the economy because money in circulation turns the wheels of the economic on the other hands, fiscal policies in the from of increase government spending if waste is to be avoided requires plans which need to be made well in advances under the best circumstances such stabilization spending that cannot be turned off and an easily. Below is the differences that exist between fiscal and monetary policies see illustration table below

Fiscal Policies Monetary Policies
1 The key instruments are

  1. Government expenditure
  2. Taxation

2 Objectives of fiscal policies are

  1. Influence the rate of economic growth of the economy
  2. Raise the level of national income output and employment
  3. Protect infant industries from the stiff or unhealthy competition
  4. Reduce the level of unemployment by seeing to equitable employment of resources.
  5. Moderate the rate of inflation
  6. Improve the balance of payment position
  7. Encouragement and diversification of foreign exchange earning through increased export activities especially in the non-oil sector.

3. By definition, it is a manipulative instrument in the hands of government designed to achieve macroeconomic objectives. It is a deliberate exercise of the governments power to tax and spending order to achieve price stability help dampen the swings of success cycles and bring the natural output and employment to desired levels.

The key tools include

  1. Qualitative
  2. Selective credit control

Objectives of monetary policies are

  1. A desired rate of economic growth


  1. Relative price stability



  1. Low rate of employment



  1. Balance  of payment



Reduction in the level of unemployment

Exchange rate stability


Desired level of interest rate






In accordance with the definition, it is an economic tool designed by the monetary authority to control the cost, quantity and direction of credit to achieve national objectives.


Tax as a Tool of Fiscal Policy

Taxes are the most important sources of government revenue. According to Ojo (1982:108) “A tax is a compulsory level imposed by the government on individuals and business firms and paid by them to the government”

Also as put forward by Seligma (1987:10) “As a compulsory contribution from  person to the management to defray the expense incurred in the common interest of all without reference to special benefits conformed” The differences between taxes and other government revenue is the compulsory element involved. In Nigeria, major taxes are enumerated in one of the attached tables in this research work.

Far from being a source of government revenue, some of the major purposes of tax may include bringing

  1. Efficiency through resources allocation (so as to produce more of some commodities and less of the others)
  2. Equality through income and wealth distribution.
  3. Economic stabilization
  4. Economic growth

In more terms, government needs money for the following reasons.

  1. To meet its social,  economic and political obligations which tax is the major source of that government revenue and government riches on this tax instrument, to discourage consumption of goods that are considered undesirable, good that are not good to health – cigarette to social welfare over used tokumbo cars or those goods that creates none for ostentation, wrong investment priorities or class distinction in the society.
  2. To protect infant industries, this could be done through a preferential tax policy that regulates the importation of certain goods that can be produced within the country e.g. domestic articles and wares of plastic materials exchanging babies feeding bottles which was adjusted from 30% to 60% in 1999
  3. To distribute income in the society
  4. To control inflation and other social and economic policies of government. Inflation can be said to cause by factors grouped generally under demand pull inflation where prices increase due to excessive demand for commodities and services, cost – pull inflation – caused by increase cost of production. Tax units own can be used to curb the demand side of the problem be reducing disposal income of individuals increase in personal income tax reduces inflationary pressure by taking away from individuals some of their purchasing power, which might otherwise be spent. Also from the supply side of it, a combination of tax relievers can encourage large scale production throw lowered cost of production.
  5. To stimulate growth and development i.e. engaging in viable project which will help in developing the economy technologically, socially and otherwise.
  6. To preserve and foreign exchange reserve

Expenditure as a Tool of Fiscal Policy

Government expenditure can be inform of recurrent or capital expenditure. Recurrent expenditure refers to the usual continuous cost of running the government machinery, while capital expenditure refers to fund expenditure or expenditure to be a viable tool for fiscal policy implementation,, prudence in terms of priority, viability, relevance and opportunity cost are to be examine thoroughly. The funds allocated to viable and relevant projects that can generate employment, make some profit to repay the capital source is capital expenditure, financial discipline/management should form the core of capital expenditure pattern.

There are some specific sectors of the economy that need government spending funds to lay a solid foundation that is needed to sustain steady growth. Funds could be channeled to these sectors through either government involvement or loans to private sectors through government numerous agencies established for such purpose national Director of Employment (NDE), Petroleum Trust Fund (PTF) People Bank, Family Economic Advancement Programme (FEAP)etc to enhance upstream and downstream development of priority sectors for instance.

  1. OIL: Funds could be directed to the work of exploration development and production of oil and gas products (upstream) and establishment of refineries, storage tanks, oil rigs, encouraging financially the setting up of essential infrastructures like industrial estate, investment of their raw materials are bye product/end.
  2. AGRICULTURE: Government should directly or indirectly channel funds towards

i. Provision of farm – fertilizers, improved seedling, farm equipment etc.

ii. Storage facilities and agro-based industries to process these farm products and possibly upgrade them to export quality for the international market. All these stages generate employment, act as an incentive to large – scale mechanized farming/production and indirectly improve the lost of the masses.

Tax and Expenditure in Fiscal Policy

For government to mop up excess unwanted purchasing power, discretionary fiscal policy, it should be applied. By the word, discretionary fiscal policy, it could be defined as a deliberate action by government in its spending and taxing activities to achieve price stability, help damage the swings of business cycles and bring nations input and employment to a desired level.

Government spending and taxing policies designed to curbing recession should not be same as those aimed at curbing inflation. Thus two distinct classes of policies.

  1. During recession, the desired objective is to raise aggregate demand to a full employment and non inflationary level. Therefore, expansionary policy comes to play to close the gap. This policy may come in form of increase in government spending, decrease in tax or combination of both. It is when the federal government budget is deficit that expansionary fiscal policy will be best applied because if there is balance budget and expansionary fiscal policy is use, it might lead to inflation.
  2. During inflation, it is wise to lower or reduce aggregate demand to the full employment non-inflationary level. Therefore the opposite of expansionary policy concretionary fiscal policy is needed to handle the situation. The combination of both expansionary and contraction fiscal policy best apply when the federal government budget is balanced.

However, the budget surplus must be large enough to induce deflationary effects for a contractionary fiscal policy to operate effectively.

Note: not all fiscal activity is discretionary. Many are non discretionary because of significant changes in government spending and taxes which occur automatically over the business cycle without any explicitly decision by government. Thus the need for in-built stabilizers. Example, which absorbs purchasing power when demand inflation is caused by increase money income and augmenting purchasing power when the economy is depressed and money incomes, are falling.

Limitations of Fiscal Policy Implementation

Many a time, policies would be well formulated but unfortunately due to one internal or external threat of the other, the implementation of that policy would be hindered. In this case some of the factors that hinder fiscal policy implementation are discussed below.

  1. Structure of the economy: Certain features or characteristics of a style of economy becomes problematic on their own, thereby being detrimental to the implementation of fiscal policies. For instance, the activities of strong and recognized labor unions, monopolistic firm etc. if taxes are raised for a particular purpose, say curbing demand – pull inflation, labor unions usually oppose, or threaten generally stick action. On the other hand, they sometimes demand for wage increases which in most cases is done across the board and will in effect result in inflation. The multi-national monopolistic firms simply pass on the burden of tax or higher cost of production to the buyer in form of higher prices since they are prices sellers can control a large share of consumer market.
  2. Political instability: as a result of frequent changes in leadership, different ideologies also tend to be springing up as it pertains to economic regulations and sometimes lead to non-implementation or discarding  of a predecessor long term strategic plan which constitutes the bedrock of development projects as incorporated in rolling plans as concerns Nigeria. It is usually long term project of 3 – 5 years mapped out as a means to consistency and direction in economic development. Even short term plans that requires consistency in implementation are out rightly changed, reversed of disposed of some of these changes in policy objectives are a time politically motivated.
  3. Interpretation, forecasting and timing problems: Identification, interpretation and prediction of treads in economic activities and adjusting of policies to address observed cases are mainly the limitations of fiscal policies. Examples is identification high prices problems which could be as a result of any of the following below.

i. General decline in economic activities

ii. Increase in money supply without a corresponding increase in production outputs, which causes disequilibria in the demand and supply balance.

  1. Increase in population, resulting increase in aggregate demand without increase in productivity.

iv. Dwindling Production Resulting In Lower Supply: It is to time fiscal policy implementation for maximum effectiveness especially in the light of the time lag between decision making. Implementation and manifestation of its effects.

  1. Corruption: In our nation today, there is the tendency for a person in position of authority indeed either through monetary or material influence perform his duties in a manner that is either favorable to the other part or detrimental to the organization/nation as a whole. This makes sound policies to die off because of poor implementation resulting in corruption.


Bringing a balance between the pursuit of viable fiscal policies and the effect it would have on the world economy, world trade, the local businessmen and the citizens as a concept that needs to be incorporated as part of constraint in fiscal policy formulation. To avoid a situation where the policies become ineffective, the side effects needs to be identified, analyzed and addressed. Therefore, any conflicting priority (ies) need to be smoothened before implementation. Such possible conflicts that may arise include.

  1. Increase in personal income tax as an anti-inflationary measure. This reduces a person” disposable income and can become a dis-incentive to work.
  2. Increase in company tax or excise duties as a measure of higher revenue for specific profits could led to retrenchment of workers – high cost of production etc.

The Role of the Central Bank in the Formulation and Implementation of Fiscal Policy

CBN as financial advisers and agency primarily charged with monetary policy, it consequently plays significant roles in the process of making and implementing fiscal policy. This is because

  1. The government budget usually have implication for public sector borrowing and hence the money supplies.
  2. As conflict among goods, required that various tools to be complement to each other. CBN involvement in practice takes the form of formal memoranda covering observed economic trend and various issues and problems at the macro level. Also regular consultations between the government, its agencies and Central Bank at various levels on the various issues relating to the economy.

The role Central Bank play in the attainment of objectives of government fiscal policies is derived largely from the institutions statutory function as banker to the federal government. This involves the operation of accounts for government ministries, departments and agencies. More importantly are tow other responsibilities – the provision of advances to help meet temporary deficiencies in revenue and the management of public debt of federal government.

Under the act of setting up central bank, the bank is empowered to grant ways and means for advances to bridge the gap between revenue and expenditure during any given year. Such advances therefore are meant only to ensure that government financial needs are met and that on going programmes and services are not disrupted solely because the timing of revenue and expenditure do not coincide exactly.

Management of Public Debts

In 1958, the management of federal government debts by Treasury Department as responsibility was transferred to the central bank of Nigeria. However, the ultimate responsibility still resides with the Treasury Department of the federal ministry of finance. The bank functions includes:

Giving advice on timing and terms of new issues, maintaining appropriate books of account, pay interest due to holders of debts instrument (discount rate, selective credit control, moral suasion etc.) upon maturity in particular development stock and treasury bounds. As regards debt servicing, central banks role includes the collection of proceeds of external loans, the payment of debt or servicing of debts on behalf of the federal government and advice on terms and conditions of loan. In fact with the emergency of trade areas and the intensification of efforts to reschedule the country’s external debt obligation, the responsibility of CBN has grown immensely.

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