One of the most interesting arguments I’ve heard on the propriety of dispensing with the subsidy on petrol in the country is the one that insists on separating the fiscal consequence of the subsidy removal from its “industry-changing” effects.
First the fiscal argument. If we admit that there is a subsidy (and many informed persons disagree with this), then we cannot but accept that it’s a reverse tax of sorts. In this sense, it transfers financial assets from government’s coffers to the pockets of the beneficiaries of the subsidy. Going by the main arguments, part of the problem with this particular subsidy is that it interferes with “market-determined allocations” of a wasting resource that is implicated in the gradual warming of the globe.
Now, there’s a tangential argument involved here. This subsidiary argument revolves round the question of where one stands on the debate over which is the more efficient use of scarce national resources: government, which (at least here in Nigeria) is in the habit of multiplying entities most inefficiently?; or the people, whose disaggregated decisions form the heart of market economies?
I will try answer this question later. However, what is significant is that by removing the subsidy on petrol, a higher burden of taxation will transfer to the people. We would be transferring money from the pockets of the consumer, in favour of business investment (to some extent) and government spending (to a considerable degree). The incidence of this new tax burden also matters for how public policy aims to achieve more efficient domestic resource allocation, income distribution, and political and economic stability.
At higher income levels, spending on fuel and fuel-related products is but an inconsiderable part of individual budgets. Perhaps the strongest case is that at this level, the main fuel for generating electricity is diesel (which price is already market-determined). In essence, the net effect on disposable incomes for Nigerians in the upper income brackets will be marginal.
At lower income levels, this is where the main effect of the new tax will be felt the most. I’ve heard that the pass through of higher petrol prices to food (the biggest item of expenditure for the man on main street) will be mitigated by the fact that food is transported across the country largely by articulated vehicles that run on diesel. This reading, unfortunately, ignores two additional facts. First is that from the farm-gate to the market where most produce is aggregated before being loaded on to the diesel-guzzling “trailers”, transportation is largely by inefficient petrol-guzzling pick-up trucks. Second, is that transport of food over the “last mile” (from, the markets home) is also petrol-based. Thus, the pressure on disposable incomes at the lower end of the income ladder will be both from a diminution of income, and from higher food prices.
Now, the industry-changing argument. With full cost-based pricing across the oil and gas industry, I’m told that it would be a most efficient industry. Moreover, the gains from leaner operations will eventually pass through to us customers. These gains include a recovery in domestic refining capacity, ultimately low, market-determined pump-station prices.
All of this is interesting, because the main industry-change argument assumes what is to be proved as part of its proof. All over the world, refining is a low margin activity from which most major operators have pulled out. In the absence of serious changes to the conduct of business environment in the local economy (non-existent infrastructure, decrepit criminal justice system, nascent regulatory competences), how would we attract new capital into such a lean sector?
Now, the only reason why doing business in Nigeria is that expensive is because we have a most incompetent public sector. Inefficient too.
At this point, we return to the earlier question “which is the more efficient use of scarce national resources: government, which (at least here in Nigeria) is in the habit of multiplying entities most inefficiently; or the people, whose disaggregated decisions form the heart of market economies?” If government and its agencies are as wasteful and conniving as the KPMG audit of the national oil company suggests, why give to such agencies the additional sums involved in the petroleum subsidy debate. Committed as this government claims it is to doing things differently, why not ask first for an act of good faith, one that shows it is capable of using its current revenues well, before we burden the people anew?
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