Are the recent VAT and social investment reforms in Nigeria conducive for social and economic inclusion?

Oluwasola Emmanuel Omoju

No 333400, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: Poverty, inequality and unemployment are major development challenges in Nigeria. According to data from the National Bureau of Statistics (NBS), poverty, inequality and unemployment are currently about 40.1% (2019), 35.1% (2019) and 33% (2020) respectively. These challenges inspired the government to introduce the cash transfer programme to cushion the effects of these trio. The cash transfer programme gives cash of N5,000 monthly to registered households. However, to raise funds to finance the cash transfer and other programmes, the government increase the VAT rate from 5% to 7.5%. This, this paper examines the macroeconomic and welfare impacts of the cash transfer programme, and further investigates the effects of the VAT increase on the effectiveness of the cash transfer programme. The PEP-1-1 CGE model calibrated on Nigeria’s updated social accounting matric (SAM) is used to carry out the impact analysis. The results show the cash transfer programme increases household consumption, household welfare, and real GDP growth while reducing unemployment rate. But the effects are much higher if the cash transfer programme is financed mainly through the budget than when it is financed by the increase in VAT rate. More so, the welfare of rural household increases than that of urban household. The cash transfer programme also induces the purchasing power of the households, leading to higher prices of commodities, and increase in consumer price index. Financing it through an increase in the VAT rate further aggravates the price effects. Meanwhile, financing the cash transfer programme through the increase in the VAT rate only improves government finances marginally. Thus, it is recommended that the while the government may provide cash transfers to household, increasing the VAT rate to fund the cash transfer might undermine the positive welfare-enhancing effects of the cash transfer.

Keywords: International Relations/Trade; International Relations/Trade (search for similar items in EconPapers)
Pages: 11
Date: 2022
New Economics Papers: this item is included in nep-des and nep-mac
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