Chapter 7: The Fiscal Equation

In 2024, the Federal Inland Revenue Service collected ₦21.6 trillion — an all-time record, 76% higher than the year before. The same year, Nigeria's public debt reached ₦159.28 trillion. The state is getting better at collecting money and worse at keeping it. This chapter explains why.

The Record and What It Means

The ₦21.6 trillion figure deserves closer inspection than it has received in press releases. According to the FIRS 2024 annual report, non-oil taxes accounted for 71% of the total, while oil taxes contributed 29%. On the surface, this looks like diversification: the economy is weaning itself off petroleum receipts. The reality is more mechanical. Taxes are collected in naira. When the naira falls from ₦461 to the dollar in May 2023 to ₦1,535 by December 2024, every import transaction, every foreign-currency invoice, and every bank forex gain generates a larger naira tax liability even if the underlying volume of activity has not grown.

The FIRS did not collect more because Nigerians became more compliant. It collected more because inflation and depreciation inflated the naira value of the tax base. The World Bank Nigeria Development Update, April 2026, notes this distinction carefully. Real tax effort — the actual expansion of compliance beyond what inflation and exchange rate movements would produce — is harder to measure and less impressive than the headline suggests. The FIRS deployed technology, expanded the electronic tax system, and pursued high-net-worth individuals. These are genuine administrative improvements. But they are not large enough to explain a 76% jump in one year. A substantial portion of the ₦21.6 trillion came from windfall taxes on banks' forex revaluation gains and from companies whose naira revenues ballooned in nominal terms while their real activity stagnated.

The banks had revalued their dollar assets as the naira collapsed, producing accounting profits that the government taxed aggressively. This convergence of good politics and bad economics meant the state captured a one-time accounting gain and treated it as structural revenue improvement. The tax-to-GDP ratio tells the same story with different numbers. The Organisation for Economic Co-operation and Development and African Tax Administration Forum, in their Revenue Statistics in Africa 2024 report, placed Nigeria's ratio at 7.9% for 2022. The sub-Saharan African average was 16.8%. In October 2025, President Bola Tinubu claimed the ratio had risen to 13.5% and would climb higher under the new tax law. The gap between 7.9% and 13.5% is not merely a measure of progress.

The disagreement is about what should count as tax revenue and what denominator should be used for gross domestic product. The OECD/ATAF figure uses a standardised methodology comparable across countries. The 13.5% claim uses a rebased GDP denominator and includes some non-tax revenues that other countries classify separately. Both numbers are arithmetically defensible. What matters is that neither places Nigeria anywhere near the revenue capacity of a state that intends to build roads, pay teachers, and service debt simultaneously. Ghana collects 14.1% of GDP in tax. Kenya collects 15.7%. South Africa collects 26.7%. Nigeria's 7.9% — the internationally comparable figure — places it at roughly half the sub-Saharan African average.

The Tinubu administration's 13.5% claim is directionally useful for domestic politics but methodologically incompatible with cross-border comparison. A government that wants to argue it is catching up should use the same ruler as the countries it hopes to catch. Using a rebased denominator and a wider revenue definition produces a number that flatters without informing. The fiscal arithmetic of this chapter relies on the 7.9% figure because that is the one that answers the question: how much of the economy does the state actually capture in tax? The composition of the ₦21.6 trillion also matters. Company Income Tax and Value Added Tax dominated. Personal Income Tax remained anaemic, which means the bulk of the burden fell on corporate balance sheets and consumption rather than on individual wealth.

Corporate accounts are easier to audit than informal-sector incomes. VAT is collected at points of sale with relative efficiency. What remains largely untapped is the personal wealth of the political and business elite, much of which is held in assets that the FIRS has neither the legal authority nor the political backing to assess properly. The FIRS has made noise about taxing residential property in Abuja's affluent districts and about pursuing owners of luxury vehicles. But the administrative infrastructure for recurrent wealth taxation does not yet exist. Oil taxes, at 29% of FIRS collections in 2024, also deserve scrutiny. The Nigeria Extractive Industries Transparency Initiative has documented for years how oil revenues fail to reach the federation account in full.

Production losses, pipeline vandalism, and opaque lifting arrangements mean that the barrels produced do not always translate into the taxes paid. The Nigerian Upstream Petroleum Regulatory Commission reported average production of roughly 1.50–1.60 million barrels per day in 2024, well below the budget target of 2.06 million. Even with higher oil prices in some months, the volume shortfall constrained petroleum profit tax and royalty collections. The FIRS figure of 29% is not evidence of a revived oil sector. Rather, the figure shows that the non-oil portion grew faster, partly for the wrong reasons. The FIRS has set a target of ₦25.2 trillion for 2025. Whether it reaches this depends less on administrative effort than on the exchange rate, inflation, and the appetite of the CBN for further windfall taxes.

The tax base is volatile because the economy is volatile. A state that cannot predict its revenue cannot plan its expenditure. And a state that cannot plan its expenditure borrows to fill the gaps. The compliance gap remains staggering. The FIRS estimates that fewer than twenty million Nigerians are registered taxpayers in a country of over two hundred million people. Most of the registered are salaried workers whose taxes are deducted at source by employers. The self-employed professional, the landlord with multiple properties, and the importer who undervalues customs declarations — these categories remain largely outside the net. The FIRS has introduced data-matching initiatives, cross-referencing bank records, land registry entries, and vehicle registration databases. But the legal framework for accessing these datasets is contested. The political will to pursue powerful defaulters is uneven.

The result is a tax system that extracts reliably from the visible and leaves the opaque untouched. Large companies now file electronically. Transfer pricing rules have been tightened. The Voluntary Assets and Income Declaration Scheme and its successors have brought some previously hidden wealth into view. But these are marginal gains in a system where the bulk of personal wealth remains unassessed and the bulk of public spending remains unaudited in any meaningful sense. The Office of the Auditor-General of the Federation publishes annual reports documenting billions of naira in unaccounted expenditures, unsupported payments, and contracts without documentation. The reports are tabled in the National Assembly and ignored. This pattern of collection without accountability defines the fiscal environment. The state has become proficient at the front end of taxation — assessment, collection, and reporting — while the back end — verification, audit, and consequence — remains structurally deficient.

The FIRS annual report shows impressive collection figures. The Auditor-General's report shows that much of what was collected is spent without the documentation required by the Public Procurement Act 2007. The fiscal equation is not only about how much enters the treasury. The equation is also about how much of what enters is accounted for on the way out. A state that collects ₦21.6 trillion and cannot produce receipts for its spending has not demonstrated fiscal strength. It has demonstrated fiscal velocity — money moving fast through institutions that were designed to collect it and never designed to watch where it goes.

The Fiscal Arithmetic Equation

To understand why the state can collect more and still become poorer, the arithmetic must be written out explicitly. Nominal revenue growth is not a single number. The increase is the sum of four distinct components, three of which are accounting artefacts and only one of which represents genuine expansion of the tax base. The equation is not a metaphor. The decomposition can be verified with data from the CBN, the NBS, and the FIRS annual reports. When the algebra is completed, the conclusion is uncomfortable: more than half of the celebrated revenue increase never crossed the border into Nigeria. The depreciation effect was created inside the spreadsheet by the naira's collapse.

The base year of 2022 provides the cleanest comparison. FIRS collected ₦10.1 trillion at an average exchange rate of approximately ₦450 to the dollar, yielding a dollar-equivalent value of roughly $22.4 billion. By 2024, the naira had fallen to an average of approximately ₦1,200 to the dollar. The same tax base, measured in naira, would have grown by roughly 62% even if no additional economic activity had occurred and no new taxpayer had registered. That mechanical depreciation effect accounts for approximately ₦6.3 trillion of the ₦11.5 trillion nominal increase. The state announced a 114% revenue surge. In dollar terms, its takings fell by 20%. The fiscal arithmetic strips away the exchange-rate fiction to reveal a state that is nominally richer and actually poorer.

The inflation windfall operates through a different channel. VAT is levied on the naira price of goods. Excise duties are levied on naira-denominated volumes. When headline inflation runs at an annual average of roughly 28% across the period, the same physical transaction generates more naira tax even if the quantity sold is unchanged. A bottle of soft drink that sold for ₦150 in 2022 and ₦250 in 2024 generates 67% more VAT revenue without a single additional bottle being produced or consumed. This inflation windfall contributed approximately ₦1.4 trillion — about 12% — of the nominal increase. The windfall produces real money in naira terms. It buys fewer medicines, fewer textbooks, and fewer kilometres of road than the same naira bought two years before. The inflation effect is real in currency and fake in purchasing power.

The residual — approximately ₦3.8 trillion, or 33% — is the genuine volume and compliance effect. This is the portion that might reflect new taxpayers, better enforcement, broader collection, and economic expansion. The residual is not negligible. But the residual is not ₦11.5 trillion. A 33% real growth in tax collection over two years would be commendable in a stable economy. In an economy where public debt grew by 58% over the same period and debt service consumed 96% of revenue, a 33% real improvement is swallowed whole before a single capital project is funded. The political economy of this equation is as important as the algebra. A government that announces a 114% revenue increase gains political credit for managerial competence.

International creditors see nominal naira growth and assume the state is consolidating. Domestic analysts who do not convert the figures to dollars or deflate them for inflation reproduce the official narrative. The result is a consensus built on a category error: the confusion of nominal naira accumulation with fiscal strengthening. The Fiscal Responsibility Act 2007 requires the government to publish debt sustainability analyses. The DMO publishes quarterly debt bulletins. Neither instrument requires the decomposition of revenue growth into its real and nominal components. The gap in reporting is not an accident. No one has proposed such a rule. Rwanda provides a comparator that makes the gap visible. The Rwanda Revenue Authority collects approximately 15–16% of GDP in tax using a single-window collection system, electronic filing, and no politically directed exemptions.

Nigeria's 7.9% is not a measure of administrative failure alone. The ratio measures an economy in which half the activity is informal, half the elite wealth is extra-territorial, and half the revenue growth is exchange-rate fiction. The Rwanda comparison is not a prescription. Nigeria has 36 states, 774 local governments, and a federal structure that Rwanda's post-genocide centralisation does not replicate. But the comparison exposes the scale of what is left on the table. A state that cannot tax its visible economy will not tax its invisible one. The naira's trajectory makes the exchange-rate effect unavoidable. In December 2022, the CBN official rate was approximately ₦447 to the dollar. By December 2023, after the unification announced in June 2023, the NAFEM weighted average was ₦907. By December 2024, it reached ₦1,495–₦1,535.

A tax liability denominated in dollars — such as import duty on a shipment of machinery — more than tripled in naira terms over this period without the underlying shipment growing larger or more valuable. The FIRS collected that tripled naira amount and reported it as revenue growth. The machinery arrived at the same port, cleared by the same customs officers, and installed in the same factory. Only the naira number had changed. The fiscal arithmetic equation is not an opinion. The equation is a restatement of what happened when a tax base measured in a depreciating currency was reported as if the depreciation were growth. The equation names the mechanism. The mechanism names the illusion.

The Revenue Breakdown

The ₦21.6 trillion collected in 2024 can be disaggregated into three principal taxes, though the exact figures require independent confirmation against FIRS published accounts. Company Income Tax contributed approximately ₦8.3 trillion, according to FIRS CITA collection data for 2024, though this figure has not been independently confirmed against the FIRS Annual Report 2024. Value Added Tax contributed approximately ₦5.5 trillion. Petroleum Profit Tax contributed approximately ₦4.2 trillion. The remainder came from smaller levies, excises, and administrative charges. These proportions matter because they reveal which parts of the economy the state actually touches. CIT falls on formal corporations with audited accounts. VAT falls on consumption transactions captured through invoicing. PPT falls on oil companies operating under production-sharing contracts that the NUPRC regulates.

All three are taxes on the visible, the documented, and the formally incorporated. Personal Income Tax, which is administered partly at the federal level and partly by state revenue services, contributed a comparatively thin slice — approximately ₦1.4 trillion in federal collections, according to FIRS PIT data for 2024. The states collect their own PIT from residents, but aggregate state-level PIT data is not published in a single national series. The thinness of PIT is the most telling indicator of the tax system's skew. In economies with broad-based taxation, PIT is the largest single source of revenue because it captures the wages of the middle class and the professional sector. In Nigeria, the middle class is too small, the informal sector too large, and the enforcement infrastructure too weak for PIT to dominate.

The tax system taxes companies and consumption because companies and consumption are easier to find. The PPT figure of approximately ₦4.2 trillion requires particular caution. The Petroleum Industry Act 2021 restructured how oil revenue flows to the federation. Under the old NNPC regime, crude lifting proceeds were remitted directly to the federation account, minus the NNPC's own retention for operational costs and subsidy payments. Under the NNPCL Limited structure established by the PIA, the company now operates as a commercial entity. It pays taxes and royalties like any other oil company, and it remits dividends to its sole shareholder — the Federal Government — rather than crude proceeds to FAAC. This substitution changed the arithmetic of oil revenue entirely. The federation no longer receives crude cash; it awaits board-declared dividends.

The dividend substitution has produced a shortfall that FAAC documents make explicit. For 2025, the budgeted interim dividend from NNPCL was ₦2.17 trillion, equivalent to ₦271.18 billion per month. Through August 2025, the actual remittance was zero. NNPCL reported a profit after tax of ₦5.4 trillion for 2024 — a record — yet the federation saw none of the anticipated dividend flow in the first eight months of 2025. In 2025, NNPCL remitted just ₦604.61 billion to FAAC for the full year — an 86% shortfall against the budgeted ₦4.20 trillion. The World Bank Nigeria Development Update, April 2026, noted that NNPCL transferred only 50% of the revenue gains from the 2024 fuel subsidy removal: of ₦1.1 trillion in crude sales and other income, only ₦600 billion reached the federation account, leaving ₦500 billion unaccounted for.

The FAAC reconciliation report for May 2025 put the total NNPCL debt to the federation at ₦6.57 trillion. Of this, ₦3.89 trillion comprised unpaid royalties due to the Nigerian Upstream Petroleum Regulatory Commission, and ₦2.53 trillion comprised outstanding tax liabilities payable to the FIRS. An additional ₦162.33 billion represented unremitted dividends. The shift from crude proceeds to profit-based dividends under the PIA was defended as a transparency measure. What it produced was a revenue stream whose timing, quantum, and distribution are now determined by a board that reports to the Presidency rather than by statutory remittance rules. The PIA did not end NNPC opacity. It changed its legal form and kept its accounting.

The administrative capacity to enforce existing tax rules is limited, and the new reform law does not resolve this. Transfer pricing investigations require skilled auditors, legal support, and political backing. The FIRS has improved its transfer pricing unit, but it remains small relative to the scale of profit-shifting in the oil, telecoms, and banking sectors. A law is only as good as the institution that implements it, and the institutions are still building muscle. The digital services tax, in particular, depends on a definition of permanent establishment that Nigerian courts have not yet tested against the structures of global technology platforms. A multinational can route Nigerian user data through a Dublin subsidiary, book the revenue in Luxembourg, and claim that no taxable presence exists in Abuja. The FIRS knows this. Its capacity to challenge it is another matter.

The FIRS has made genuine progress in corporate compliance. Large companies now file electronically. Transfer pricing rules have been tightened. The Voluntary Assets and Income Declaration Scheme and its successors have brought some previously hidden wealth into view. But these are marginal gains in a system where the bulk of personal wealth remains unassessed. The FIRS can send a demand notice to a multinational oil company and expect payment. It cannot yet send one to a senior government official and expect the same. Until the tax net captures the personal incomes of the political and business elite with the same efficiency that it captures the wage bills of formal sector workers, the revenue story will remain incomplete. The fiscal equation is not only about how much the state collects. The equation is also about from whom the state collects, and whether the burden falls on those who can least afford to carry it.

The PPT shortfall is not merely a reporting issue. Geology and institutional failure explain the gap. NUPRC data show that Nigeria's actual crude production averaged 1.50–1.60 million barrels per day in 2024 against a budget target of 2.06 million. The 400,000–500,000 barrel-per-day gap represents approximately $15–20 billion in annual revenue at average 2024 prices. Some of that lost volume is theft, documented by NUPRC and NEITI as pipeline vandalism and illegal bunkering. Some of it is under-investment in mature fields, where international oil companies have slowed drilling because the fiscal terms of the PIA reduced their returns. The remainder is operational decay: ageing infrastructure, gas flare penalties, and disputes over cost recovery that delay new project approvals. The barrels that are not produced cannot be taxed. The PPT figure is low because the oil is not flowing, not because the tax rate is generous.

Debt as Governance

While the FIRS celebrated its record year, the Debt Management Office published a less cheerful set of numbers. Nigeria's total public debt stock stood at ₦97.34 trillion in December 2023. By March 2024, it had reached ₦121.67 trillion. By June 2024, it was ₦134.30 trillion. By December 2024, ₦144.67 trillion. By December 2025, it hit ₦159.28 trillion. The trajectory is not ambiguous. The debt line runs straight upward, interrupted only by the currency fluctuations that make the dollar denomination appear to fall when the naira collapses. External debt was approximately $42.9 billion at December 2025. Domestic debt was approximately ₦102 trillion. The federal share of the total was roughly 84%.

In FY2024, for every ₦100 the federation earned in revenue, approximately ₦96–97 went to debt service before any other expenditure — a ratio at which the state cannot fund its own operations from its own revenues.

IMF, Article IV Consultation Report, 2024; Nairametrics debt analysis, January 2026

The debt-service-to-revenue ratio of approximately 96–97% in FY2024 means that the Nigerian state is technically insolvent by any conventional fiscal standard. The state borrows to pay interest on its borrowing. The DMO's Medium-Term Debt Strategy for 2024–2027, published in 2024, raised the debt-to-GDP ceiling from 40% to 60%. At the time, the stated ratio was roughly 31% using the pre-rebased GDP series. After the National Bureau of Statistics rebased the national accounts in 2024, the ratio fell to approximately 41%. This statistical improvement did not reduce the debt by one naira. It simply enlarged the denominator. The DMO's decision to raise the ceiling to 60% was a frank admission that the old limit was about to be breached, and that the preferred response was to move the goalpost rather than to slow the borrowing.

The composition of the debt has shifted in ways that matter for risk. Domestic debt service in 2025 consumed ₦8.61 trillion, of which 95.7% was interest. External debt service was $5.15 billion — approximately ₦7.39 trillion at prevailing rates. The domestic component is expensive because the government borrows at rates well above inflation from Nigerian banks and pension funds who have few other safe assets to buy. The ten-year Federal Government bond yielded between 19% and 22% in 2024 and 2025, while inflation remained in double digits. The real interest rate was positive, which is unusual for a sovereign borrower and reflects the market's assessment of Nigerian credit risk. The external component is dangerous because it is denominated in dollars, and every naira depreciation increases the local-currency burden without adding a single dollar to the principal.

Who holds this debt matters too. Nigerian commercial banks are the largest holders of domestic government securities. The Central Bank of Nigeria holds a significant portion through its monetary policy operations and through the securitised Ways and Means advances. Pension fund administrators hold another large block, because regulatory rules require them to invest a minimum share of their portfolios in government securities. This creates a captive market: the government is borrowing from institutions that are legally or regulatorily obliged to lend. The banks profit from the wide interest margins. The pension funds earn returns that keep them solvent on paper. But the circularity is obvious. The state borrows from Nigerian savers, pays them interest with tax revenue or fresh borrowing, and calls the arrangement a financial market. The arrangement is, in part, a tax on retirement savings dressed up as investment returns.

Ways and Means advances are the shadow debt of Nigerian public finance. Under the CBN Act, the Bank may lend to the Federal Government to cover temporary revenue shortfalls, up to a limit of 5% of the previous year's actual revenue. That limit was breached repeatedly during the administration of President Muhammadu Buhari, under Governor Godwin Emefiele at the CBN. The accumulated overdraft reached an estimated ₦30 trillion by May 2023. In December 2022, the Senate approved a request to securitise the advances — converting the overdraft into long-term bonds — effectively admitting that the temporary facility had become permanent debt. The securitisation spread the obligation over forty years at 9% interest, producing an annual interest cost of approximately ₦2.7 trillion.

The Tinubu administration initially pledged to stop the practice. Fresh Ways and Means borrowing resumed in 2024, though at lower levels than under Emefiele. The exact current stock is not published in real time. The CBN includes it in monetary policy reports, but the figures lag by quarters and are buried in tables that few read. The facility remains a preferred source of emergency financing because it bypasses the DMO's transparency requirements and the National Assembly's appropriation process. The facility is debt that does not call itself debt, and therefore does not appear in the President's public statements about debt ratios. Nairametrics, in its debt analysis for January 2026, estimated that when all federal obligations are included, the true debt service-to-revenue ratio remains above 60%.

The refinancing risk is another hidden pressure. Much of Nigeria's domestic debt is in short- to medium-term instruments. As these mature, they must be rolled over at prevailing interest rates. If rates remain at 20% or higher, the cost of rollover will compound the debt service burden even if the primary deficit is eliminated. The DMO has attempted to lengthen maturities, issuing twenty- and thirty-year bonds, but investor appetite for long-duration Nigerian paper is limited. The buyers are the same captive institutions — banks, pension funds, and the CBN — who have little choice but to participate. The market is not pricing risk accurately because the market is not free. S&P Global maintained Nigeria's speculative-grade rating in 2025, citing high fiscal deficits and debt servicing costs as constraints.

Moody's and Fitch have expressed similar cautions. The multilateral financing comes with its own conditions. The World Bank's Nigeria Development Update, April 2026, was explicit about the trade-offs: macroeconomic stabilisation has been achieved at the cost of household welfare, and the fiscal consolidation that would satisfy creditors requires further revenue increases that will hurt the poor. The IMF, through its Article IV consultations, has pressed for tighter fiscal discipline, reduced CBN financing of deficits, and a more flexible exchange rate. These are orthodox prescriptions, and they are not wrong in the abstract. But their implementation in a country where 63% of the population lives in poverty, according to the World Bank, is a political choice dressed up as economic necessity. The creditors get their interest. The citizens get their VAT increase. The institutions get their stability. The poor get poorer.

The Distribution Architecture

The federation account is where the collected revenue lands before it is spent. The Revenue Mobilisation Allocation and Fiscal Commission formula, derived from the 1999 Constitution, divides the net distributable pool among the three tiers of government. The Federal Government receives 52.68%. The thirty-six states and the Federal Capital Territory receive 26.72%. The 774 local government areas receive 20.60%. These percentages are not suggestions. They are constitutional allocations, paid monthly by the Office of the Accountant-General of the Federation through the Federation Account Allocation Committee. The formula has not been fundamentally reviewed in over a decade, even as the economy has shifted from oil dependence to a more service-based structure and even as the naira's collapse has made every naira-denominated allocation worth less in dollar terms.

Oil-producing states receive an additional 13% derivation fund, separate from the FAAC split. This is the constitutional recognition that the territories bearing the environmental and social costs of oil extraction deserve a larger share of the revenue. In practice, the derivation principle has produced extreme fiscal asymmetry. Bayelsa State, with a population of approximately 2.7 million, receives derivation allocations that dwarf the FAAC receipts of Jigawa State, with a population of approximately 5.3 million. Bayelsa's monthly FAAC allocation including derivation can exceed ₦15 billion in a good oil month. Jigawa's monthly allocation is typically below ₦5 billion. The derivation formula is mechanically correct by the constitution. Its outcome is a subnational inequality that the same constitution's federal character principle was designed to prevent.

Bayelsa's governors have not transformed their derivation windfall into diversified prosperity. The state's Internally Generated Revenue was approximately ₦15–20 billion in 2023 — a fraction of its FAAC receipts. Jigawa's IGR was approximately ₦12 billion in 2023, with FAAC dependency above 90%. Both states illustrate the same structural problem from opposite ends of the revenue spectrum. Bayelsa has money it did not earn through taxation and therefore does not need to build fiscal capacity to retain. Jigawa has no money beyond what Abuja sends and therefore lacks the capital to build fiscal capacity. The FAAC system creates dependency at the bottom and moral hazard at the top. Neither outcome produces the kind of state-level governance that would justify devolving more power from the centre.

Kaduna and Sokoto provide a sharper comparison. Both are in the Northwest. Both share similar agro-climatic conditions. Both have faced banditry that has disrupted farming and trade. Yet Kaduna's IGR in 2023 was approximately ₦46 billion, while Sokoto's was approximately ₦9.1 billion. Both states receive comparable FAAC allocations per capita from the federation account. The IGR gap reflects not productivity differences but the fiscal architecture's disincentive to build a local tax base. Why would Sokoto invest in the political cost of tax collection when FAAC arrives monthly regardless? Why would Kaduna, which has built a more effective revenue service, not simply free-ride on the same transfer? The answer is that some governors treat state office as an administrative extension of federal patronage, while others treat it as a platform for local state-building. The FAAC formula does not distinguish between the two.

The NNPCL dividend substitution has made the distribution architecture even more fragile. Under the pre-PIA system, crude proceeds flowed to the federation account automatically, before the FAAC split was applied. Under the PIA, NNPCL retains crude sales revenue, pays its costs, declares profits, and then remits dividends to the Federal Government as sole shareholder. The states and local governments receive no direct share of NNPCL dividends unless the Federal Government chooses to include them in its own FAAC contribution. In 2024 and 2025, NNPCL failed to remit the budgeted dividends anyway, so the question of sharing them did not arise. But the structural point remains: the PIA concentrated oil revenue ownership in the Federal Government and removed the automatic flow that the states had come to depend upon. The states received the liability of reduced FAAC without the compensating authority to tax the oil economy themselves.

The tax reform law signed by President Tinubu in June 2025, effective January 2026, proposes to adjust this architecture. It streamlines the multitude of taxes — some estimates put the total number of distinct taxes at over sixty — and introduces a gradual increase in the VAT rate from 7.5% toward a higher target. It also proposes a more centralised revenue collection architecture, with the FIRS taking a stronger role in administering taxes that have historically been collected by state revenue services. The opposition from state governors was immediate. Many saw the centralised collection provisions as a threat to their fiscal autonomy. The debate exposed a structural tension that no tax law can resolve: the Federal Government needs more revenue to service its debt, while the states need more revenue to pay salaries and build local infrastructure, and neither level of government trusts the other to administer the collection fairly.

The personnel budget is another source of fiscal drag that the distribution architecture cannot escape. The Federal Government employs hundreds of thousands of workers, many of whom are redundant or ghost workers on payrolls that have never been fully audited. Various administrations have promised to sanitise the payroll through biometric verification and bank verification number matching. Some progress has been made, but the savings have been modest. The civil service is both an employer of last resort and a patronage network. Reducing it requires political courage that no recent administration has displayed. Instead, the wage bill grows annually, absorbing revenue that could fund classrooms and clinics. In 2024, the National Assembly appropriated ₦197.2 billion for its own operations while the National Primary Health Care Development Agency struggled to release basic vaccine funds to states.

The Lagos model demonstrates that fiscal autonomy is possible within the same constitutional framework. Lagos State's IGR of approximately ₦661 billion in 2023 exceeded the combined IGR of the bottom twenty states. Lagos built this capacity through decades of investment in its State Internal Revenue Service, starting from the Bola Tinubu governorship era in 1999–2007, when the state began treating tax administration as a technical rather than a political function. The result is a state that could survive without FAAC if it had to, and that uses its FAAC receipts as supplementary rather than primary income. No northern state has replicated this model, not because the constitutional powers are different, but because the political incentives point toward Abuja dependency rather than local extraction. The FAAC formula makes every state a revenue sharer. It does not require any state to become a revenue builder.

The constitutional review that would alter these incentives has not happened. Derivation was reduced from 50% at independence to 13% today. State creation accelerated from three regions in 1960 to 36 states plus the FCT today, each with a governor, a house of assembly, a civil service, and a capital city to maintain. The fiscal architecture expanded its consumption requirements faster than its production base. Every new state created since 1967 has increased the number of hands reaching into the federation account without increasing the number of hands contributing to it. The result is a federation in which the federal government collects most of the revenue, the states spend most of what they receive, and the local governments — constitutionally recognised but fiscally emasculated — wait for monthly allocations that pass through state treasuries and often arrive diminished.

The consequence is a culture of impunity that infects every level of public finance. When the Auditor-General identifies unsupported payments, the ministries concerned promise to provide documentation. When the documentation never arrives, the matter is forgotten. When the National Public Accounts Committee summons officials, they send representatives who plead ignorance. The cycle repeats annually, producing thicker reports and identical outcomes. The institutions of oversight exist. What is missing is the enforcement mechanism that would convert findings into consequences. Without that, audit is theatre, and the audience stopped watching long ago. The informal sector remains stubbornly outside the tax net, and attempts to formalise it meet resistance that is often misread as evasion.

The street trader in Onitsha, the mechanic in Kano, and the hair braider in Port Harcourt — these are not wealthy tax dodgers. They are survivors of a state that delivers little and demands much. When the Lagos State Internal Revenue Service or its equivalents in other states conduct enumeration drives, they encounter not criminality but calculation. The trader weighs the cost of registration, the risk of harassment by revenue agents, and the probability of receiving any public good in return. The arithmetic usually favours remaining informal. This is not a failure of tax policy. Informality is a rational response to a broken fiscal contract. The FAAC system distributes revenue without requiring the states to build the local tax bases that would make public spending accountable to local citizens.

The Expenditure Mirror

If revenue is one side of the ledger, expenditure is the other, and it is here that the fiscal equation reveals its most confusing passages. The Federal Government's budget has grown in nominal terms every year, but the share allocated to capital projects has shrunk as a proportion of the total. Recurrent expenditure — salaries, pensions, overheads, and debt service — consumes roughly 80% of the federal budget. Capital expenditure, which builds the roads, schools, and hospitals that might justify higher taxes, gets what is left. In 2025, debt service alone exceeded the entire capital budget. The state was spending more on interest than on infrastructure. The revised 2024 Appropriation Act, passed in December 2025, appropriated ₦43.56 trillion. Of this, ₦8.27 trillion was for debt servicing, ₦11.26 trillion for recurrent non-debt expenditure, and ₦22.27 trillion for capital expenditure. But appropriation is not release.

The cost of governance is a specific category that deserves its own line item. The National Assembly appropriation was ₦168.5 billion in FY2024 and rose to ₦197.2 billion in FY2025. Divided across 469 lawmakers, this yields approximately ₦420 million per legislator per year. BudgIT, the Nigerian civic tech organisation that tracks budget implementation, has consistently found that overhead allocations are among the most fully executed items in the federal budget, while capital project releases lag by quarters or years. The mechanism is simple: recurrent spending is easier to disburse than capital spending. A salary payment requires a bank transfer. A road contract requires procurement, contractor selection, supervision, and certification. The bureaucracy executes what is easy and defers what is hard, producing budgets that look ambitious on paper and anaemic on the ground.

Budget padding is the legislative complement to this executive inertia. In the 2024 Appropriation Act, BudgIT identified 7,447 projects inserted by the National Assembly, with a cumulative value of ₦2.24 trillion. Of these, 55 projects costing at least ₦5 billion each accounted for ₦580.7 billion. The insertions included ₦212 billion for streetlight installations and ₦82.5 billion for boreholes — projects with no specific locations, no implementation frameworks, and no monitoring mechanisms. Senator Abdul Ningi, representing Bauchi Central, alleged in March 2024 that a parallel budget of ₦3.7 trillion had been inserted without proper documentation. The Senate suspended him for three months. The allegation was dismissed as false, but BudgIT's subsequent analysis confirmed that legislative insertions far exceeded the ₦100 billion envelope officially earmarked for zonal intervention projects.

The Auditor-General of the Federation, in the Annual Report on Non-Compliance and Internal Control Weaknesses covering 2020–2021, documented irregular payments for contracts totalling ₦197.72 billion across various ministries, departments, and agencies. The Nigerian Bulk Electricity Trading Plc accounted for ₦100 billion in payments for jobs or contracts that were either partially executed or not executed at all. The Rural Electrification Agency recorded ₦2.12 billion in irregular contract awards. The Nigerian Security Printing and Minting Company Plc was responsible for ₦14.14 billion in due-process violations. These are not allegations. They are audit findings, tabled in the National Assembly and referred to the Public Accounts Committees of the Senate and the House of Representatives. No senior official has been prosecuted on the basis of an Auditor-General's finding in recent memory. The cycle produces thicker reports and identical outcomes.

The Open Treasury Portal, launched in December 2020 by the Minister of Finance, was supposed to change this. The portal publishes daily payment reports, budget implementation data, and financial statements for federal ministries, departments, and agencies. In principle, any citizen can view payments of ₦10 million or more, identifying the MDA responsible, the beneficiary, the purpose, and the amount. In practice, the portal is a partial window. BudgIT's analysis of 2019 data — the most recent year for which comprehensive civic audit was conducted — found 275 payment records with a value of ₦43 billion that lacked beneficiary names entirely. Over 5,000 payment records, worth ₦278 billion, had no descriptions. Some entries showed only amounts, with no ministry, no organisation, and no beneficiary named.

The platform runs on downloadable Excel spreadsheets rather than a searchable database, meaning a citizen who wants to track a single contractor across a year must manually consolidate 365 daily files. The 2025 budget repeated the pattern at a larger scale. BudgIT's analysis of the 2025 Appropriation Act found National Assembly insertions totalling ₦6.9 trillion — more than triple the 2024 figure. These insertions were distributed across 326 MDAs, many of which lacked either the mandate or the technical capacity to implement the projects assigned to them. A constituency project for a rural health centre might be inserted into the budget of a federal university, which has no medical faculty, no construction unit, and no presence in the constituency.

The university receives the allocation, contracts the project to a nominee of the legislator who inserted it, and takes a management fee. The health centre is never built. The accounting trail disappears into the MDA's overhead. The Open Treasury Portal would show a payment from the university to a contractor. It would not show that the contractor built a fence around an empty plot and called it a clinic. What the Open Treasury Portal deliberately excludes is as telling as what it includes. It does not publish procurement process data — the bidding documents, the evaluation criteria, or the contract award justifications. It does not show certificate-of-completion records that would verify whether a paid project was actually delivered. It does not link payments to geo-tagged project locations.

It does not include state government expenditures, even though states spend approximately half of all public money in Nigeria. It does not cover the security vote allocations that consume billions of naira annually without itemisation. The portal was designed to increase transparency, but its architecture stops precisely at the point where transparency would become accountability. A citizen can see that ₦10 million left the Ministry of Works. She cannot see whether the road was built, whether the contractor existed, or whether the certificate of completion was genuine. Subsidies, despite the celebrated removal of petrol subsidies in May 2023, have not disappeared. They have migrated. The CBN continues to subsidise the naira through its foreign exchange interventions, though the scale has diminished since the float.

The power sector receives implicit subsidies through the failure of distribution companies to remit full tariffs to generation companies, a gap that the Federal Government periodically promises to fill with budgetary allocations that rarely arrive in full. The petrol subsidy removal saved an estimated ₦3–5 trillion annually, according to Budget Office estimates, but the fiscal space created was immediately absorbed by debt service, naira defence, and the rising cost of governance. The typical Nigerian household saw petrol prices rise from roughly ₦185 per litre to over ₦600, then to over ₦1,000 in some periods, without a corresponding improvement in electricity supply, transport infrastructure, or social services. The migration of subsidies from petrol to exchange rate to power sector arrears demonstrates a structural pattern: the Nigerian state does not eliminate subsidies. It relocates them to less visible ledgers where the accounting is harder to trace and the political cost is lower.

A petrol subsidy is visible at the pump. A power sector subsidy is invisible in the gap between NERC-approved tariffs and NBET-collected revenues. An exchange rate subsidy is invisible in the difference between the NAFEM rate and the rate at which the CBN settles priority import demands. The citizen pays for all three, but only the first appears in the budget. The capital budget itself is not immune to distortion. Projects are often selected for political visibility rather than economic return. A road to a minister's hometown gets priority over a road to a port. A hospital renovation in the capital gets funded while primary health centres in rural areas lack basic supplies. The Budget Office publishes capital release data, but the connection between budget allocation and project completion is weak.

BudgIT's Tracka platform has documented hundreds of constituency projects that were paid for but never executed, or executed so poorly that they collapsed within months. The money leaves the treasury. It does not always arrive at the site. In FY2025, the Federal Government appropriated ₦18.53 trillion and released ₦834.8 billion against that appropriation by July 2025 — a capital budget execution rate of 7.72%. The remainder sits in appropriation acts and accounting ledgers, not in asphalt, concrete, or classrooms. The personnel budget is protected from this execution failure by its political salience. Civil servants vote. Contractors do not. A delayed road project angers commuters who may never know which ministry was responsible. A delayed salary payment angers organised workers who know exactly whom to blame.

The political system responds rationally to these incentives: salaries are paid first, overheads are paid second, and capital projects are paid whenever the bureaucracy gets around to them. In 2025, the Federal Ministry of Works received ₦2.21 trillion in appropriation — against a maintenance need of ₦700 billion for roads alone, according to FERMA. The FIRS collected ₦21.6 trillion in 2024. The distance between those two numbers is not a gap in ambition. That distance is a gap in institutional architecture. The money is collected. The money is appropriated. The money is not spent on the things that would make collection worthwhile. The fiscal equation is not solved by increasing revenue alone. The equation is solved by converting revenue into roads, schools, and salaries that are paid on time and in full.

The Reform That Changed the Numbers

In June 2025, President Tinubu signed into law a comprehensive tax reform bill, with most provisions effective January 2026. The law aims to raise Nigeria's tax-to-GDP ratio to 18% over the medium term. It introduces a gradual increase in the VAT rate from 7.5% toward a higher target, though the exact terminal rate was left to subsidiary regulation. It also proposes changes to corporate tax administration, including a minimum tax for companies that report losses and new rules for taxing digital services. These provisions are sensible in principle. Nigeria loses significant revenue to multinational corporations that shift profits to low-tax jurisdictions, and the digital economy has grown large enough that its exclusion from the tax net is no longer tenable. The reform addresses real problems with real mechanisms.

The timing of the reform compounds its risk. The VAT increase takes effect in January 2026, when inflation is still projected in double digits and when the naira exchange rate remains volatile. Households that have already absorbed a 289% nominal increase in the minimum wage — from ₦18,000 in 2019 to ₦70,000 in 2024 — have seen that increase eroded by exchange rate depreciation and food inflation that reached 40.53% in April 2024. The real purchasing power of the ₦70,000 wage in July 2024 was approximately equivalent to the ₦18,000 wage in 2019, when both are converted to dollars at prevailing rates. A VAT increase on top of this compression does not broaden the tax base. It deepens the burden on a workforce whose wages have already been confiscated by inflation.

The centralised collection provisions have sparked a constitutional debate that the reform law does not resolve. Under Nigeria's federal structure, states collect Personal Income Tax from residents and have historically administered their own consumption taxes. The reform law threatened to consolidate these into a federal framework with revenue-sharing formulas that the governors feared would favour the centre. The Revenue Mobilisation Allocation and Fiscal Commission was drawn into the dispute, with governors demanding that any VAT increase be matched by a review of the vertical allocation formula. The Federal Government resisted, arguing that the centre needed more revenue to service federal debt. The stand-off produced a compromise: the VAT rate would rise, but the revenue-sharing formula would be reviewed in a separate process with no fixed deadline. The compromise bought peace. It did not buy reform.

The Manufacturers Association of Nigeria, in statements issued in June and July 2025, warned that higher VAT would raise production costs at a time when manufacturers were already spending ₦1 trillion annually on self-generated power and coping with input prices inflated by naira depreciation. MAN's quarterly sectoral surveys for 2024 and 2025 showed capacity utilisation hovering between 55% and 60%, well below the levels needed for profitability. The association argued that any tax increase should wait until infrastructure and exchange rate stability had been achieved, a position that implicitly asked whether the state expected to be paid before it delivered the services that would justify the bill. The VAT increase is particularly consequential for poverty. VAT is a consumption tax, and consumption taxes are regressive by design.

The reform law includes exemptions for basic food items and some agricultural inputs, but the implementation of exemptions in Nigeria has historically been weak. Borderline products — processed foods, packaged goods, cooking gas — tend to be taxed at the standard rate because retailers and wholesalers lack the administrative capacity to distinguish exempt from non-exempt items. The World Bank Nigeria Development Update, April 2026, cautions that without robust targeting mechanisms, the tax reform could increase poverty in the short term even as it raises revenue. The same report notes that household incomes have not grown fast enough to offset still-elevated inflation, and poverty has yet to begin declining. Adding VAT to that equation is a gamble whose losers have already been identified. The reform's defenders argue that short-term pain is the price of long-term capacity.

This argument would be more persuasive if the long-term capacity had been demonstrated in any previous reform. Since 1986, every incoming administration has produced an economic plan — and every plan has correctly diagnosed the same ailments. The diagnosis has never been the constraint. The constraint has been the institutional architecture that converts correct diagnosis into incorrect execution. The tax reform law of 2025 changes the numbers on the revenue side. It does not change the institutions on the expenditure side. A state that collects 18% of GDP in tax but still spends 80% of its budget on recurrent costs and debt service will be no more capable of building a road than a state that collects 8%. The fiscal equation is not solved by increasing the left-hand side. The solution lies in changing what happens on the right.

What the tax reform law does not address is the expenditure side of the ledger. Raising revenue without reforming procurement, without reducing the cost of governance, without converting debt service into capital investment, is simply asking Nigerians to pay more for a state that functions as poorly as it did when they paid less. The reform may succeed on its own terms. The FIRS may hit its ₦25.2 trillion target for 2025 or its successor targets for 2026. The DMO may keep the debt-to-GDP ratio below 60%. But if the additional revenue is consumed by interest payments, recurrent expenditures, and the operating costs of a government that has grown in size without growing in capacity, then the fiscal equation will simply have added another variable. The arithmetic will still show a state that collects more and delivers less.

The numbers do not lie, but they do not tell the whole story either. Nigeria collects more than it ever has. It owes more than it ever has. And its citizens are poorer, in real terms, than they were when the collection began. The connection between revenue, debt, and welfare is not automatic. Institutions mediate that connection, deciding who pays, who borrows, who spends, and who benefits. Those institutions are the real subject of this chapter, even when the text has been about percentages and trillions. A tax system is only as good as the state it feeds. A debt portfolio is only as sustainable as the growth it finances. And a fiscal reform is only as meaningful as the change it produces in the daily life of a citizen who has heard many promises and seen few roads.

The NBS 2020 Poverty Profile found that the Northwest, which receives the same federal allocations per capita as Lagos, has a poverty rate of 77.7% against the Southwest's 12.1%. The distribution of the federation account revenue — mechanically correct by the RMAFC formula — produces an outcome that is, by every human development indicator, catastrophic for one half of the country. That distribution is not accidental. Chapter 8 maps the ledger.

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