8 January 2013

Nigeria: Fiscal Cliff - FSDH Warns Against Revenue Slide

Following the agreement reached to avoid 'fiscal cliff' in the United States, the FSDH Securities Limited has advised the Federal Government to be cautious due to the country's strong reliance on crude oil as source of revenue.

FSDH stated this in its latest report made available to THISDAY Monday.

The United States last week averted the looming fiscal cliff as President Obama signed into law a compromise bill, the American Taxpayer Relief Act of 2012, approved by Senate and the House of Representatives.

The fiscal cliff, with its January 1, 2013 deadline, was put in place in 2011 as motivation for Obama's administration and Congress to reduce the lingering US budget deficit. The Act maintained and made permanent the Bush administration's tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000.

However, tax rates increased for individuals earning above $400,000 and couples earning more than $450,000 from 35 per cent to 39.6 per cent, and will raise about $600 billion in new revenue over 10 years according to various sources. The population subject to the new tax rate increase constitutes only two per cent of the American population leaving a majority of "Americans" unaffected.

FSDH said: "Nigeria currently relies on the sales from crude oil exports as a major source of revenue. Therefore, the health of the US economy is crucial to the level of demand and consequently determines the price of oil. The US accounts for about 12.27 per cent of Nigeria's export and 13.30 per cent of Nigeria's total oil exports."

According to World Bank data, household consumption has historically accounted for about 70 per cent of US Gross Domestic Product (GDP). Therefore, it remained crucial for the well-being of the US economy that the purchasing power of most "Americans" was not affected in order to avoid economic recession.

On the other hand, the Act will also delay for two months the threat of sequestration - a series of automatic, across the board cuts in federal spending and extend federal unemployment benefits for a year without a budget offset elsewhere.

Also, Federal unemployment benefits would be extended for a year for people actively looking for jobs. Economists predicted that a combination of tax increases and spending cuts could have sent the US economy back into recession and increased unemployment rate.

The World Bank Group estimates that the US Economy accounts for about 25 per cent of world's GDP.

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