Fiscal Federalism and Development In Nigeria
DORCAS AkHERE ODIGWE AND STANLEy AIbIEyI
Abstract
It is a known fact that the nature of fiscal federalism the military government imposed on the nation has no regards for the source of production and revenue generation. This was as the result of constitutional empowerment that put the federal government in charge of payment and tax collection.This has gone a long way to hamper revenue generation effort and subject states as agents of federal government. Despite various committees and commissions’ recommended principles and formula, conflict are still brewing. Though previous scholarly works have been geared towards the adoption of an acceptable revenue sharing formula for equity and fairness to take its root, but what is obtainable generates internal ramblings in the polity, cold war amongst the various ethnic groups and a yardstick in understanding lack of sustainable development in the country. In the course of finding solution to this problems, this paper focuses on the following issues: Nigerian fiscal federalism, effect on development, its importance to national development, summary of the existing various principles and sharing formula, the contending issues, objective of fiscal relations and theory of fiscal federalism. The system approach was used in analysing the various component in its theoretical framework. Historical method was used in gathering data and documentary analysis was used to analyse secondary data to arrive at conclusion which recommendations were made for an enhanced fiscal federalism for a sustainable development.
Keywords: fiscal federalism, development, revenue, Nigeria, government.
Sumário
É um fato conhecido que a natureza do federalismo fiscal do governo militar imposta à nação não tem relação com a fonte de produção e geração de receita. Este foi o resultado de empoderamento constitucional que pôs o governo federal responsável pelo pagamento e cobrança de impostos. Este sistema impediu, por muito tempo, o desenvolvimento de esforços de geração de receita e sujeitou o estado como agente do governo federal. Apesar das várias comissões propostas e fórmulas recomendadas, os conflitos ainda persistem. Vários estudos académicos apontam para a adoção de uma fórmula de partilha de receitas aceitável para equidade e justiça. Todavia, o que pode se observar são divergências internas nas políticas, entre os vários grupos étnicos e um critério na compreensão sobre a falta de desenvolvimento sustentável no país. No processo de busca de solução para este problema, este artigo centra-se sobre os seguintes temas: federalismo fiscal nigeriano, o efeito sobre o desenvolvimento, a sua importância para o desenvolvimento nacional, resumo dos vários princípios existentes e
compartilhar fórmula, sobre as questões em disputa, assim como o objetivo das relações fiscais e a teoria do federalismo fiscal. A abordagem do sistema foi utilizado na análise dos diversos componentes em seu quadro teórico. O método histórico foi utilizado na coleta de dados e análise documental foi utilizada para analisar os dados secundários para chegar à conclusão de que recomendações foram feitas para um federalismo fiscal reforçado para um desenvolvimento sustentável.
Palavras-chave: federalismo fiscal, desenvolvimento, receita, Nigéria, governo.
Introduction and Background
Historically, Nigeria as a country began as a unitary state due to the mistake (in the view of some people) of the 1914 amalgamation. Federalism has been in Nigeria since the former British Colony was reorganised into a federation of three regions by Arthur Richard, who succeeded Bernard Bordello in 1939 and as a result, laid the foundation of federalism in Nigeria in 1946. The British merged the northern and the southern protectorates for economic reasons. Through Macpherson’s constitution of 1951 and the Littleton federal constitution of 1954, the country became a federal state with regional autonomy; the balance of power was tilted in favour of the regions in the first republic. In this context, the process and principles of revenue sharing in Nigeria have remained a very contentious issue since 1946. According to Offiong (2012), from 1946, derivation was reduced from 100% to 50% by Philipson Commission’s recommendation in 1951. The Raiseman Commission set it at 50% in 1958. In 1960, it remained at 50%, and General Gowon reduced it to 45% in 1970. It was further slashed in 1975 to 20%. Obasajo/Yar’Adua’s administration raised it to 25%. Shehu Shagaria reduced it to 5% in 1981, while General Buhari later crashed it to 1.5%. General Babangida pretended to raise it to 3%. Ken Saro Wiwa’s pressure forced the government to raise it to 13% as reflected in Nigeria’s current constitution. Military intervention in 1966 and its Decree Number 9 of 1971 and Decree Number 51 of the 1969 Petroleum Act bestowed ownership of both solid minerals and oil to the federal government. It allowed 100%
offshore rents and royalties to go to the federal government. Decree Number 13 of 1970 also created an atmosphere where the federal government could amass enough wealth to tackle the problem of public expenditure after the civil war with the aim of reducing funding for lower levels of government, and these decrees imposed and changed the phase of federalism, and its fiscal relations (Offiong, 1999). The fiscal practice has discouraged internal revenue generation in the country. Therefore, the result has been under development and poor economic growth due to neglect in the agrarian sector and over dependence on single products to meet the needs of the federal units. Fiscal federalism aims at managing conflicts in a heterogeneous society (Kayode, 2014). It is the system of revenue generation, allocation and redistribution within a federal system.
Development is when a country is progressing in terms of infrastructure and technology to improve the standard of living of its citizens. Thus, sustainable development could only be achieved and
well sustained through proper policy implementation in an atmosphere where the federal units manage and are in full control of available resources. But in a bifurcated society such as Nigeria, the federal system patterned after the American model would go a long way to shape the nations’
dwindling fiscal federalism, perceived to be a mirage by its alienated citizens.
This work examines the Nigerian fiscal federalism, problems associated with the sharing formula and allocation principles, and suggests a way forward to reduce internal contradictions in the polity.
Theoretical Framework
The theoretical framework for this work utilises the system approach in analysing the various components of fiscal federalism and development in Nigeria. This approach outlines the environment as a system with component parts that is dependent on each other to function properly in order to achieve its goals. It outlines the political activities as involving the environment, the political system and output. The environment consists of objective conditions and forces that generate demands and output (Ikelegbe, 2006). The organisation and its parts interact and depend on each other to achieve its purpose, and when one part is faulty, the others will not work or will stop. This means various political institutions that allocate resources are attributes of the environmental inputs. The manner in which a nation allocates its resources has a long way to go in determining the nature of development of that nation.
The Nigerian situation concerning revenue allocation falls within this framework; hence in a situation where one part happens to have a problem or is not functioning properly, the other parts will not function at full capacity. The nature of fiscal federalism currently practiced in Nigeria, where the Federal government dictates the tax, the tax base and sharing formula within the three levels of government and expands its fiscal jurisdiction with little or no fiscal responsibilities, has left the lower levels of government with enormous responsibilities but without fiscal power. This is the fiscal position of the states and the local government in Nigeria, which is bound to malfunction and lacks sustainable development.
Literature Review
The history of Nigeria’s fiscal politics emerged since the Macpherson’s Constitution of 1951 and Littleton’s Federal Constitution of 1954 made Nigeria a federal state, where there was regional autonomy and derivation was based on the contribution of each region. Military intervention in politics in 1966 created a ‘lacuna’ in the nation’s fiscal matters. Previous scholars have focused on the structure, nature and revenue principles adopted over the years, while this study’s major focus is on the nature, trends, structure of fiscal practice, and its effect on development in Nigeria. Fiscal federalism is the division of taxing and expenditure functions among levels of government (Hyman, 1990). Oriakhi (2004) made a finding that due to the organisational chain of command inherent in the federal structure, it is usually possible for the government to allocate more money to itself to the detriment of other regions. Due to this mismatch between the expenditure obligation and
the revenue sources of various tiers of government, especially the lower levels, revenue allocation was used as a mechanism for redressing the imbalance between expenditure obligations and revenue sources. Offiong’s (2013) conclusion was that the revenue allocation within the lower tiers of government has been lopsided through the criteria used in allocation and these two tiers of government have been treated like appendages due to the highly restricted revenue powers and there is a heavy dependence on federal government for survival. Bird (1979) argues that fiscal federalism in Canada is based on four factors, which include: shared cost programmes, tax collection agreements, established programme financing and equalisation. Mbanefor, et al, (1999) is of the view that fiscal federalism in Nigeria is different from other federal states; since 1992, the sharing formula remained at 48.5%, states 24% and the 774 local government are entitled to an annual allocation of 20%. The Nigerian state practices a quasi-federal political system where federal government dominates the states and the states in turn dominate the local government, undermining the constitution of the country. The leaders practice an advanced unitary system, which has affected the nature of fiscal federalism in the country (Dibie, 2014). This development encourages irresponsibility among the various units, thereby hampering meaningful development.
The national government is better at handling issues of equitable distribution of income and maintaining high employment while the regional government is better at distributing resources efficiently. In the same vein, many scholars have used different methods in their analysis, for example, Jimoh (2003), using regression analysis on the impact of decentralisation of government expenditure on the level of economic activities in Nigeria, is of the view that more decentralised governance would stimulate economic growth, with economic and population a preponderance of poverty. Kayode (2014) focused on four principles in addressing the core issues of Nigerian fiscal federalism and development, which include the principle of accommodation, correction of spillover effect, a social safety net, and the principle of derivation. The study found that the country’s fiscal problem could be addressed from its historical origin and the character of the fiscal arrangement, as well as politicisation of the revenue-sharing formula that encourages a constant inequitable federalism, both vertically and horizontally. The study also concluded issues of rent-seeking, corruption, cost and balance merit, with the diminished principle of derivation as a sharing formula since the discovery of oil created the perceived imbalance in the system. Olofin et al (2012) made a concrete discovery in their study in evaluating the differences in revenue allocation at the states and local government level in Nigeria from 1999 to 2008. They found that the South-East zone benefitted less than other zones from statutory allocation; the Northwest zone benefited more in the case VAT; the North-Central zone was the smallest beneficiary; and the oil-producing states received the largest statutory allocation. According to Ojeifa (2004), military intervention in politics changed the fiscal practice where unscrupulous decrees were made, which vested the power of ownership within the federal government in the oil and mineral resources of the country. The study also found that lack of diversification and over centralisation of resources; the failure of the present 1999 constitution to address this issue; and the stance on resource control agitations from leaders from Niger Delta regions, which has been intimidation and blackmail, is a contributing factor to
underdevelopment. Centralised government is highly favoured in all revenue allocation formulae and this has gone a long way in affecting the economic survival of all the states’ governments.
The Nigerian economy is dependent on one product – oil in the Niger Delta – but the citizens of this region are poor and susceptible to all forms of hazards and environmental degradation, and adoption of derivation in the nations’ revenue sharing formula (Omotoso, 2010). States suffer most due to a high level of mismatches in taxing and responsibilities attributable to a high concentration ration of both expenditure and revenue (Aigbokhan, 1999). The area of distinction in our research is that we concentrated on the effect of the available formula on development of the composite units. This was done through the utilisation of historical method and documentary analysis of secondary data.
Conceptual Clarity
Understanding federalism as a larger concept will make it easy to understand the concept of fiscal federalism. Federalism, in principle, as earlier noted by Kayode (2014), can be used to manage conflict in a heterogeneous society. It is perceived to serve as a medium point between oneness and separation, and to bring about unity in diversity. Federalism is derived from the Latin word ‘foedus’
meaning covenant. It is a political concept in which members are united together by a covenant with a governing body; it is also a system of government in which the sovereignty is constitutionally divided between the levels of government (Arowolo, 2011). According to Wheare (1953), federalism is the method of dividing powers so that general and regional governments are each within a sphere, are co-ordinated and independent. Federalism is an arrangement whereby powers in a multi-national country are shared between a federal government and component units in a way that each unit exists as a separate unit independent from others, operating within the territory and with a will to conduct its own affairs and with authority in exclusive matters (Sagay, 2008). In federalism, each unit exists as an independent entity without sacrificing its own freedom; each state is autonomous, has the power to raise revenue and develop using resources at its disposal.
Fiscal federalism is the fiscal relations and transaction between the three levels of government.
Herber (1979) looked at fiscal federalism as the division of fiscal powers between sovereign levels of government in a federation. It is a system that refers to the existence in a country of more than one level of government, each with different expenditure responsibilities and taxing powers (Okigbo, 1969). Fiscal federalism is a framework for allocating responsibilities to different levels of government and the necessary fiscal instrument for carrying out these functions. According to Sharma (1995), fiscal federalism constitutes a set of guiding principles, a guiding concept that assists in the design of financial relations between the national and the sub-national levels of government. Thus, fiscal federalism is the system of revenue generation, allocation and redistribution among the federating units in a federal system that creates room for regional fiscal autonomy.
The concept of development is used interchangeably with economic and national development.
Development means a continuous improvement of what is already in existence; it has to do with progressing in one’s choice, effort and opportunity, which consists of an upward movement of
goal expectation. When looking at the concept from the nature of services delivered to the people by the government, development could be said to be a condition where things are adequately improving. Also looking at it from a gross income perspective, development is the attainment of the socioeconomic progress or advancement at a particular period. To buttress this point, Walter (1979) asserted that development means a capacity for self-sustaining growth. It means that an economy must register advances that in turn will promote further progress. National development, according to Woodhall (1985), is the improvement of a country’s productive capacity through changes in social attitudes, values and behavior, and finally, changes towards social and political equality and eradication of poverty. Development is not only about a mathematical and statistical increment in a country’s gross product (GDPs) but basically a progressive improvement in the living conditions of a people and their environment (Kayode, 2014). Development entails modernisation and civilisation, especially on existing structures, to improve the standard of living of the people. Development is when the government has put in place amenities that allow citizens to achieve self-actualisation and it reflects happiness and fulfilment. According to the World Bank (2015), development is considered sustainable when it is inclusive and environmentally friendly in the reduction of poverty and meets the needs of both the present and future generations. It anchors itself on economic growth, environmental stewardship, and social inclusion of all sectors of development such as agriculture, infrastructure, energy and many others. Thus, development must be inclusive; the local levels must be included if any goals are to be achieved.
On a similar note, economic development has to do with improvement in the standard of living.
It includes the process in which a nation’s economic, political and social well-being of its people, can be seen in terms of the progress or indicators such as literacy rates, life expectancy and poverty rates (Sullivan and Schifrin, 2003).
Conclusively, development is an increase in infrastructure technology and a transition from traditional state to modern one, improved healthcare and quality education. It must register advancement, meet the aspirations and needs of the people, and include the lower levels of government and the willingness of the nation to contribute towards its sustainability. Economic development is an increase in a nation’s capacity to produce goods and services, and improvement in infrastructure and living conditions of the people.
Materials and Method
In order to collect valid and verifiable data for this research, the historical descriptive approach was utilised to gather data from journals, textbooks, newspapers, online materials, etc. Through this method, we were able to analyse collected data from both past and present events to determine future results. Historical method is the systematic collection and objective evaluation of data related to past occurrences. Hence, the researcher can only have knowledge of the past event through the application of scientific objectivity to explain the event. The research work also utilised documentary analysis to analyse secondary data to arrive at a conclusion. Through these methods, focus was on the nature of Nigerian Fiscal federalism, issues, the various existed
commissions and committee’s outcome from 1946 to the present democratic dispensation and its effect on development. A contribution was made through the study towards an improved fiscal federalism and sustainable development.
Theory of Fiscal Federalism
The basic foundation for the theory of fiscal federalism was laid by Richard Musgrave (1959) and Paul Sadweh Samuelson (1955) on the theory of public goods and on public finance, which provided the framework for what became the acceptable role of the state in the economy that was later known as ‘Decentralization Theorem’ to correct market failure, also ensuring equitable distribution of income to maintain stability in the macro-economy at full employment and stable prices. As Ozon-Eson (2005) noted, the government is expected to intervene where the market mechanism of laissez faire fails due to the characteristics of public goods, is seen as a custodian of public interests, and should provide social welfare on the basis of ensuring electoral success in a democratic society. According to Oates (1995), the theory of fiscal decentralisation tends to focus on situations where different levels of government provide efficient levels of public goods output, and where goods with benefits include several activities according to their geographical jurisdiction. He asserts further that this role of government in maximising social welfare through public goods should be assigned to lower levels of government and the central government should be in charge of income stabilisation and distribution of local public goods with inter- jurisdictional spillovers. Through this role assignment based on the theory of fiscal federalism, the central government is expected to ensure equitable distribution of income, maintenance of macroeconomic stability and the provision of public goods at the national level. The lower levels of government are to concentrate on the provision of local goods while the national government will render assistance through grants in aid, especially in emergency situations. There was a need to determine the appropriate taxing powers (Ozon-Eson, 2005).
According to Gordon (1983), emphasis is laid on an extensive application of no benefit taxes on mobile factors at decentralised levels of government, which could lead to instability in locating economic activities. He went further to say that when assigning functions, taxes should allow for effective implementation when assigned to lower levels of government. Ozon-Eson (2005) examined the need to prescribe taxes to decentralised levels of government to promote economic efficiency in dealing with mobile economic units like firms and individuals. Through this theory, there is fiscal equalization, which is a form of transfer made by the federal government to other levels of government to compensate different tax capacity and also to render help to poor regions.
Summarily, the traditional theory of fiscal federalism lays out a general normative framework for the assignment of functions to different levels of government and the appropriate fiscal instruments for carrying out those functions. At the general level, this theory contends that the central government should have the basic responsibility for the macroeconomic stabilisation function and for income redistribution by assisting the poor through adequate provision of basic socioeconomic needs.
Importance of Fiscal Federalism to National Development
Fiscal federalism as a system of generation, allocation and the redistribution of revenue in a federal system of government, cannot be overemphasised. Fiscal federalism serves as an important tool for economic development. Countries like Colombia, through fiscal decentralisation of most of its spending on social services, is done at the local level and when the country development plan gives priority to social sector spending. Decentralisation is an important part of its social strategy (Wiesuer, 1995) concluded. A well-designed policy framework of decentralisation leads to improvement in spending on social services and this well-controlled system of local government transfers the local spending on social services, which is helpful to the population in a number of ways. Olaleye and Olowu (1989) also enumerated the importance of fiscal federalism, that it not only produces efficient and equitable services through the assistance of local understanding, but will also lead to greater participation and democracy that will result in popular consent to government and improved political stability. With this good quality of increased resource mobilisation and reduced dependence on the central finance, greater accountability and more responsive and responsible government can be achieved. Shah (1990) also provided a strong rationale for fiscal federalism in terms of efficiency, accountability, manageability and autonomy principles. He went on to state that through local provision, the government is able to respond to the needs and aspirations of local people, decision-making is closer to the targeted population in terms of services, and this will lead to more responsiveness to local concerns and more fiscal responsibility and efficient provision in financially decentralised areas. It also removes multiple layers of jurisdiction and enhances inter-jurisdictional competition and innovations in the provision of public services (Shah 1990:557).
Also, Ter-Manassiah (1997) and Wildasin (1998) enumerate the benefits of fiscal federalism to include prevention of revenue shortfalls, if the gap resulting from fiscal imbalance between the source of revenue and expenditure needs is bridged. Guaranteed minimum standards across levels of government in terms of quality services, especially in areas with limited resources, reduces inefficiencies arising from inter-jurisdictional spillover where people who utilise public goods are not responsible for the cost of providing them. This could result in the sub-national government vesting interest in their jurisdiction, leading to provision of poor public goods to compensate for the presence of interstate and local governments. A differential in income and resource capacities creates inefficiencies due to fiscally induced migration as a factor in production gravitating towards rich areas.
Revenue Allocation and Allocation Principles in Nigeria
Revenue allocation is the mechanism for sharing the nation’s financial resources between the various tiers of government in the federation with the objective of enhancing sustainable economic growth and development and to minimise inter-governmental conflicts and to assist the nation in attaining national unity (Ola and Offiong, 1999). It is the function of the federal and state government to handle the accruing receipts in the economy – which is federal, state, and local government (Oriakhi, 2004). There are particular receipts that the state and local government
are entitled to and exclusive receipts of the federal. Thus, revenue allocation is the function of the character of a political system. Revenue allocation is rationalised in a number of ways that is usually balancing, equalising, incentivising or stimulating. Balancing are the transfers made due to the existing imbalance between available resources and responsibilities, and it is done to compensate the state and local government for limited taxing powers. While equalising is necessary due to the variations in ability to generate revenue by the lower levels of government and these transfers are done to help minimise the tax burden, and if possible, eliminate them.
Stimulating incentives or promotional transfers are made to help stimulate economic activities in specific directions in their disbursements, and these transfers are usually referred to as grants in aid by the federal government (Ola and Offiong, 1999).
A number of principles have been used over time in order to ensure equity in the distribution in different parts of the world including Nigeria, and this includes the principles of derivation, need, even development, population, minimum responsibility of government, equality of states, continuity of government services, and so forth. This shall be elucidated upon.
Revenue Allocation Principles
In Nigeria as a country, revenue allocation has remained a burning issue in the country’s fiscal federalism and this is as a result of the 36 states in the federation currently depending on statutory allocations from the government account to enable them to embark on their development plans.
This problem associated with revenue allocation posed a difficulty to efficient and effective public administration since 1946, through an increasing number of fiscal units. Nigeria, as earlier mentioned, began as two protectorates, and was increased to three regions, to four regions with the creation of the Midwest, moved to 12 states, to 19, and to 21 and presently 36 states and 774 local governments. And the economy is not diversified, relying solely on one product, and this is the genesis of the ethnicity syndrome for which the nation is yet to find a solution. According to Ola and Offiong (1999), the revenue allocation formula includes:
Principle of Derivation
This principle is the most controversial of all principles, different regions of the nation read meaning into it from their various perspectives to facilitate goal achievement. This principle is based on the grounds of equity. The proponents asserted that the states that have the capacity to generate tax and that are naturally endowed should receive a huge allocation compared to states that are not naturally endowed and that allocation should be based on derivation, that is, a certain percent should be set aside for this purpose. Underlining this principle is the fact that the proponents are mostly from Niger-Delta and their argument is that their communities ought to be adequately compensated for the damage done to the environment and communities on the account of oil exploration and exploitation. On the other hand, some Nigerians (especially from non-oil producing areas) frowned at it on the grounds that natural resources belong to the federal government, there is the ideal of allocating a portion of the federal revenue to states on the basis of oil exploration
and exploitation in the environment of oil producing communities, and the ownership is that of Nigeria as a whole and not of the states where those natural resources are discovered. As a result, the government has turned a deaf ear to the dissatisfaction of these people, and this attitude of the government has made this principle a bone of contention.
Even Development Principle
The aim of this principle is that growth and development should be spread in order to reduce inequalities and imbalances. Allocation on this basis is premised on equity, that funds should be allocated to resolve the problems of equity in development, and that allocation on an equal basis may likely widen the gap of development and could also compound some existing problems.
Principle of Need
This principle is anchored on the need of the state such as development and that revenue should be allocated on this basis. Every government has needs to provide such as infrastructure. This principle could have been useful if need was based on legitimate and population census, but unfortunately in Nigeria, population census has been politicised till now. There is no particular state whose need is more crucial.
Principle of Population
This principle stipulated that revenue allocation should be based on population. That means that the states that are less populated should receive a higher allocation than states less populated in horizontal revenue sharing. This principle has also been argued that a largely populated area is endowed with human and natural resources and therefore deserves less revenue than the less populated states. The problem with this principle is that people argued against it on the ground that the revenue allocated on this basis has many times been diverted by the elite and the controversy of the 1991 census figure questions the desirability of population as a suitable formula for revenue allocation.
Internal Revenue Effort
This principle laid emphasis on the ability of states to raise or generate revenue and that put states in a position to get a higher allocation from the federal government. The implication is that the state that generates more revenue internally also stands a chance to collect revenue externally from the federal account. This principle generates debate, especially from states that lack the capacity to generate revenue internally. Due to the problem associated with this principle, it was subjected to review by Okigbo’s Commission, which reviewed the recommendation of the Abayode’s Committee and was later modified by the Danjuman’s Commission – the weight was decreased from 50% to 20% while the AFRC reduced the Danjuman’s recommendation from 20% to 10%.
Landmass and Difficult Terrain
This principle was introduced in January 1990. It suggested that states with landmass and difficult terrain should be given more revenue, hence development in these areas is usually difficult and they would require more funds, hence they tend to incur higher costs when providing infrastructure facilities such as the building of a bridge across an ocean in a rocky environment as opposed to states with less hazardous terrain. The nation’s revenue should be shared on that basis.
Equality of States
This principle is indicative of the fact that each state in the federal units, irrespective of size and resource endowment, should have an equal share of the percentage of total revenue set aside under the principle. This principle helps to affirm the equality, importance and constitutional status of each state within the federation.
Minimum National Standards
This principle emphasised maintenance of minimum standards in the allocation of resources among states. Such standards are usually in terms of education, health, agriculture and so forth with the objective of uplifting the desired units to a defined level, which should never fall below this.
This principle bridges the existing social gap among the federating units.
Absorptive Capacity
Through this principle, states are assessed on the grounds of their capacity to make use of funds.
Hence, it means that funds should go to those states best able to use them. The index is the ratio of total actual capital expenditure in a planned period and the total planned capital expenditures over the whole period such that the state with the highest ratio is rated first.
Minimum Responsibility of Government
This principle recognises that each level of government has a minimum responsibility and as such, services being provided by the government for its citizens must not be allowed to fall below a defined level. This principle is equity oriented and refers to the functions assigned to other tiers of government constitutionally, and also reaffirms the principle of need.
Social Development Factors
This principle helps to recognise issues such as healthcare delivery, education and urbanisation as major social development indicators. Primary school enrollment is often employed as an indication for social development. Education is a priority to most governments all over the world, especially when it is enshrined in most nations’ constitution and a basic objective of states’ policies.
Fiscal Relations
Fiscal relations is a major area, therefore resource control is an issue. Every federal system has a method by which resources are distributed and allocated. There are financial transactions that takes place, and the pattern of allocation – the fiscal relations and the vertical fiscal relations – has to do with transfer of funds to lower levels of government by the higher level of government – while the horizontal transfer occurs due to differences in regions’ capacity to generate funds.
Odd-Helge (2001) sees the rationale for fiscal relations as a result of an existing fiscal gap at local government level from its revenue and expenditure assignment. It is the financial transactions that take place among the different levels of government in a federation. The objective of fiscal units in a federation is to encourage similar expenditure responsibilities and their revenue sources (including grants from central government) to facilitate effective performance of assignment by the national government, by granting the sub-national government expenditure choices in appropriate areas for efficient public spending as well as the accountability of public officials to their constituents for sub- national services. It ensures that the macroeconomic policies of government are not weakened and compromised and ensures that intergovernmental transfers are less stressful (in administration), stable, transparent, with a clear objectives and based on non-transparent criteria. It also minimises cost and economises scarce criteria, and affordability of major services by poorer levels of government to balance the differential in local government fiscal capacity. Mechanisms should be incorporated in support of public infrastructural development and adequate funding for a consistent support of the government’s role, which is market-oriented to create a basis for consensus with the goal of rational distribution, and finally, to create incentives to lower levels of government to encourage internal revenue generation (Sewell, et al, 1994).
The Problem of Nigerian Fiscal Federalism
Fiscal federalism in Nigeria is characterised by constant struggle and agitation for change and resource control. This is due to the centrifugal tendencies in our disaggregated federalism. The challenge is about the hold on equity of assigned expenditure and revenue raising functions among the three levels of government. The lingering problems are discussed below.
Functions and Tax-raising Power
One of the problems of Nigeria’s fiscal federalism is the allocation of functions among component units of the federal system, which is the federal, state, and the local government. These functions are spelt out in Part 1, section 4 of the schedule of the 1999 Constitution of the federal republic of Nigeria. The section specifies three main legislative functions: the exclusive legislative list, the concurrent legislative list, and the residual legislative list. In the provisions of the constitution, the federal government has exclusive constitutional responsibility for functions under the exclusive list. Both the federal and state have control over the concurrent legislative list (Aigbepue et al, 2011). The allocation of tax-raising power is a legislative function – it was said to be stable even during the military regime in Nigeria. The 1999 constitution also specified the procedure for the
disbursement of the ‘Distributable pool account to the three levels of government’ in section 162, (1) (2). This specification was done in order to enable the different levels of government to carry out their functions. Despite this specification, there is still a problem between the state and federal government over tax jurisdiction: what level of government should collect what tax, and this has led to the existing perceived imbalance among the ethnic groups. (Onwe, 2011).
The Problem of Acceptable Sharing Formula
According to Nasir (2011), there is a problem with the existing sharing formula. The federal government has not justified its claim to the lion’s share of nations’ revenue with small responsibilities to carry out, that this has resulted to wastage and a high level of corruption. He went on to say that there is a conflict between the three levels of government in Nigeria over the acceptable formula, especially the principle recommended by different Revenue Allocation Commissions to be used as a basis for revenue allocation. Even when accepted, conflict would still arise over the principle that took precedence over the others. This has being the situation in Nigeria since the period of colonial administration and the introduction of the Richard’s Constitution in 1946. Odoko and Nanna (2009), also noted that in terms of revenue assignment, the fiscal system in Nigeria gave little or no room for fiscal autonomy to the regional governments, that the local level does not put an effort into generating revenue internally, and that they depend on federal allocation. They went further to say that there is a difference between the expenditure and revenue responsibilities that are evident in the resource allocation and the nation’s revenue, which is considered outdated.
There is still conflict over the principle of derivation as being the acceptable sharing formula.
State and Local Government Joint Account
Sagay (2008) observed that there is an unbridled diversion of local government funds by the state government, to the extent of rendering them idle in development. The local government is considered but a clearing and forwarding house through which the councils get their share from the federal account. The role of the state was to add a compulsory 10% of internally generated revenue to local government, however, it earmarked the fund for takeover on allocated resources from the federal government. Despite all the reforms to solve the thorny issue, the problem has remained – this has facilitated loyalty of local government chairmen, who have no other option but to comply. The diversion of local government funds is a serious issue and has affected performance at the local level, hence Nigerians will need to lobby for what is rightfully theirs.
Fiscal Federalism and Development in Nigeria
Revenue allocation is a primary issue and a key determinant of any political system. For an effective development to take place, the degree with which a nation allows true federalism in full operation determines the nature of development of such a nation. The non-adherence to the laid down rules of fiscal federalism and constitutional provisions are germane issues. According to Silas (2013), the verdict of the supreme court created a fiscal stampede, which gave room to
the president to introduce a new revenue allocation of 56% to the federal government, 24.72% to the state and 20.60% to the local governments. The states’ resistance to this formula prompted the federal government to reduce to 52.68% and states’ increase to 26.72%. He added that revenue allocation remains a thorny issue as the contentious debate persists – the state is always in conflict and criticising the federal government for taking the lion’s share and the federal government’s justification is that it is as a result of its enormous responsibilities, which include the cost of providing education, healthcare services, roads, energy and national security. The Binns Commission of 1964, Abayode (1977) and Okigbo (1979) Commissions failed to properly arrive at an acceptable formula for the nation (Ozon-Eson, 2005). This lack of equity and fairness in the Nigerian fiscal practice has resulted in a lack of sustainable development. Egwakhide (2004) observed that the federal government takes the lion’s share of the vertical allocation for itself and delegates more constitutional functions to the federal units. Okeke and Innocent (2013) were clear and vivid in their argument that even in the nation’s democratic dispensation since 1999, the components of the nation have not been able to reach a workable sharing formula in line with the constitutional provision (such as section 16 (2) of the 1999 Constitution of the federal republic of Nigeria that empowers the RMAFC to determine the mode of distribution). Obasanjo, as a democrat, set 54.68% for the federal government, 24.72% for the states and 20.60% for the local government, which still placed the federal government at an advantage in fiscal relations.
Due to this imbalance in the system, various ethnic groups are clamouring for the practice of true federalism where the various states and regions develop with the resources at their disposal, as this will leave room for a competitive spirit in federalism. We could deduce that the country operates unitary federalism, where the federal government controls every resource domicile in the country. This has given rise to a high level of public official corruption, and agitation for the creation of more states without resources to run these proposed states but who are dependent on resources from the federal government. The minority groups have developed the psyche of being marginalised non-developers, especially the non-oil sectors such as agriculture and many others.
This has resulted in a lack of implementation of policies that will encourage economic growth and development. The table below reveals the Nigerian Allocation Formula.
Table 1: Revenue Allocation from 1946-1964
Commission Principle Allocation Formula
Chick Philipson of 1946 Derivation 100%
Chick Philipson of 1951 Derivation/Fiscal Autonomy, Need and National Interest
50%
Chick Committee of 1953 Fiscal Autonomy 50%
Raiseman Commission of 1958 Derivation, Fiscal Autonomy, Balanced Development and Need
50%
Binns Commission of 1964 Derivation and Fiscal Autonomy 50%
Table 2: Revenue Allocation from 1988-1993 (Victor, 2013)
Allocation 1988 1989 1990 1991 1992 1993
Federal Government 55% 55% 50% 50% 50% 48.5%
State Government 32.5% 32.5% 30% 30% 25% 24%
Local Government 10% 10% 15% 15% 20% 20%
The above tables show the allocation of the Nigerian revenue allocation formula and its possible effect on the development of the federal states. Table 1 shows that from 1946 to 1964, allocation was based on derivation, which was 100% and was left at 50% by the various commissions till military intervention in 1966. Table 2 shows revenue allocation from 1988 to 1993 and the federal government was at 55% from 1988 to 1989, which was reduced to 50% in 1990 to 1992, and was later reduced to 48.5%. The state government was set at 32.5% in 1988 to 1989, was reduced to 30% in 1991 to 1992, further reduced to 25% in 1992 and later slashed to 24% in 1993. Local government was set at 10% from 1988 to 1989, was later increased to 15% in 1990-1991, and remained at 20% in 1992 and 1993. The present formula in the democratic era is based on this formula set by the then head of state, General Ibrahim Babangida, and was adopted by Obasanjo as a Democrat with little modification, which set the Federal government at 54.68%, the states at 24.72% and local government at 20.60%. The tables revealed that the Nigerian fiscal practice is a system where the federal government takes all the resources and the states are left with little or nothing to function with – such a system will always generate tension among the various ethnic groups and reduce sustainable development.
Results/Findings
The findings of the study are as follows:
• Nigerian fiscal federalism lacks equity and therefore cannot give room to sustainable economic development, especially at the lower levels of government.
• Despite the various fiscal mobilisation commissions that have existed over the years, their inability to arrive at an acceptable revenue sharing formula since 1946 to the present day is attributable to the imbalance in the polity.
• The politicisation of revenue allocation principles has created a lacuna in the nations’ fiscal practice.
• The creation of a joint account for states and local government was an injustice – local government funds were earmarked for takeover by the state government.
• The diminished derivation principle has hindered each state’s ability to develop with resources at their disposal, and has rendered them too weak to defend their constitutional rights.
• The federal governments practice of taking the lion’s share without fiscal responsibility causes underdevelopment. Consequently, some sections of the country are being marginalised and this is generating conflict among the various ethnic groups in the nation.
Discussion
The findings of this study revealed that Nigerian fiscal federalism lacks equity and therefore cannot give room to a sustainable economic development, especially at the lower levels of government. The problem associated with the Nigerian fiscal arrangement is attributable to the nature and character of the fiscal regime’s institutional and sociopolitical factors that shaped the nation’s policy, including scarce resources (Kayode, 2014). The inability of the various existing commissions and committees to arrive at an acceptable revenue sharing formula is also a source of conflict in the polity, and even when one formula is accepted, it is usually based on political exigencies. The nation’s experience of military has had a negative effect on development. The derivation principle, which was left at 50% by Philipson’s Commission in 1946, automatically dwindled to 13%, even in a democratic dispensation as resource control generates tension in the political arena. The current sharing formula portrays a high level of imbalance in the nation’s fiscal relations, as the central government takes the lion’s share of the nation’s revenue without responsibilities and leaves the states with little or no fiscal power. The minority groups feel betrayed by the various allocation principles and therefore, marginalised. Revenue sharing is still based on ethnic considerations. Various groups are agitating for more states to be created in order to access the national ‘cake’. Internally generated revenue is low and the inability of the country to diversify its economy is obvious. Where this is rife, conflict is bound to exist, which could lead to national instability. In our analysis, it was concluded that the lack of sustainable development is due to the fiscal imbalance in the system.
Conclusion and Recommendations
The paper focuses on fiscal federalism and development in relation to Nigeria from 1946 to the democratic dispensation in 1999. The outcome clearly states that there is unwillingness by the political leaders to address the contentions that have a negative impact on the development of various units that form the union. The revenue allocation formula from 1946 to 1999 undermined the constitutional provision, which gave way for equity and fairness in the distribution mode. The issue of a local government and State joint account and the problem of tax jurisdiction between the State and the federal government are still hanging, and fiscal independence has not been addressed. The nature of Nigerian fiscal federalism has not given way to a sustainable national development; rather it encourages a lack of competitive spirit among the federal units. Thus, there is an urgent need for a revisitation and depoliticisation of the country’s fiscal relations for a sustainable development. Based on the outcome from this, we implore the government to utilise the following recommendations in policy making for positive economic growth:
• The Nigeria government should endeavour to practice a true federalism pattern after the American model, and shun the currently practiced quasi-federalism where the states are left with enormous responsibilities without fiscal power to function.
• The government should adopt a suitable revenue formula to enable the lower levels of government to have adequate funds for the execution of capital projects.
• The federal government should increase the derivation principle to guarantee development,
and this increment should be increased from the current 13% to 50% – this will help to reduce agitation for resource control and the incessant creation of more states without resources to manage them.
• Effort should be made towards solving the fiscal issues and to accelerate meaningful development that is globally acceptable in the country.
• The government should create massive employment by providing an environment that is conducive to allow both domestic and foreign investors to invest, as this will reduce the states’
overdependence on the federal government.
• The government should make development a priority to give room for resilient infrastructure at all levels of government.
• There should be a focus on economic diversification to allow other viable sectors such as agriculture to contribute significantly to the nation’s Gross Domestic Product, (GDP), as this will create other sources of revenue for the federal units to reduce overdependence on one product.
• The federal government should depoliticise its fiscal federalism for sustainable development and to revive the spirit of federalism, which is competitive development.
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