FISCAL FEDERALISM IN NIGERIA: MEANING OF CONCEPTS

It is generally believed that the devolution of certain public responsibilities to

lower tiers of government still remains the best approach to the effective provision of
public goods and services. This has led to an overwhelming support for the federal
system of government. Currently, Nigeria operates a federal system of govern, with a
federal government, 36 states and 774 local governments. Ion such a multilevel
system, fiscal responsibilities are vested in both the central and lower-level
governments – the federal, state, and local. This gives rise to a decentralized fiscal
system or fiscal federalism. Federalism is seen as a series of legal and
administrative relationships established among units of governments possessing
varying degrees of real authority and jurisdictional autonomy. This implies the
coexistence of both national and subnational governments which perform the
economic functions required by the people of the society- or an association of two or
more levels/tiers of government within a country. Federalism is a system of
government where revenue and expenditure functions as well as the appropriate
fiscal instruments for carrying out these functions are divided among the various
levels of government. Thus, revenue generating and spending responsibilities,
intergovernmental transfer and the administrative aspects of fiscal decentralization
are, in fact, the real issues involved in the so-called fiscal federalism (Odoko and
Nnanna, 2007).

On the other hand, fiscal federalism refers to the existence in one country of
more than one level of government, each with different expenditure responsibilities
and taxing powers. Thus, under fiscal federalism, any one individual is subject to the
influence of the fiscal operations of different tiers of government. It is the division of
fiscal powers between or among sovereign levels of government in a federation.

In discussing fiscal federalism, it is generally assumed that the method of

taking collective decisions is predetermined and that it is relatively efficient. That is,
governments, due to the incentives of vote-maximizing or whatever, tend to take
resource allocation decisions according to the collective preferences of their
constituents. Thus, in this way the distinction between the positive theory of fiscal
federalism and the normative theory tends to become blurred since governments are
treated as if they behave optimally.
 In Nigeria, the structure of fiscal federalism involves spending and revenue
generating powers assigned to the three tiers of government, namely the federal,
state and local governments. Within this arrangement, the constitution provides that
all revenues accruing to the federation account (a common pool) mainly from crude
oil and gas sales, taxes and royalties as well as non-recurring receipts are to be
shared among the three tiers of government based on a sharing formula approved
by the National Assembly. In the same vein, the constitution assigned various
powers, exclusive and/or concurrent, to each tier of government to raise revenue and
legislate on expenditure. More often than not, however, certain gaps created by
geographical and economic forces necessitate intergovernmental transfers from
higher to lower tiers of government in order to bridge such gaps.

It is important to note that fiscal federalism and intergovernmental fiscal

relations are often used interchangeably. Intergovernmental fiscal relations refer to
the fiscal transactions and coordinating arrangements among the various tiers of
government in a federation. The nature of intergovernmental fiscal relations
constitutes an extremely relevant consideration for the attainment of fiscal rationality
within a decentralized political structure. Intergovernmental fiscal relations assume
two principal dimensions: (a) budgetary influence between the levels of government,
which is known as the area of “vertical” intergovernmental fiscal relations, and (b)
budgetary influence between different government units at the same level, which is
known as the area of “horizontal” intergovernmental fiscal relations. The latter type of
inter-relationship is possible only at the state and local levels of government where
more than one unit of government exists.