Effectiveness of fiscal federalism for poverty reduction in Nigeria: an analysis of federal and state governments’ expenditures

Megbowon Ebenezer,Aderoju Samuel,Gbenga Peter Sanusi

doi:10.1007/s43546-021-00118-w

Megbowon Ebenezer, Aderoju Samuel + Show 1 more

Open Access

https://doi.org/10.1007/s43546-021-00118-w

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Abstract

One of the sustained political and economic strategies that have been adopted by various countries over 3 decades to achieve the desired level of development is fiscal federalism. Through this economic development strategy, various levels of government within an economy have been involved in the pursuit of reducing poverty overtime. The purpose of this study is to examine the relationship between government expenditure on poverty reduction with respect to federal and state government expenditures, respectively. The study employed the auto-regressive distributed lag (ARDL) estimation technique to establish long-run relationship, and to examine the magnitude of the effect of federal and state government expenditures in both the short-run and long-run periods using time-series data for the period 1981–2018. Results obtained indicate that only state government expenditure has positive effect on poverty reduction in Nigeria. The findings of this study, therefore, support the need for greater decentralization and increase in fiscal expenditure responsibilities and strengthening revenue capability in favor of state governments, giving that achieving desired poverty reduction could be achieved through increased state government spending on developmental projects.

Highlights

The Keynes School of thought argues that government’s fiscal policy especially her expenditure is a tool for stabilizing the economy, improving economic performance and welfare
The effect of federal government expenditure on poverty reduction varies across period of time, while the effect is insignificant in the short-run, it is found to be negative but significant (β=-0.23; p
In the long-run, one percent increase in the state government expenditure will lead to about 0.34 percent increase in household expenditure and by extension a reduction in poverty is achieved at the same proportion

Summary

Introduction

The Keynes School of thought argues that government’s fiscal policy especially her expenditure is a tool for stabilizing the economy, improving economic performance and welfare. This argument is based on the premise that government spending has impact on output, employment, productivity, and income (Keho, 2019). Government spending on infrastructure can increase employment through entrepreneurship and awarded projects. This will further increase disposable income, increase aggregate demand, increase private consumption and eventually lead to an improved welfare or reduced poverty. The role of government in economic growth and development process remain undisputable

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