Fiscal Federalism and Imbalance in Revenue Allocation in Nigeria: Implications for Socio-economic Development

Abstract

Imbalances in Nigeria’s federal arrangement have been a constant source of conflict in Nigeria’s politics. Fundamentally, the federal structure was adopted to accommodate Nigeria’s multi-ethnic nationalities. The dissatisfaction among the federating units underlies an unending search for an acceptable revenue sharing formula contention. The problem identified is that the current formula gives more revenue to the Federal government rather than to the State and Local Governments that have greater base and responsibilities for the provision of social welfare to the people. The arrangement stifles the sub national governments’ ability to provide social welfare and accomplish other statutory responsibilities, aggravates crises of relative deprivation, accentuates corruption and intensifies ethnic politics. Being ex-post facto, the paper uses qualitative expository analysis to examine the nature and character of Nigeria’s fiscal relations and the implications for socio-economic development. The finding is that Nigeria, being a consumptive mono economy, is overly susceptible to external shocks. The country therefore, needs to allocate more revenue to the sub-national governments in order to encourage an integrative, bottom-up, people-oriented development. It recommends that the vertical revenue allocation formula be restructured in the following proportions: federal 35%; state 40%; local government 25%. Moreover, derivation principle should be given primacy in horizontal allocation formula to encourage competition among the tiers of government. The economy should be diversified to reduce over-dependence on federal allocation while the fight against corruption should be sustained.