Fiscal Federalism, Penacea for True Federalism


True Federalism is a mirror that reflects Devolution of Powers, Regionalism, Resource Control or, Restructuring as some would prefer to call it. The clamour for “Restructuring” of the Nigerian nation has become more vocal as reflection of the maturing democracy, which ironically, had become the target of criticism. The call to restructure the nation is simply the new form that the agitation for “Resource Control” and/or “Devolution of Power” has taken.


The following definition of relevant terms and phrases as contained in this article.

1.2 Federalism

This is simply defined as a system of government with specified relationship between the central government at the national level and its constituent units at the regional, state, or local level. It is, in a legal terms, a system of government which has created, by written agreement, a central and national government to which it has distributed specified legislative (law-making) powers, and called the federal government, and regional governments (or sometimes called provinces or states) governments to which is distributed other, specified legislative power.

1.3 Fiscal Federalism

It is easy to situate this if we grasp and understand that the principle under which federalism operates dictates that power and authority are allocated between the national and local govemental units, such that each unit is delegated a sphere of power and authority only it can exercise, while other powers must be shared.


2.1 Universal Applicability

This is concerned with “understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government” (Oates, 1999). In other words, it is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated across different (vertical) layers of the administration. An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower levels of government. Federal governments use this power to enforce national rules and standards.

2.2 Fund Allocation

There are two primary types of transfers, conditional and unconditional. A conditional transfer from a federal body to a state, local authority, or other territory, involves a certain set of conditions. If the lower level of government is to receive this type of transfer, it must agree to the spending instructions of the federal government. The second type of grant, unconditional, is usually a cash or tax point transfer, with no spending instructions. An example of this would be a federal equalization transfer.

2.3 Devolution of Power & Fiscal Decentralisation

Fiscal federalism constitutes a set of guiding principles, a guiding concept, that helps in designing financial relations between the national and subnational levels of the government; while the principle of fiscal decentralization on the other hand, is a process of applying such principles. This is what should interest us the most here in Nigeria as it relates to the sharing of revenues from, say, tax between the central government and regional or local authorities. The revenues may be raised by either authority and switched between them, as VAT is raised by governments and passed to the national government for distribution. (


Fiscal federalism is delicate as sovereignty must be focal to nationhood and whatever relationship that defines the constituent units, a balance that strengthens rather than weaken it must be ensured. The principle of dependency and interdependency should be brought to bear on the concept of the indivisibility of a sovereign nation.

3.1 Inter-Dependence

Fiscal federalism supports the independence of the federating units in the management of their fiscal affairs. In other words, fiscal affairs are decentralised and the units enjoy management of their revenues, expenditure and debts. In the Federal Republic of Nigeria, however, this relationship is governed by the principle of fiscal responsibility where the sanctity of the oneness of the economy is preserved and the activities of all tiers of government, which impact national economy are coordinated by the federal government.

3.2 Independence

The central government is expected to ensure equitable distribution of income, maintain macroeconomic stability and provide public goods that are national in character. Decentralised levels of government on the other hand are expected to concentrate on the provision of local public goods with the central government providing targeted grants in cases where there are jurisdictional spill-overs associated with local public goods.

3.3 Principles of Fiscal Responsibility

Fiscal Federalism demands Fiscal Responsibility, which principle is underscored by the following:

• government spending is prudently managed and sustained,

• government is not over-leveraged,

• government spending promotes growth,

• uniformity, transparency and accountability as well as timely disclosure and reporting of government financial affairs.

3.2 Fiscal Responsibility and Devolution of Power

✓ Decentralisation or devolution of power can simply be defined as the transfer of part of the powers of the central government to regional or state authorities, usually in response to demands for diversity and agitations based on perceived imbalance. In general decentralization or devolution is a response to the problems of centralized systems. It is seen as a solution to problems like economic decline, government inability to fund services and the demands of minorities for greater say in local governance. Decentralization or devolution of powers is linked to concepts of participation in decision-making, democracy, equality and liberty from high authority.

✓ The processes by which entities choose to achieve decentralization vary. They can be initiated from the central government in a top-down approach. Top-down decentralization may be a political gimmick while bottom-up decentralization initiated by individuals or states may be opposed as is the case with federalism we are now debating. At any rate whether it is top-down or bottom-up decentralization or devolution, it may not be constitutionally binding. Such decentralization or devolution may depend on the whims of the central government either to implement or ignore it.

The following reasons are often advanced for the increasing demand for decentralisation/devolution of fiscal affairs of the nation: –

• Central governments increasingly are finding that it is impossible for them to meet all of the competing needs of their various constituencies, and are attempting to build local capacity by delegating responsibilities downward to their regional governments.

• Central governments are looking to local and regional governments to assist them on national economic development strategies.

• Regional and local political leaders are demanding more autonomy and want the taxation powers that go along with their expenditure responsibility.

In 1997 the World Bank and other multilateral institutions observed that decentralisation had become a feature of reform agenda, which they promoted and continued to support. The rationale for this had been in part that decentralisation promotes accountability. It was not therefore surprising that by 1997, 62 of 75 developing nations, Nigeria inclusive, had embarked on one form of decentralisation or another.


In Nigeria, the Fiscal Responsibility Act, 2007 as an enforcement instrument for fiscal federalism, was promulgated toward ensuring a behaviour true to a federal nation.

4.1 The Theories of Fiscal Federalism

• “Fiscal Federalism” concerns the division of public sector functions and finances among different tiers of government. In undertaking this division, Economics emphasizes the need to focus on the necessity for improving the performance of the public sector and the provision of their services by ensuring a proper alignment of responsibilities and fiscal instruments. While economic analysis, as encapsulated in the theory of fiscal federalism, seeks to guide this division by focussing on efficiency and welfare maximisation in determining optimal jurisdictional authority, it needs to be recognised that the construction of optimal jurisdictional authority in practice goes beyond purely economic considerations. Political considerations, as well as historical events and exigencies, have in practice, played major roles in shaping the inter-governmental fiscal relations in most federations.Economics teaches us that public goods will be under-provided if left to private market mechanisms since the private provider would underinvest in their provision because the benefits accruable to her or him would be far lower than the total benefit to society. Governments and their officials were seen as the custodians of public interest who would seek to maximise social welfare based on their benevolence or the need to ensure electoral success in democracies.

• Once we allow for a multi-level government setting, this role of the state in maximizing social welfare then provides the basic ingredients for the theory of fiscal federalism. Each tier of government is then seen as seeking to maximize the social welfare of the citizens within its jurisdiction. This multi-layered quest becomes very important where public goods exist, the consumption of which is not national in character, but localized. In such circumstances, local outputs targeted at local demands by respective local jurisdictions clearly provide higher social welfare than central provision. This principle, which Oats (1972) has formalised into the “Decentralisation Theorem” constitutes the basic foundation for what may be referred to as the first generation theory of fiscal decentralisation (Oats, 2004). The theory focussed on situations where different levels of government provided efficient levels of outputs of public goods “for those goods whose special patterns of benefits were encompassed by the geographical scope of their jurisdictions” (Oats, 2004: 5). Such situation came to be known as “perfect mapping” or “fiscal equivalence” (Olson 1969).

4.2 Issues with Fiscal Federalism

To discuss the problems of fiscal federalism is actually to enumerate the problems of Federalism itself. And the single most important issue that is being viewed by most, from the political dimension, is over-concentration of power at the centre. This translates to more resources in the hands of the federal or central government. At the moment, all revenues accruing to the Federal Government of Nigeria is lodged into a pool account called the Federation Account and broadly shared in the following manner:

The table above represents the subsisting constitutional arrangement, which is implemented on monthly basis after 13% derivation on the gross oil revenue is first deducted and shared between the eight oil-producing states of the Republic of Nigeria. This information is generally published online and in different reports produced by government every month. Some see the above arrangement as fiscal centralisation or skewed fiscal federalism. States have continued to call for the decentralisation in the sharing of the national income so as to give them greater share corresponding to their responsibilities and, most importantly, the derivative nature of these resources. Some of the factors supporting this call may be discussed under the following:

4.2.1 Infrastructure

The states have vast needs to develop intra-state road network to enable economic movement of persons and goods

4.2.2 Agriculture

Many argue that agriculture could be a sustaining sector for the nation or, at least, a major complementary area for the nation’s sustenance in food crops and earnings from cash crops.

4.2.3 Education

Education has continued to defy measures taken to stop the falling standards in all the three tiers of education.

4.2.4 Employment

Government has raised the National Minimum Wage to a level that some states had decried; current realities have made the ₦18,000 objectionable to most.

4.2.5 Environment

Environmental degradation of the oil-producing areas is also an area posing social and security concerns, and, hence, the call for a higher derivation share or greater resource control.

4.2.6 Insurgency

The surge of militancy and terrorism in the north-east and south-south Nigeria threatened the core existence of Nigeria. The central government only was responsible for bringing back normalcy. Whatever level of Fiscal independence that is granted the federating units, national security is always handled by the Central Government with Security as its exclusive preserve.

4.2.7 Poverty

Poverty level differs between state to state and region to region. It was regarded the precursor to the insurgencies in the country.


Every region, every state in Nigeria is richly endowed with resources, be they oil, solid minerals, forest resources, arable land, etc. The centralisation of oil wealth and the resultant over-dependence of all states on the revenues therefrom has accelerated the national degeneration into the resource curse and Dutch disease conundrum. What we have done by this process is that, we have shielded the states from a hard budget constraint, thus encouraging them to merely ‘raid the commons’. Incentives for developing own tax bases and resources are thus stultified to the detriment of overall growth and development. Recent studies provide evidence on the growth impact of decentralisation and enhanced regional autonomy (Kee, undated; Desai, 2003).

The global shift from fossil energy derived from crude oil, natural gas and heavy oils to alternative and renewable sources has ushered a dawn of realization that, for any nation to remain a viable economy, it must diversify to other sources of economic and human sustenance. Nigeria is a fledgling democracy operating a centralised federalism under an equally centralised fiscal federalism. The previous constitutional amendment took cognisance of this fact and, therefore, carefully avoided adjusting the subsisting fiscal arrangement .

Our main concern should be the focus on the political unity of the federation for now. Issues concerning decentralised fiscal federalism can still be revisited under the ongoing constitutional review without losing sight of where we are headed. Let us target the consolidation of true gains of democracy, and aim to achieve paradigm shift in our collective psyche as well as a measurable shift from dependance one a mono production society to other alternate national growth enablers such as agriculture and industrialization. The basis for my concern predicates on the consequence of absolute devolution where each state gets 100% control of its resource. Oil, as a priceless resource today, will cease to be so in a decade or two, according to the global trend. Ownership of Nigeria’s main commodity may change with time. We need to keep faith with the shared model for the political and socio-economic survival of our Nigeria.

Meanwhile, for true federalism to be realized, the centre may need to surrender its substantial holding on federation allocation. The following is suggested:

The devolution of resource control to the federating units as proposed, shall effectively abrogate the 13% derivation allocation of resources to any specific state or unit as obtained under the current arrangement. The devolution of resources to producing and controlling federating units is an inclusive principle and impartial principle of universal application.

Under the proposed arrangement, a few of the responsibilities being exercised exclusively by the federal government are expected to devolve to the federating units with the emphatic exceptions to security functions. The lower federating units are to be granted the largest share of VAT income, to spur them into greater income generation activities at the grassroots level. Power and resources shall be effectively exercised by the local governments, hoping that, fiscal responsibility by all tiers of Government, would not only be respected but assiduously observed.


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