Fiscal Federalism in Nigeria Essay

The question of an acceptable formula for receipts sharing among the comp wiznt tiers of the Nigerian nation is one of the to the highest degree protract and contr everywheresial debates in the political and macro scotch management of the economy. This debate has its foundations in the history and evolution of the Nigerian fusion. Revenue storage allocation or the statutory scattering of receipts from the fusion count on among the distinct levels of politics has been one of the most studyious and controversial sleep withs in the nations political life.So contentious has the matter been that none of the formulae evolved at sundry(a) generation by a commission or by decree low polar politicss since 1964 has gained general acceptability among the component units of the country. Indeed, the issue, like a recur decimal, has painfully remained the maiden problem that nearly every incoming regime has had to grapple with since independence. In the process, as many as thir teen different attempts have been made in devising an acceptable revenue allocation formula, each(prenominal) of which is more remembered for the controversies it generated than issues settledFiscal federalism refers to the scope and structure of the tiers of political sympathies responsibilities and functions as well as the allocation of resources among the tiers of giving medication. Perhaps the most key issue of monetary federalism is the revenue allocation formula, the sharing of national revenue among the various tiers of giving medication ( just revenue sharing) as well as the distribution of revenue among the state authoritiess (that is, horizontal revenue allocation).The centralization of Nigerias monetary federalism began with the report of the Dina Commission (1968) which argued that an appropriate revenue allocation system should end in a more equitable distribution of revenue among the states to secure a balanced development of the federation. Revenue alloc ation washstand be described as a method(s) of sharing the centrally generated revenue among the different tiers of regime and how the amount allocated to a particular tier is sh ard among its components.Nigeria is a federal state downstairs the federal system of giving medication, federation or centrally-generated revenue is sh ared among the three levels of government, namely the federal government, the states and the local governments. The supposition of revenue sharing in a federal state is that each level of government receives an allocation of financial resources tailored to their specific requirements as defined by the mandate of legislative competence, their actual situation and the statutory indices of calculation.In Nigeria, decisions as to what proportion of centrally-generated revenue that would be retained by the federal government, the proportion that will be roled among the state governments and the proportion that will go to the local government has always be en a problem, due to the fact that at that place is no consensus of opinion as to what could be seen as an ideal formula.The tenets that guide the implementation of intergovernmental fiscal relations include (a) The pattern of Diversity The federal system must have the ability to placate a large variety of diversities. Hence, the fiscal system must stick out scope for variety and differences to supply national, regional and local globe goods. (b) The commandment of Equivalence Based on the geographical incidence of different popular goods, allocative cogency requires the equalization of locational advantages arising from inter-jurisdictional differences with a combination of task incomees and public goods and services.This requires the use of fiscal instruments for achieving macro frugal objectives of growth, stabilization and full employment by residents of different geopolitical units this requirement statements for what is practically referred to as central city expl oitation dissertation. (d) Minimum Provision of Essential Goods and Services This ensures that fiscal federalism guarantees all citizens, no matter of where they reside, the minimum provision of ertain basic public goods and services. (e) Principle of Fiscal tearing down In decree to ensure a minimum level of public goods and services same degree of fiscal equalization is required.This is as a result of differences in resource endowment. (f) The Efficiency Principle This principle implies that efficiency must be applied in the allocation of resources (g) The Principle of line The component units of a system should be able to control several(prenominal) of its own resources as they desire. h) The Principle of Locational Neutrality Interregional fiscal differences tend to mould location choices of individuals and firms. Therefore, policy should focus on minimizing distortions due to some interference. Hence, derivative instrument taxes which create locational distortions should be avoided as much as practicable. (i) The Principle of centralize Redistribution This principle states that the redistribution function of fiscal policy through progressive revenue get upment and expenditure programmes should be centralized at the federal level.That is, if the redistributive function is decentralized, it can result in distortions in location decisions. It should be noned that the preceding(prenominal) principles are not mutually consistent. There are several challenges and contending issues confronting intergovernmental fiscal relations in Nigeria 1) Non Correspondence Problem Ideally, each level of government should be given adequate resources to allow it discharge its responsibilities.Because this is not possible, there is usually a lack of correspondence between the expending responsibilities and the tax powers/revenue sources as patsyed to different levels of government. It is this incongruence that is often referred to as the non-correspondence problem . In Nigeria, most of the major sources of revenue come under the jurisdiction of the federal government so far lower levels of government are supposed to generate sexual revenue. There is, therefore, the need to resolve the imbalance between assigned functions and tax powers.The issues concerning fiscal relations among the constituent units of the Nigerian federation that remain more often than not unresolved are the divergence between assigned functions and tax powers, principle of horizontal and good revenue allocation, dependence of states and local governments on federal sources of funding, tendency towards concentration and federal presence in the states (Fadahunsi, 1998). The five principles before long applied in the horizontal revenue allocation formula are far from acceptable to all the stakeholders. 2) Fiscal Autonomy and IndependenceThe issue of relative fiscal autonomy and independence of the state and local governments in a line up federal structure goes with the corollary issue of the correspondence of governmental functions and revenue sources. Since the creation of the twelve-state structure in 1967, states and local governments have been likewise dependent on the Federation Account. This independence must be rock-bottom if the federating units are to be free to pursue their own development goals without be hampered by the unpredictable fluctuations in their shares of the Federation Account.It is important that revenue sources should be reallocated and made compatible with the fluctuations stated for each tier of government to enhance steady and proper funding of administrative and developmental activities instead of the often experienced unexpected financial constrictions at the two lower tiers of government. 3) embrocate colour Producing States, Oil Producing Local Government Administrative Areas or Communities Professor Omo Omoruyi in his treatise the Politics of Oil who owns the rock rock oil, Nigeria, states or communities (2 000) raised three salient questions on true ownership of oil in Nigeria.The question of local control over local resources is an established constitutional principle in federal systems. But the way the Nigerian federal system developed under the external colonial order (1954-60) and continued under the period of geo-ethno-military inhering colonial order (1960-1999) and in the democratic dispensation between 1999 to date is yet an unresolved contending issues in the discourse about Nigerias federalism. He challenged the Tripod overture to Nigerias problem where the three major ethnic nationalities decide the content and the trend of national issues. This tripod approach to Nigerian politics, should have been done apart with by now, with the introduction of the notion of federal character, which takes states in the federation as the units of representation.The tripod approach to Nigerian politics applies to how the oil, which comes from the non-majority areas, is approached in the political and economic discourse. We should similarly be aware of the feeling among the majority ethnic nationalities that the areas producing oil by virtue of powerlessness in the military and politics should not be allowed to lay claim to the oil from their areas as of right.However, theres a distinction between oil producing communities and oil producing states. This is the institution of the activities of the Traditional Rulers of the Producing Communities who are dealing with the President and want the money due to states on the basis of the 13% line of descent in the Constitution should be paid to the oil producing communities/local government areas. The Traditional Rulers argument is that communities own oil and not states.This is an unresolved issue and separates the communities in riverside areas nowadays affected by oil spillages from their compatriots in landed areas from enjoying the full benefits of allocations to producing states. One does not hold out the end of this argument. How should the National Assembly address this matter? The federal government should find a way of making the oil producing local government administrative areas as shareholders in the joint venture arrangements with the oil companies, consequently making them stakeholders in the oil industry.There was the issue of who should be spending the oil money. Should it be the Nigerian government in conjunction with the oil producing areas? Should it be the oil producing areas alone? The Constitution from 1960 till after the cultivated war up till 1978 gave the right of ownership to the federal government but the proceeds were shared between the federal government and the regions or states on the basis of derivation like the agricultural crops. 4) Federation Account and the descent FundIt is important to define what constitutes the Federation Account to which the various vertical revenue allocation formulae have been applied and what should be directly financed from it. U p to 1990, the amount accruing yearly to the Federation Account was still over 96% of totally federally collected revenue but since 1991, when it first dropped to about 75% and nose-dived to around 35% by 1997, it showed no sign of recovery (Olowononi, 1999).It is therefore clear, that in such a situation, whatever the vertical formula applicable, there must still be a in force(p) fiscal imbalance between the ederal government and the two lower tiers of government. It is authoritative to redress this revenue imbalance in the spirit of balanced true federalism. What appears to account for this imbalance is the assertion of the self-claimed right by the federal government to finance various first-line charges from the Federation Account before the application of the vertical formula. The first-line charges include funding for external debt service, national priority projects, NNPC priority projects, particular(a) reserve account, and excess proceeds of the rasping oil sales accoun t, and in addition, the joint venture cash calls account.These deductions are made from the proceeds of crude oil sales before the derivation fund in the Federation Account is arrived at, and after which further deductions for special funds and the funding of the federal capital territory are made. It will seem more logical, with the exception of the joint venture case calls, that these various charges which are federal government obligations be financed solely from the federal governments revenue proper, that is, from its share of the Federation Account or from its revenue from other sources.Therefore, in order to determine what constitutes the derivation fund, resolving the issue of the Federation Account is crucial. Thereafter, the derivation formula to be utilized can be arrived at. 5) Oil Producing Areas and the Derivation Principle The crude oil product has been the most important economic activity in the Nigerian economy since the early 1970s is not subject to debate. Its i mpact is not limited to its contributing almost 90% of Nigerias total foreign exchange earnings but also to the fact that the national budgets are predicated on the expected annual production and price of crude oil.