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FEDERALISM AND REVENUE ALLOCATION IN NIGERIA: A CRITICAL EVALUATION OF THE DERIVATION PRINCIPLE

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

In a single country, federation denotes the establishment of multiple levels of government, each with its own budgetary and taxation authorities. Nigeria is a federal federation made up of 36 states and the federal capital territory, as well as a federal government and 774 local governments. Fiscal arrangements between tiers of government should be adequately worked out to ensure fiscal balance in the context of macroeconomic development and stability.

Because they involve many levels of government, federal systems are by definition complicated administrative architectures. As a result, the Nigerian federal system faces numerous significant challenges. Fiscal federalism is the term used to describe the fiscal arrangement between the different tiers of government in a federal structure (Osisioma and Chukwuemeka, 2007); it is also known as inter-tier or intergovernmental fiscal interactions in other types of political structures. The balance between decentralization of revenues and decentralization of government spending determines the federal, provincial, and territory governments’ ability to fulfill their tasks. The percentage of total revenue and expenditures allotted to both state and local governments is referred to as decentralization. According to Okoro (2006), the extent of independent decision-making by the various arms of the government in the provision of social and economic services is the degree of decentralization. Other areas of the economy prospered in Nigeria prior to the discovery of oil. Agriculture, for example, was a significant source of income in the Western Region. The Eastern Region, which was less well-off, found additional revenue streams. All of this has altered, however, with the country’s discovery of oil. This has resulted in the downfall of the economy’s other productive sectors. In fact, Nigerians today are poorer than they were prior to the oil boom. This is primarily due to the way of distributing oil earnings. The struggle for control of the oil wealth has resulted in an unfavorable shift in revenue allocation from a revenue-oriented to an expenditure-oriented concept (CyberEssays, 2010).

The way resources are allocated or revenue is distributed among the constituent units has a considerable impact on the growth and development of any economic system, whether it is capitalist, socialist, or mixed. Even in a capitalist economy where resources are allocated through the market mechanism, they should be allocated efficiently and methodically in order to obtain optimal profits or benefits.

The issue of revenue allocation is heavily influenced by a country’s political background and operating system. Nigeria, on the other hand, is a good example of federation via devolution, with sharing serving as a powerful but contentious tool for resolving regional economic disparities and fiscal imbalances. Since 1914, the country has been administered by the colonial power as a unitary system until the conclusion of WWII. The Phillipson-Adebo Commission, formed in 1946 in response to the impending formation of three component areas, was the first income allocation study committee. The Hicks-Phillipson commission of 1951 mirrored the constitutional push toward more regional autonomy in the early 1950s. The Chick Commission, a new realignment of constitutional functions between the center and the regions, was established in 1953. Internal self-government had arrived in the regions by the mid-1950s, despite the fact that the country as a whole was still under British colonial administration, and the Raisman Commission of 1958 recognized this.

Despite the recommendation, the military followed their own rule-of-thumb for the majority of the rule’s duration. The Aboyade Technical Committee was established in 1977, after the 12 states had been further partitioned into 19 states (with a new federal capital carved out), and the civilian takeover was nearing under a new constitution. The new civilian administration, on the other hand, had its own views about how to address regional inequities and established the Okigbo Commission in 1979.

At every turn, there have been changes in which allocation concepts were prominent, attempted, offered, approved, or rejected. These ideas can be found in the dominant political views of the day, as well as in the fortunes of political parties. And politicians from various ideological perspectives and political parties could be expected to support and extol the specific allocation principles that were most likely to benefit their respective constituencies at any given time, even if the same politician had to intellectually somersault and completely reverse themselves in the following period. Leaving aside the more colorful allocation principles (such as regional characteristics and surface areas) proposed by various pressure groups, the following are the core revenue-sharing criteria that have been tried at one point or another in Nigeria’s succession of fiscal review commissions: derivation, even development, independent revenue, need, national interest, government continuity, minimum accountability, population size, financial comparability, equal access to development chances. The list of principles, as long, complex, and often confusing as it is, is still primarily intended to address only one aspect of the regional development problem: the distribution of any given sum among the various member states or regions. The problem of establishing among different levels of government within the federal system was always a separate issue, which was approached differently by the various Nigerian review commissions. The issue of local government funding was also present. The question of transferring grants from one level of government to a lower level was also raised. However, with the exception of personal income taxation, the distribution of tax powers across the various levels of government has remained relatively consistent in recent years.

STATEMENT OF PROBLEM

Nigeria’s federalism is plagued by structural inequity. True federalism, on the other hand, indicates that component or federating units should follow their own developmental programs at their own pace, using resources available to them on their own land. However, the number of federating units in Nigeria continues to grow, putting further strain on available resources. Under such conditions, it is impossible for any unit to be completely satisfied with its shares. Surprisingly, Nigeria’s revenue allocation has been subjected to a slew of reviews, as indicated by the several committees and commissions established in that respect (Okeke, 2004). Despite this, no viable formula for meeting citizens’ desires and ambitions has been developed. Defects of this nature have sparked a slew of responses from the lower levels of government, who are always complaining about fiscal imbalance. “The presence of a federal system with its associated political entities demands a revenue sharing scheme to enable each unit to carry out its constitutionally allocated obligations,” argues Danjuma (1994). There is always a gap between the expenditure requirements and the revenue to different levels of government in federalism since the reasoning underlying the allocation of tax power (revenue sources) does not always tally with the logic underlying the assignment of constitutional responsibilities. The process of revenue allocation was developed to deal with the imbalance or gap between expenditure obligations and revenue resources. It is necessary for such allocation to be successful and efficient. The practice of federalism without actual fiscal federalism is blatantly hypocritical. The fact that the fundamental concerns in Nigeria’s fiscal federalism remain murky has slowed her progress toward becoming a true nation state. Several commissions were established prior to independence to investigate the concerns with Nigeria’s fiscal federalism. The Philipson Commission (1946), the Hicks-Philipson Commission (1950), the Lenis-Chick Commission (1954), and the Raisman-Tress Commission (1956) are among them (1958). Despite the fact that each attempted to overcome the question surrounding Nigeria’s actual fiscal federalism, the problem continued. This resulted in the establishment of a slew of subsequent post-independence commissions to give the country with the requisite fiscal federalism solution. Binns Commission (1964), Interim Revenue Allocation Review Committee (1969), Okigbo Commission (1979), Danjuma Commission (1988), and other commissions were among them. Given the circumstances, when the country transitioned to democratic control in 1999, the 1989 constitution was put into effect, with many attempts to address the myriad of problems linked with fiscal federalism in the country. However, there were numerous problems concerning the country’s budgetary policy during this time, leading to certain states in the Niger Delta region challenging the federal government to court (Olugbemi 2000).

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