FEDERAL POLYTECHNIC NEKEDE OWERRI

FEDERAL POLYTECHNIC NEKEDE OWERRI P.M .B 1036, OWERRI IMO STATE ASSIGNMENT ON DICUSS FISCAL FEDERALISM WRITTEN BY GROUP 13 NAMES: REG. NO: AMADI AUGUSTA I. 14/0080/PS AMADI PRISCA CHINAZAEPERE ANYAWU CASMIR C. 14/0001/PS EDUPUTA CHIDERA V. IKERIONWU CHIDERA AUGUSTINE NWACHUKWU MARTIN U. 14/0042/PS NWANYA ONYEDIKACHI FORTUNE 14/0075/PS OKIKE PROMISE CHIMAOBI 14/0027/PS ONWULA INNOCENT O. ONYEWUCHI CHETACHI B. 14/0013/PS THEOPHILOS JOSTINA NWAMAKA DEPT: GNS 131 LECTURER: HIS EXCELLENCY DATE: AUGUST, 2015. PURCHASING AND SUPPLY LEVEL: NDI MORNING COURSE TITLE: CITIZENSHIP EDUCATION COURSE CODE: ABSTRACT Fiscal federalism, which mirrors the amount of fiscal autonomy and responsibility accorded to sub-national government, has been an important subject in the policy equation of many developing, transition, and developed countries. This paper, therefore, examined the evolution, structure, and practices of fiscal federalism in Nigeria. The paper revealed that Nigeria has not operated as a true federation since it adopted a federal constitution. Fiscal responsibility and taxing powers still remain considerably centralized. The practice of fiscal federalism in Nigeria has been inhibited by several factors which include, the dominance of the federal government in the revenue sharing, the protracted period of interregnum rule of the military, and over-reliance on the revenue from the Federation Account. Keywords: Decentralisation, Allocation, Centralism, Military INTRODUCTION Fiscal federalism 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. There are two primary types of transfers, conditional and unconditional. A conditional transfer from a federal body to a province, 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. An example of this would be the Canada Health Transfer. An unconditional grant is usually a cash or tax point transfer, with no spending instructions. An example of this would be a federal equalization transfer. This may be noted that the concept of fiscal federalism is relevant for all kinds of government: unitary, federal and con-federal. The concept of fiscal federalism is not to be associated with fiscal decentralization in officially declared federations only; it is applicable even to non-federal states (having no formal federal constitutional arrangement) in the sense that they encompass different levels of government which have de facto decision making authority. This, however, does not mean that all forms of governments are 'fiscally' federal, only that 'fiscal federalism' is a set of principles that can be applied to all countries attempting 'fiscal decentralization'. In fact, fiscal federalism is a general normative framework for assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions These questions arise: (a) how are federal and non-federal countries different with respect to 'fiscal federalism' or 'fiscal decentralization', and (b) how are fiscal federalism and fiscal decentralization related (similar or different)? Chanchal Kumar Sharma clarifies that while "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, "fiscal decentralization on the other hand is a process of applying such principles". Federal and non-federal countries differ in the manner in which such principles are applied. Application differs because unitary and federal governments differ in their political and legislative context and thus provide different opportunities for fiscal decentralization. What is Fiscal Federalism? There are numerous definitions of fiscal federalism or what is sometimes referred to as “intergovernmental fiscal relations” (see Ekpo, 2004). Understanding these meaning(s) and the controversies that the issue of fiscal federalism generates across countries logically presupposes an understanding of the term “federalism.” I won’t waste too much time in defining federalism but to simply view it as a system of government with in-built mechanisms that allows the various component constituent-state governments certain spheres of operation which are not necessarily mutually exclusive but which in the main, assures them of specific powers in terms of the legislation and control or adjudication over this spheres. By this definition, I escape the classicalist K. C. whereas’ distinct position that argues that each component of a federal system operates within their spheres “coordinate” and “independent.” In reality, there is no federal structure with one hundred percent coordinate and independent units. In adopting this position, I also, therefore, agree with the position of Donald Horowitz that though federalism, at least in principle is aimed at managing conflict(s) in pluralised (not plural) societies, “federalism can also foster undemocratic institutions (Horowitz, 2008: 103). Main concepts The concepts of fiscal federalism are related to vertical and horizontal fiscal relations. The notions related to horizontal fiscal relations are related to regional imbalances and horizontal competition. Similarly the notions related to fiscal relations are related to vertical fiscal imbalance between the two senior levels of government, that is the centre and the states/provinces. While the concept of horizontal fiscal imbalance is relatively non controversial (as explained above), the concept of vertical fiscal imbalance is quite controversial (see Bird 2003 and Sharma 2011) A recent article published in Public Administration, Blackwell, Oxford, authored by Chanchal Kumar Sharma, clarifies the notion of vertical fiscal imbalance.The paper also demonstrates how the notion of Vertical Fiscal Imbalance (VFI) is conceptually distinct from the notion of Vertical Fiscal Gap (VFG). These terms are used as synonyms, burt they are not. Recent attempts at differentiating the notions, particularly in the Canadian literature on fiscal federalism, had rather added to the confusion (see Sharma 2011, Tables 1,2,3; section VI). The incisive analysis of the aforementioned paper at once clarifies the entire conceptual confusion. The article states that any existing revenue-expenditure asymmetry between the two levels of a government should simply be called, what it is, that is, a Vertical Fiscal Asymmetry (VFA). The precise nature of this asymmetry, in a particular country, can be determined by using certain criteria that the author has evolved. The kind of policy solution to be applied will depend on the nature of asymmetry (VFA). Thus, there can be three types of VFAs: 1. Fiscal asymmetry with fiscal imbalance: VERTICAL FISCAL IMBALANCE (VFI). This means inappropriate allocation of revenue powers and spending responsibilities. This state can be remedied by reassignment of revenue raising powers. 2. Fiscal asymmetry without fiscal imbalance but with a fiscal gap: VERTICAL FISCAL GAP (VFG). This means a desirable revenue-expenditure asymmetry but with a fiscal gap to be closed. This state can be remedied by re-calibration of federal transfers. 3. Fiscal asymmetry without fiscal imbalance and without fiscal gap: VERTICAL FISCAL DIFFERENCE (VFD). This means a desirable revenue-expenditure asymmetry without a fiscal gap ( i.e. gap is closed). This is a state of fiscal asymmetry where there is "no imbalance and no gap" and thus needs no remedial measure. Conceptual Issues Fiscal federalism is a byproduct of federalism. Federalism is a political concept in which power to govern is shared between national, and sub-national governments creating what is often called a federation (Arowolo 2011, Akindele and Olaopa, 2002). Federalism is a political concept in which the power to govern is shared between national, states and local governments, creating what is often called a federation (Arowolo, 2011, Akindele and Olaopa, 2002). Arowolo (2011, p.4) states that “It is a political theory that is divergent in concept, varied in ecology and dynamic in practice”. According to Vincent (2001), the concept of federalism implies that each tier of government is coordinate and independent in its delimited sphere of authority and should also have appropriate taxing powers to exploit its independent sources of revenue. Fiscal federalism demands that each level of government should have adequate resources to perform its functions without appealing to the other level of government for financial assistance (Wheare, 1963): For any federation to be sustained there must be fiscal decentralization and financial autonomy. Fiscal decentralization means delegating decision-making to lower levels of government instead of concentrating it at the centre. Each level of government, therefore, should be free to take decisions and allocate resources according to its own priorities in its own area of jurisdiction. In addition, the federating units should be able to act independently on matters within their own jurisdiction(Ewetan, 2011). Fiscal federalism 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). Fiscal federalism is a general normative framework for the assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions (Arowolo, 2011). It is a set of guiding principles or concept that helps in designing financial relations between the national and subnational levels of government, while fiscal decentralisation is the process of applying such principles (Sharma, 2005). Fiscal federalism concerns the division of public sector functions and finances among different tiers of government (Ozo-Eson, 2005). Fiscal federalism is characterized by fiscal relations between central and lower levels of government. The fiscal relationships between and among the constituents of the federation is explained in terms of three main theories, namely, the theory of fiscal relation which concerns the functions expected to be performed by each level of government in the fiscal allocation; the theory of inter-jurisdictional cooperation which refers to areas of shared responsibility by the national, state and local governments, and the theory of multijurisdictional community (Tella, 1999). In this case, each jurisdiction (state, region or zone) will provide services whose benefits will accrue to people within its boundaries, and so, should use only such sources of finance as will internalize the costs. Theory of fiscal federalism The basic foundations for the initial theory of Fiscal Federalism were laid by Kenneth Arrow, Richard Musgrave and Paul Sadweh Samuelson. Samuelson’s two important papers (1954, 1955) on the theory of public goods, Arrows discourse (1970) on the roles of the public and private sectors and Musgrave’s book (1959) on public finance provided the framework for what became accepted as the proper role of the state in the economy. The theory was later to be known as “Decentralisation Theorem” (Ozo-Eson, 2005). This framework identifies three roles for the government sector. These are correcting various dimensions of market failure, maintaining macroeconomic stability, and redressing income inequality. The central government is responsible for the correction of market failure and maintenance of macroeconomic stability, while the subnational governments and the central government are jointly responsible for redressing income inequality(Ozon-Eson, 2005). Each tier of government is seen as seeking to maximize the social welfare of the citizens within its jurisdiction. This multi-layered quest becomes very important where public goods exists, 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 Oates (1972) has formalized into the “Decentralization Theorem” constitutes the basic foundation for what may be referred to as the first generation theory of fiscal decentralization (Oates, 2006a; Bird, 2009). The theory focuses on situations where different levels of government provide efficient levels of outputs of public goods “for those goods whose special patterns of benefits are encompassed by the geographical scope of their jurisdictions” (Oates, 2006b). Fiscal Federalism Network The relationship between central and subcentral government bodies has a profound effect on efficiency and equity within the government and on macroeconomic stability of the country. The role of the OECD Network on Fiscal Relations Across Levels of Government is to provide data and analysis on these relationships between organizations at different levels of government. Fiscal Federalism And Development In Nigeria According to Professor Akpan Ekpo, a one-time Vice Chancellor of University of Uyo, during his 2004 presentation entitled “Intergovernmental Fiscal Relations: The Nigerian Experience” at the 10th Year Anniversary of the Financial and Fiscal Commission of South Africa in Cape Town, “Nigeria’s fiscal federalism has emanated from historical, economic, political, geographical, cultural and social factors. In all of these, fiscal arrangements remain a controversial issue since 1946. Therefore, there exist unresolved issues on this matter”. Flowing from the above statement, I would start by stressing one fundamental point: there is no such thing as a ‘true federalism’ in the real sense of the word. Consequently, there is no totally identical federal system, and each system, even where such idea had been borrowed from elsewhere, often reflects the peculiar socio-economic and historical moments that led to its introduction. Hence, scholars have always talked about a “spectrum” of federalism which ranges from a centralized federal system to the most decentralized the commonest feature amongst them being at least two tiers of government, namely, the federal government and constituent states. Having said this, my presentation will engage two seemingly simple but difficult questions. (1) How can fiscal federalism impact development? That is, in what ways does fiscal federalism have a negative or positive effect on development? (2) What are the core issues in Nigeria’s fiscal federalism and how does this impact development? In other words, what are the fundamental issues in Nigeria’s fiscal federalism? Nature and challenges of fiscal federalism in Nigerian The legal basis of fiscal federalism is derived from the past constitutional arrangements and, hence, in any true federalism the fiscal powers of all tiers of government must be related to the functions and responsibilities assigned to them by the Constitution. Constitutionally, Nigeria is a federation, but in practice, and with the assumption of power by successive military administrations, the constitution has always been suspended and the country ruled more or less like a unitary state. The imposition of a centralized unitary system on a federal structure under the military administration partly explains our experience of poor fiscal management and low economic performance which, over the years, had adversely inhibited the true practice of fiscal federalism. Summary The paper analyzed the evolution of fiscal federalism, evolved a theoretical basis for fiscal federalism and discussed extensively on the nature and challenges of fiscal relations in Nigeria. The paper concluded that fiscal responsibility and taxing powers still remain considerably centralized. Fiscal federalism has therefore been viewed as a subfield of public economics concerned with understanding what functions and instruments are “best centralized” and which are “best placed in the sphere of decentralized levels of government” (Kalu, 2011: 1). In this piece, I define fiscal federalism as the system of revenue generation, allocation and redistribution within a federal system. It is that aspect of federalism that concerns the financial and attendant functions and responsibilities of component units within a federal structure. Expectedly, however, because federalism is generally viewed as a system represented by ‘unity in diversity,’ fiscal federalism is itself guided by some principles. For instance, Ekpo (2004) identifies ten of these principles. Here I will emphasis four of the most popular ones. These include: principle of accommodation, principle of correction of spill-over effects, principle of social safety net, and principle of derivation. First is the principle of accommodation which relates to the ability or requirement of a federal fiscal system to accommodate diversity (i.e. varieties and differences) in its supply of national, regional and local public goods. Second is the principle that speaks to the correction of spill-over effects which means that a fiscal federalism instrument must be able to address “externalities” (i.e. negative and positive effects of distribution on different geo-political zones). Simply put, for instance, if fiscal distribution of public goods leads to the development of State A, mechanism(s) must be put in place to ensure that State B, that does not benefit from such interventions, is supported in a manner that the negative effect of State A’s positive development does not continue to engender a negative development in State B. Recommendation The solution is to redress the prevailing mismatch by raising the level of taxing assignment of sub-national governments. • The need for an efficient formula between the centre and other tiers of government is recommended. This formula should also satisfy the broad objectives of inter-regional equity and balanced national development. To this end the present vertical revenue allocation formula should be reviewed by the federal government to increase the percentage to lower governments in Nigeria to strengthen their fiscal capacity and enable them play strong role in nation building. • Also, it is imperative to embark on radical diversification of the Nigerian economy to other viable and productive sectors of the economy, such as agriculture, mining, industry and human development. • Urgent reform in fiscal federalism in Nigeria to address the constitutional issue of fiscal powers among the three tiers of government to redress the prevailing fiscal mismatch at sub-national levels of government is strongly recommended. • The need to diversify and strengthen the fiscal base of sub-national governments is recommended. To this end, local tax administration should be improved, unproductive local taxes eliminated, and untapped tax potentials identified. • The need to promote fiscal discipline at all levels of government to sustain macroeconomic stability is strongly recommended. The policy should compulsorily place effective limits on governments’ deficits at all levels, consistent with the objective of macroeconomic stability to ensure sustainable national development. Conclusion In conclusion, the problems associated with the fiscal arrangements of the Nigerian federation are fundamentally attributable to the nature, content and character of the country’s fiscal regime as well as the institutional and socio-political factors that shaped the country’s economic policy including limited revenue base as discussed above. However, no single paper can fully address the challenges of Nigeria’s fiscal federalism but I would make some suggestions on how to enhance the performance index of both the federal and state governments despite their limited revenue base. First, government must be proactive in the development projects. This means that not only must federating states and the federal government understand the need for development but they must also show that they know how to bring it to the grass-root in order to achieve maximum results. Second, anti-corruption institutions and the fight against corruption must be enhanced. It is unbelievable the amount of funds that is lost to corruption. It is pathetic that some have noted and lamented that state governments receive less funds than is required, yet, some are silent on the disturbing cases of corruption in these states even with the supposedly meager resources at their disposal! Third, the people must continue to hold their representatives accountable. It is only through this that governments can live up to their expenditure responsibilities by providing public goods and services for the benefits of all Nigerians. REFERENCES Aristovnik, Aleksander. 2012 'Fiscal decentralization in Eastern Europe : trends and selected issues', Transylvanian review of administrative sciences Aigbokhan, B.E. (1999), “Fiscal federalism and economic growth in Nigeria”, in Fiscal Federalism and Nigeria’s Economic Development 1999 proceedings of the annual conference of the Nigerian Economic Society, Nigerian Economic Society, Ibadan, pp. 333-352. Ajayi, K. (1999), “Federalism and unitarism”, in Kolawole, D. (Ed), Readings in Political Science, Dekaal Publishers, Ibadan, pp. 149-165. Akindele, S.T. and Olaopa, K.(2002),“Fiscal federalism and local government finance in Nigeria: an examination of revenue, rights and fiscal jurisdiction”, in Omotoso, F. (Ed.), Contemporary issues in public administration, Bolabay Publications, Lagos, pp. 46-64. Akpan, E.O. (2011), “Fiscal Decentralization and Social Outcomes in Nigeria”, European Journal of Business and Management, Vol. 2 No. 4, pp. 167-183. Arowolo, D. (2011),“Fiscal federalism in Nigeria: Theory and dimensions”, Afro Asian Journal of Social Sciences, Vol. 2 No. 2.2, pp. 1 22. Bird, R.M. (2009), “Taxation in Latin America: Reflections on sustainability and the balance between efficiency and equity”, working paper [0306], Rotam School of Management, University of Toronto, 26 June. Bird, R.M. 2003. ‘Fiscal Flows, Fiscal Balance, and Fiscal Sustainability’, Working Paper 03-02, Atlanta: Georgia State University. Ferrara, A. (2010) Cost-Benefit Analysis of Multi-Level Government: The Case of EU Cohesion Policy and US Federal Investment Policies, London and New York: Routledge. Sharma, C. K. (2011), BEYOND GAPS AND IMBALANCES: RE-STRUCTURING THE DEBATE ON INTERGOVERNMENTAL FISCAL RELATIONS. Public Administration. Vol. 89 doi:10.1111/j.1467-9299.2011.01947.x Sharma, C. K. (2011), BEYOND GAPS AND IMBALANCES: RE-STRUCTURING THE DEBATE ON INTERGOVERNMENTAL FISCAL RELATIONS. Public Administration. Vol. 89 doi:10.1111/j.1467-9299.2011.01947.