Revenue Allocation Essay Example

government in the federation in such away as to reflect the structure of fiscal federalism.

It is in the light of the economic growth process in Nigeria has not been utilized. Hence the need to examine empirically whether revenue allocation formular adopted in the past has had any meaningful impact on the economic growth process in Nigeria. The issue of revenue allocation in Nigeria is a fundamental one that border on promotion of national unity and rapid economic growth. It is however sad the despite continious increase in revenue generation in Nigeria over the years, the expected impact on economic growth in Nigeria has not been realized.

Hence the need to examine empirically whether revenue allocation formula adopted in the past had any meaningful impact on the economic growth process in Nigeria.  The major aim of the study is to assess the impact of revenue allocation on economic growth in Nigeria. This is important in view of the fact that the exists a link between revenue allocation formular and economic growth when one considers the position of government is gross fixed capital above, the specific objectives of this study are to; 1.

Examine the extent to which the revenue allocation formula adopted in the past has affected the path of economic growth and development in Nigeria.  Proffer solution to the teething problem of revenue allocation formula in view of macro economic aspiration of rapid economic growth and development. The important of this is that whatsoever revenue formula that is being canvassed for or is adopted; the important thing is whether or not it improves the quality of life of people in Nigeria. 2. Literature Review 2. Fiscal Revenue

and Economic Growth In line with most growth theories, natural resources, human resources, capital enterprises and technonlogy are all important for rapidly economic growth. Expenditures on human resources development via spending on education and research, provision of infrastructural facilities health care, housing and urban development, environment, quality of national statistics, securities and administration of justice are made possible or better still financed through the revenue gotten from the nation’s resources.

These invariably lead to economic growth. This therefore posits that an efficient revenue allocation is of great importance in the equation of growth. Similarly, successive governments do make provisions for human capital development and technological improvement through improvement in educating funding and expenditure on research because of the fact that these are necessary ingredients for economic growth and development it is often said that economic growth is possible even when an economy is deficient in natural resources.

As pointed out by Lewis, (1990) “a country’ which is often considered to be poor in resources today may be considered very rich in resources at some later time, not merely because unknown resource are discovered, but equally because new users are discovered for the known resources” Japan is one such country which is deficient in natural resources but it is one of the advanced countries of the world because. It has been able to discover new uses for limited resources.

Moreover, by importing certain raw materials and minerals from other countries, it has been successful in over coming the deficiency of its natural resources through superior technology, new researches and higher knowledge. It is also important to note that capital accumulation is one of the factors than enhance economic growth.

Capital means the stock of physical reproducible factor of production. When the capital stock increases with the passage of time this is called capital accumulation (or capital formation).

Since the prospensity to save IS low in most LDCs, Voluntary savings will not be forth coming in sufficient quantities. Therefore, the consumption and thereby release resources for capital formation. The various methods of forced saving are taxation, deficit financing and borrowing. These now brings out the role of revenue allocation formula because of the simple fact that in LDCs, the government does the above. It is obvious that how the fund/resources from this forced saving is been shared and the expenditure pattern is of great importane when the talk of rapid economic growth.

Moreso, capital formation helps in providing machines, tools and equipment for the rising labour force. The provision for social and economic overheads like transport, power, education etc in the country is through capital formation. It is also capital formation that leads to the exploitation of natural resources, industrialization and expansion of market, which are essential for economic progress. For an economy that is open like ours, the issue of economic growth cannot be discussed without bringing in particular.

It is important to note that international free trade has been regarded as the “Engine of growth” that propelled the developed of today’s economically advanced nations during the nineteenth and early twentieth centuries. Rapidly expanding export market provided an additional stimulus to growing local demands that led to the establishment of large manufacturing industries. Together with a relatively stable political structure and flexible social institutions, these increased export earning enables the developing country of the nineteenth century to

borrow funds in the intenration capital market at very low interest rates.

This capital accumulation, which is very important to growth in turn stimulated further production, made possible increased imports and led to a more diversified industrial structure. Having gone through some of the importance economic actors of growth, it is important to note that there are some non-economic factors that are also crucial to rapid economic growth and development. It is sufficie to say that the final distinction between the historical experience of developed countries and the situation faced by contemporary developing nations relates to the nature of social and political institutions.

Conversely, the early post World War II growth theorist pushed the pendulum to tile opposite extreme and concentrated on, the role of capital in the growth process. More recently economist have tried to develop an integrated view that combines the effects of labour force growth, capital growth, and improved technology in explaining economic growth. Many very interesting questions have bee raided. If output per capital tends to grow at a particular rate in a full employment economy, what is the magnitude of the growth rate, and what are their determinant?

What fraction of growth is due to the fact that each worker has more capital to work with? What fraction is due to the fact that the capital is improved? And, finally, what fraction is due to the fact that labour itself might be becoming’ more productive as standards of health, education and training improve? Todaro (2003) stated that another cornerstone of the neoclassical free market argument is the assertion that liberalization of national markets draws additional domestic and foreign investment thus increasing the rate

of capital accumulation in terms of GNP growth.

This is equivalent to raising domestics savings rates, which enhances capital – labour ratio and pr capital incomes in capital poor developing countries, Traditional neoclassical models of growth are a direct out growth of the Harrod Domar and Solow models, which both. Stress the importance of savings. The RLM. Solow neoclassifical growth model in particular expanded on the Harrod-Domar formulation by adding a second factor, labour and introducing a third independent variables technology to the growth equation.

Since ? is assumed to be less than 1 and private capital is assumed to be paid it marginal product so that there are no external economies, this formulation of neoclassical growth theory yields diminishing returns to capital and labour In line with the traditional neoclassicial growth theory, Output growth results from one or more of three factors: Increases in labour quantity and quality (through population growth and education in which public fund is been expanded upon), and improvement in technology.

This underscores the importance of revenue allocation formula and other factors that are crucial to rapid economic growth and development. 2. 3 National Revenue Mobilization, Allocation And Fiscal Commission (NRMAFC) The Babangida government decided to revisit the Dina revenue allocation commission of 1968 which had recommended the setting up of a permanent revenue planning and fiscal commission but which was at that time rejected by government. Decree no 49 of 1989 provided for the setting up of a permanent commission to review revenue allocation formula.

The decree established the national revenue mobilization, allocation and fiscal commission (NRMAFC), which was also charged with the responsibility of revenue mobilizations, and promotion of fiscal efficiency. Some

of the specific functions of the commission include the design and mobilization on all sources of public revenues, the periodic review of revenue allccation formulae, the prescription and application of revenue allocation formulae as well as monitoring the accruals form the federation account and other joint accounts.

It would be necessary to stated that the 1992 revenue allocation formular backed by decree 106 was in place and used into the new era of democracy. But this could not address changing realities like the increase in numbers of states (6) local government councils (185) and the constitutional provision that increases derivation principle form 1% to 13% By the time collations were made and analysed, a critical study on constitutional responsibilities of each tier was done to assign commensurate indices through percentages to the beneficiaries.

It was therefore not surprising that it look the commission almost a whole year to submit its first proposal to the president in August 2001, which was subsequently passed to the National Assembly in its original form. The proposed revenue formula remained the National Assembly for almost eight months before the Supreme Court verdict of April 2002 on resource control nullified special fund in the existing formula, which invariable affected the fate of the pending formula with the legislators.

Since an executive order, as authoritative interim measure which legalized by a subsequent ruling of Supreme Court was in place, the commission had to device another strategy in making sure that the revised formula is fair and just without emotion or sentiments. It therefore with drew the early submission and asked for fresh inputs from stakeholders and general public on how to apply the special fund.

The commission came up with the final sharing formula with federal government having 46. 63% states 33% and local government 20. 37%. it further recommended that FCT should be treated like state so also the municipal councils.

The implementation of institution, compulsory contributory pension scheme to address the problems that are common and peculiar sources of discontent among tiers and provision of fund that will take care of ecology, technology research, solid mineral development, national reserve and agricultural development (Shauib 2003) 2. 3. 3 Vertical Revenue Allocation Balance In Nigeria As earlier stated in the beginning of this chapter, Nigeria been a country that practices federalism provides the primary basis for the inter-governmental fiscal problems of the Nigeria public sector.

Normally each tier of government should be given adequate resources to be able to discharge its constitutional responsibilities, which is very important for the preservation of the autonomy of the constituent units. However, this is practically impossible in practice instead we notice that some may not have enough to meat their expenditure responsibilities from their own revenue source. In Nigeria, fiscal imbalances have followed a distinctive pattern where the federal government is in a superior position and sub-national levels in the inferior position.

This means that the central government engages in functional expenditure obligations than both the state and local government does. An anomaly observed in the Nigerian situation is the inclusion of derivation as a part of vertical revenue allocation under a special fund instead of the universal practice of including it as a principle in horizontal revenue allocation. This explains partly the measure percentage allocated to it. (Tijani and Godowoli 1992) observed that the apparent oscillation

in the use of the principle is esponsible for the state apparent oscillation in the use of the principle is responsible for the state of affairs. In Particular, certain sections of the country (especially the oil producing states) felt circumvented that the principle of derivation was lightly emphasized in revenue sharing arrangements from the 1940s through the 1960s when the nations economic mainstay was agriculture, but the emphasized when oil became the major revenue earner from the early 1970s. The issue was further politicized with argument over on shore and off shore oil until the recent time.