The objective of this paper is to investigate the effects of fiscal federalism on economic welfare in Nigeria between 1970 and 2009 using an econometric approach. The ordinary least square (OLS) technique is adopted. The Augmented Dickey-Fuller test was used to test for unit root and it was discovered that all the variables are I (I) except Fiscal Autonomy Ratio (FAR) that is I (O). Also the Johasen co-integration test was used to test for the long term properties of the variables and the result shows that there exist a long-run relationship between measures of FD and PCI. The short-run dynamic result shows that measures fiscal decentralization have mixed relationship with Per capita income with R^sup 2^ of 0.907 and F-statistic of 30.26. The dummy variable shows that there is a significant difference between civilian and military regimes with respect to fiscal decentralization and economic welfare in Nigeria during the period of study. The study recommends among others that the National Revenue mobilization, Allocation and Fiscal Commission (NRMAFC) should be independent and be allowed to meaningfully undertake its functions regarding fiscal relationship between the various levels of government.
Keywords: Fiscal Federalism and Economic Welfare;
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Federation implies the existence in one country of more than one level of government, each with different expenditure responsibilities and taxing powers (Ekpo, 2004). In the Nigeria context, this consists of a federal government, 36 states, federal capital territory and 774 local governments. The fiscal arrangement among the different tiers of government in a federal structure is often referred to as fiscal federalism.
Conceptually, fiscal operations of any economy can be viewed from two extreme forms of the public sector. On one hand, there exists a highly decentralized fiscal system in which the government at the centre has no economic functions. The other tiers of government perform virtually all economic functions. The other extreme is a case of total centralization where the central government takes total responsibility for all economic activities of the public sector and therefore no other tiers of government participate in the economic life of the nation. In practice, there exists some degree of decentralization in all economies (Ekpo, 1999).
Mowhood (1983) and Smith (1985) defined decentralization as any act by which central government formally cedes power to actors and institutions at lower levels in political administrative and territorial hierarchy. The objective as argued by Ribot (2002) includes downsizing central government by increasing local participation in democracy and strengthening local government.
The introduction of a democratic experiment in 1999 re-echoed the problems of intergovernmental fiscal arrangement among the different levels of government. The issues of revenue allocation and the sharing formula have generated such intense debate that led to the demand of a national conference. It was during this period that the 'resource control' phenomena rose to an unprecedented dimension such that the struggle for political power become the fight for resource control. Hence, the democratic experiment has created 'new' problems; the interference by the executive arm of government on the functions of the National Revenue Mobilization Allocation and Fiscal Commission (NRMAFC) on the appropriate revenue-sharing formula among the different levels of government, the debate regarding the correct interpretation of the section of the 1999 constitution affecting the derivation principle, among others have posed challenges for Nigeria's fiscal federalism (Onah and Ukwueze,nd). It is the thinking of most Nigerians that with fiscal decentralization, economic welfare of Nigerians will be automatic.
In view of the above, it is pertinent to ask some fundamental questions. …