History Of Revenue Allocation Problems in Nigeria

Nigeria has one federal government, 36 state governments excluding the FCT, Abuja, which is being runned like a state on its own and over 760 local governments. The problem of revenue allocation in the country seem to worsen as the number of governments competing for centrally-collected revenue in the country increases.

The problem officially started in 1914 when the northern and southern protectorates of Nigeria were amalgamated. Before then, the Southern part of Nigeria was fiscally self-reliant from duties on spirits, while the North received imperial grants annually. Fiscal union became necessary for two main reasons:
  1. Both protectorates had fiscal years starting at different times of the year.
  2. Trade between the North and South was not free.
The amalgamation introduced a problem by transferring customs duties to the central government, which caused a lot of suffering to the southern provinces that relied almost on such duties for their revenue.

However, the problem was not a serious one. In order to ensure a balance in the aggregate budget of the central, Northern and Southern government, all expenditures were met from a general revenue fund into which all revenue was collected. Between the fiscal years of 1926 and 1948, the estimate of revenue and expenditure by the federal, Southern and northern government was fully unified.

More serious allocations problems started as from 1939, when the south was divided into the Eastern and Western provinces. The North and West felt irked the the east contributed the least to the central pool, but claim the most from it. Separate budgets were introduced for the four governments in 1949 which caused further problems. A revenue allocation commission was introduced to resolve the situation.

The commission recommended that allocation the allocations given to each region should be based on what the region contributes to the central pool, but backward areas should be given special attention. The situation got worse because the East and West felt that both factors favoured the North. Meanwhile, Customs duties were distributed according to how they contribute to the central pool. The East was dissatisfied with this, so they introduced a personal income tax in 1955 so as to boost its revenue.

The mid-west was created in 1963 as the fourth region of Nigeria and a twelve-state structure was introduced in 1967. The number of states was increased to nineteen in 1967 and was increased to in 1987, to thirty in 1991 and thirty-six in 1995. States creation only complicated the revenue allocation even more.