DISTANCE LEARNING CENTRE

AHMADU BELLO UNIVERSITY

ZARIA, NIGERIA.

COURSE MATERIAL

FOR

Course Code & Title: PADM 407: PUBLIC FINANCIAL MANAGEMENT

Programme Title: Bsc Public Administration

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 COPYRIGHT PAGE

© 2019 Distance Learning Centre, ABU Zaria, Nigeria

All rights reserved. No part of this publication may be reproduced in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise without the prior
permission of the Director, Distance Learning Centre, Ahmadu Bello University, Zaria,
Nigeria.

First published 2019 in Nigeria.

ISBN:

Published and printed in Nigeria by:

Ahmadu Bello University Press Ltd.
Ahmadu Bello University,
Zaria, Nigeria.

Tel: +234

E-mail:

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 COURSE WRITERS/DEVELOPMENT TEAM
Dr. John Daniel Ndan (Subject Matter Expert)
Dr. H. A. Yusuf (Subject matter Reviewers)
Ibrahim M. Dikko
Adeyemo, Peter Adekunle (Language Reviewer)
Nasiru Tanko Graphics
Ibrahim Otukoya
Prof. Adamu Z. Hassan (Editor)

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 Quotes
When someone wants to borrow money, lend him only what you can afford to loose.

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 TABLE OF CONTENT

Title Page
Acknowledgement Page
Copyright Page
Course Writers/Development Team
Table of Content

COURSE STUDY GUID

i. Course Information
ii. Course Introduction and Description
iii. Course Prerequisites
iv. Course Textbook(s)
v. Course Objectives and Outcomes
vi. Activities to Meet Course Objectives
vii. Time (To Complete Syllabus/Course)
viii. Grading Criteria and Scale
ix. Course Study Guide and Outline

MODULES
1.0 1 Module 1______________________________________________21
Study Session 1: Introduction to public financial management_______21
Study Session 2: Comparing Public with Business Finance______________31
Study Session 3: Government Revenue and Taxes____________________46
Study Session 4: Approved List of Tax revenue according to Tiers of government in
Nigeria________________________________________69

2.0 Module 2_______________________________________________76

Study Session 1: Tax Administration_____________________________76
Study Session 2: Principles of Effective__________________________83
Study Session 3: Government Expenditures_______________________92
Study Session 4: Macro-economic Policies______________________108

3.0 Module 3______________________________________________122

Study Session 1: Public Debt burden on the Economy______________122
Study Session 2: History of revenue allocation in Nigeria____________136
Study Session 3: Criteria and formulae for revenue Sharing_________141

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 COURSE STUDY GUIDE
i. COURSE INFORMATION
Course Code: PADM 407
Course Title: Public Financial Management
Credit Units: 2 credit units
Year: four
Semester: First

ii. COURSE INTRODUCTION AND DESCRIPTION

The Course focuses on key areas of financial management where principles and
practices of global best practices are exposed to our students. A whole lot of areas
are covered to adequately equip students with the knowledge to understand the
operations of government financial matters. The main topics covered are: the
nature and scope of Public Financial management, Differences between Public and
Business Finance; the role of government in the economy; Government Revenue;
Taxation Administration; Public Expenditure, Revenue Allocation;
Macroeconomic policies, Public Debt; among others are addressed.

Public Financial Management is about managing the finances of government and

regulating the economy to ensure government fulfill its role of treating its subjects
as citizens and not customers just to make profit. Government being the largest
spender in the Nigerian economy like ours regulates the economy to ensure that it
meets the needs and yearnings of the people. The revenue it generates, the budget
it implements, the revenue shared from the federation account among tiers of
government, the expenditures it embarks upon, the macroeconomic policies it

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applies and other measures it takes help in no small way to regulate the economic
and impact positively on the lives of the citizens. The impact we feel from the
application of public financial management varies, depending on the nature of
work we indulge in. This course seeks to expose students to how revenue is
generated and spend how macroeconomic policies shape our economy. In other
words our capacity to manage our finances prudently can go a long way to
determine the level of our development and vice versa. The turbulent period we are
experiencing today calls for greater vigilance in managing our resources. This
course is grounded in our own personal experiences and more importantly on how
government operates the economy in partnership with the private sector. The aim
of this course is to help you develop your capacity to evaluate government policies
and actions in financial management and the impact it has on the citizens and the
economy. The course is concerned with the application of government financial
policies and decisions, principles and techniques through readings, group sessions
and case studies. The course is taught mainly via the internet and you'll take part in
an online collaboration with your course mates.

iii. COURSE PREREQUISITES

You should note that although this course has no subject pre-requisite, you are
expected to have:
1. Satisfactory level of English proficiency
2. Basic Computer Operations proficiency
3. Online interaction proficiency
4. Web 2.0 and Social media interactive skills

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 iv. COURSE TEXTBOOKS
ABUBAKAR, H.I. (1999), Revenue Generation and control in Local Government.
National Orientation Workshop for Local Government Councilors,
Produced by office of the Vice President, State and Local Government
affairs, Abuja.
ABUBAKAR, H.I. (2000), “Local Government Finance in Nigeria: Revenue Right
and Fiscal Jurisdiction”. National workshop on the Review of 1999
Constitution Office of the Vice President of Nigeria, Abuja.
ABUBAKAR, H. (1991) I, Local Government Finance: Its Sources Management
and Stewardship Background Paper Prepared For the Orientation
Workshop for Newly Selected Local Government Chairman and
Councilors
MAWHOOD P. Ed; (1982) Local Government in the Third World, the Experience
of Tropical Africa London John Wiley Publishers.
MAXWELL J.A. (1977) Financing State and Local Government Brooking,
Publishers U.S.A.
OREWA G.A, (1966).Local Government Finance, Ibadan University Press
MUSGRAVE R. Public Finance in Theory and Practice, International Student
Edition, McGraw Hill, 1976.
PREST A. R. (1985) Public Finance in Developing Countries 3rd Edition, London
ROBERT H. Haveman; (2004) Public Finance Microsoft ® Encarta ®
Encyclopedia 2004.
LOUIS FISHER, Budget Microsoft ® Encarta ® Encyclopedia 2004
HARVEY S. ROSEN Microsoft ® Encarta ® Encyclopedia 2004

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Kaduna, Aug. 28, 2013 (NAN) The Kaduna State Government on Wednesday
called on the private sector to invest in the tourism industry to develop
the sector.

v. COURSE OUTCOMES
After studying this course, you should be able to:
1. Understand the elementary principles of Public Financial Management in the
public sector in different contexts and situations especially in your
organizations.
2. Identify and appreciate issues in financial management in the public sector,
analyze the issues, and propose appropriate and well-justified solutions.
3. Evaluate and have a clear understanding of how financial matters are dealt
with, be well informed and be an active player in resolving financial issues
and proffering solution to simple and even complex financial issues.
4. Have been exposed to issues of budget, revenue, expenditure, monetary and
fiscal policies, sharing of revenue from the federation account and many
others, you can be an active player in government and even private financial
matters.

vi. ACTIVITIES TO MEET COURSE OBJECTIVES

This is a hands-on course; it will require a considerable amount of your
participation in terms of extensive reading, writing, researching, and case analyses.
Research will require interacting with others and sharing the results of your efforts.
Find the Course Structure in the table below, showing clearly the sequence of
activities, due dates, etc. for the course.

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 Viii. GRADING CRITERIA AND SCALE
Grading Criteria
A. Formative assessment
Grades will be based on the following:
Individual assignments/test (CA 1,2 etc) 20
Group assignments (GCA 1, 2 etc) 10
Discussions/Quizzes/Out of class engagements etc 10

B. Summative assessment (Semester examination)

CBT based 30
Essay based 30
TOTAL 100%

C. Grading Scale:
A = 70-100
B = 60 - 69
C = 50 - 59
D = 45-49
F = 0-44

D. Feedback
Courseware based:
1. In-text questions and answers (answers preceding references)
2. Self-assessment questions and answers (answers preceding references)

Tutor led:

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 1. Discussion Forum tutor input
2. Graded Continuous assessments

Student led:
1. Online programme assessment (administration, learning resource,
deployment, and assessment)

IX LINKS TO OPEN EDUCATION RESOURCES

OSS Watch provides tips for selecting open source, or for procuring free or open
software.
SchoolForge and SourceForge are good places to find, create, and publish open
software. SourceForge, for one, has millions of downloads each day.
Open Source Education Foundation and Open Source Initiative, and other
organisation like these, help disseminate knowledge.
Creative Commons has a number of open projects from Khan
Academy to Curriki where teachers and parents can find educational materials for
children or learn about Creative Commons licenses. Also, they recently launched
the School of Open that offers courses on the meaning, application, and impact of
"openness."
Numerous open or open educational resource databases and search engines
exist. Some examples include:
• OEDb: over 10,000 free courses from universities as well as reviews of
colleges and rankings of college degree programmes
• Open Tapestry: over 100,000 open licensed online learning resources for an
academic and general audience
• OER Commons: over 40,000 open educational resources from elementary
school through to higher education; many of the elementary, middle, and high
school resources are aligned to the Common Core State Standards
• Open Content: a blog, definition, and game of open source as well as a
friendly search engine for open educational resources from MIT, Stanford, and
other universities with subject and description listings
• Academic Earth: over 1,500 video lectures from MIT, Stanford, Berkeley,
Harvard, Princeton, and Yale

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• JISC: Joint Information Systems Committee works on behalf of UK higher
education and is involved in many open resources and open projects including
digitising British newspapers from 1620-1900!

Other sources for open education resources

Universities
• The University of Cambridge's guide on Open Educational Resources for
Teacher Education (ORBIT)
• OpenLearn from Open University in the UK
Global
• Unesco's searchable open database is a portal to worldwide courses and
research initiatives
• African Virtual University ([Link] has numerous modules on
subjects in English, French, and Portuguese
• [Link] is Google's open source software
that is designed to let anyone create online education courses
• Global Voices ([Link] is an international community
of bloggers who report on blogs and citizen media from around the world,
including on open source and open educational resources
Individuals (which include OERs)
• Librarian Chick: everything from books to quizzes and videos here, includes
directories on open source and open educational resources
• K-12 Tech Tools: OERs, from art to special education
• Web 2.0: Cool Tools for Schools: audio and video tools
• Web 2.0 Guru: animation and various collections of free open source
software
Livebinders: search, create, or organise digital information binders by age, grade,
or subject (why re-invent the wheel?)

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 X. ABU DLC ACADEMIC CALENDAR/PLANNER

PERIOD
Semester Semester 1 Semester 2 Semester 3
Activity JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC
Registration
Resumption
Late Registn.
Facilitation
Revision/
Consolidation
Semester
Examination

N.B: - All Sessions commence in January

- 1 Week break between Semesters and 6 Weeks vocation at end of session.
- Semester 3 is OPTIONAL (Fast-tracking, making up carry-overs & deferments)

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 ix. COURSE STRUCTURE AND OUTLINE
Course Structure
WEEK MODULE STUDY ACTIVITY
SESSION
Study Session 1: 1. Read Courseware for the corresponding Study Session.
Introduction to 2. View the Video(s) on this Study Session
Week 1 public financial 3. Listen to the Audio on this Study Session
management 4. View any other Video/U-tube

Study Session 2 1. Read Courseware for the corresponding Study Session.

Week 2 STUDY Comparing Public 2. View the Video(s) on this Study Session
with Business 3. Listen to the Audio on this Study Session
MODULE 1 Finance 4. View any other Video/U-tube
Study Session 3 1. Read Courseware for the corresponding Study Session.
Government 2. View the Video(s) on this Study Session
Week 3 Revenue and Taxes 3. Listen to the Audio on this Study Session
4. View any other Video/U-tube
Study Session 4 1. Read Courseware for the corresponding Study Session.
Approved List of 2. View the Video(s) on this Study Session
Week 4 Tax revenue 3. Listen to the Audio on this Study Session
according to Tiers 4. View any other Video/U-tube
of government in
Nigeria
Study Session 1 1. Read Courseware for the corresponding Study Session.
Week 5 Tax Administration 2. View the Video(s) on this Study Session
3. Listen to the Audio on this Study Session
4. View any other Video/U-tube
Study Session 2 1. Read Courseware for the corresponding Study Session.
Week 6 Principles of 2. View the Video(s) on this Study Session
Effective 3. Listen to the Audio on this Study Session

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 4. View any other Video/U-tube
Study Session 3 1. Read Courseware for the corresponding Study Session.
Week 7 STUDY Government 2. View the Video(s) on this Study Session
MODULE 2 Expenditures 3. Listen to the Audio on this Study Session
4. View any other Video/U-tube
Study Session 4 1. Read Courseware for the corresponding Study Session.
Macro-economic 2. View the Video(s) on this Study Session
Week 8 Policies 3. Listen to the Audio on this Study Session
4. View any other Video/U-tube

Study Session 1 1. Read Courseware for the corresponding Study Session.

Week 9 Public Debt burden 2. View the Video(s) on this Study Session
on the Economy 3. Listen to the Audio on this Study Session
4. View any other Video/U-tube

Study Session 2 1. Read Courseware for the corresponding Study Session.

History of revenue 2. View the Video(s) on this Study Session
Week 10 allocation in 3. Listen to the Audio on this Study Session
STUDY Nigeria 4. View any other Video/U-tube
MODULE 3
Study Session 3 1. Read Courseware for the corresponding Study Session.
Criteria and 2. View the Video(s) on this Study Session
Week 11 & 12 formulae for 3. Listen to the Audio on this Study Session
revenue Sharing. 4. View any other Video/U-tube

Week 13 REVISION/TUTORIALS (On Campus or Online)

Week 14 & 15 SEMESTER EXAMINATION

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Course Outline
1.0 Module 1:
Study Session 1: Introduction to public financial management
Study Session 2: Comparing Public with Business Finance
Study Session 3: Government Revenue and Taxes
Study Session 4: Approved List of Tax revenue according to Tiers of
government in Nigeria

2.0 Module 2
Study Session 1: Tax Administration
Study Session 2: Principles of Effective
Study Session 3: Government Expenditures
Study Session 4: Macro-economic Policies

3.0 Module 3
Study Session 1: Public Debt burden on the Economy
Study Session 2: History of revenue allocation in Nigeria
Study Session 3: Criteria and formulae for revenue Sharing

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 STUDY MODULES
MODULE 1: Introduction to Public Financial Management
Content:
Study Session 1: Introduction to public financial management
Study Session 2: The Role of the State/Functions of Public Finance
Study Session 3: Government Revenue
Study Session 4: Oil and Non Oil Revenue

STUDY SESSION 1
Introduction to Public Financial Management
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Concepts of public financial management
2.2 Government Spending and Taxation
2.3 Labour Supply
2.4 Savings
2.5 Physical Investment
2.6 Tax Shifting
2.7 Tax Incidence
2.8 Direct and Indirect Tax
3.0 Tutor Marked Assignments
4.0Study Session Summary and Conclusion
5.0Self-Assessment Questions and Answers
6.0Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

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Introduction
In this session attempt would be made to understand what public financial
management is and its boundaries compared to other related terms like finance,
personal, private and public finance. Finance, according to the Encyclopedia
Britannica 2009 (Student and Home Edition), is the process of raising and
spending funds or capital for any kind of expenditure. Consumers, business
firms, and governments often do not have the funds available to make
expenditures, pay debts, or complete other transactions and must borrow or sell
equity to obtain the money they need to conduct their operations. Savers and
investors, on the other hand, accumulate funds which could earn interest or
dividends if put to productive use. These savings might accumulate in the form
of savings deposits, savings and loan shares, or pension and insurance claims;
when loaned out at interest or invested in equity shares, they provide a source of
investment funds. Finance is the process of channeling these funds in the form
of credit, loans, or invested capital to those economic entities that most need
them or can put them to the most productive use. The institutions that channel
funds from savers to users are called financial intermediaries. They include
commercial banks, savings banks, savings and loan associations, and such
nonbank institutions as micro-credit unions, insurance companies, pension
funds, investment companies, and finance companies. In Nigeria, these are
effectively controlled and monitored by the Central Bank of Nigeria.

The following three broad areas in finance have developed specialized

institutions, procedures, standards and goals: business finance, personal finance,
and public finance. In developed nations, an elaborate structure of financial
markets and institutions exists to serve the needs of these areas jointly and
separately. The same can be said of some developing nations including Nigeria.

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The first is business finance, which is a form of applied economics that uses the
quantitative data provided by accounting, the tools of statistics, and economic
theory in an effort to optimize the goals of a corporation or other business
entities. The basic financial decisions involved include an estimate of future
asset requirements and the optimum combination of funds needed to obtain
those assets. Business financing makes use of short-term credit in the form of
trade credit, bank loans, and commercial papers. Long-term funds are obtained
by the sale of securities (stocks and bonds) to a variety of financial institutions
and individuals through the operations of national and international capital
markets.
The second is personal finance which deals primarily with family budgets, the
investment of personal savings, and the use of consumer credit. Individuals
typically obtain mortgages from commercial banks and savings and loan
associations to purchase their homes, while financing for the purchase of
consumer durable goods (automobiles, appliances) can be obtained from banks
and finance companies. Charge accounts and credit cards are other important
means by which banks and businesses extend short-term credit to consumers. If
individuals need to consolidate their debts or borrow cash in an emergency,
small cash loans can be obtained at banks, credit unions, or finance companies.

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In-text Question
1. List three types of finance you have learnt.
Answer
1. Personal Finance
2. Business Finance and
3. Public Finance or Public Financial Management

The third is public finance or public financial management which has become
prominent and increased sharply in Western countries since the Great
Depression of the 1930s. As a result, taxation, public expenditures, and the
nature of the public debt now typically exert a much greater effect on a nation's
economy than previously. Governments finance their expenditures through a
number of different methods, by far the most important of which is taxes.
Government budgets seldom balance, however, and in order to finance their
deficits governments must borrow, which in turn creates public debt. Most
public debt consists of marketable securities issued by a government, which
must make specified payments at designated times to the holders of its
securities. While, business finance and personal finance would form part of this
field of study, the main area of focus would be public finance or better still
public financial management as the scope is beyond, revenue generation,
expenditure and public debt.

1.0 Session Learning Outcome

At the end of this session, you should be able to:
1. Define Public Finance Management,
2. Explain ways of government spending and revenue,
3. Discuss labour and saving issues,
4. Explain the concepts of physical investments, tax shifting and tax
incidence, and
5. Discuss the concepts of direct and indirect taxation.

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2.0 Main Content
2.1 Concepts of Public Financial Management
The following concepts highlighted here are meant to ensure soft landing for
those studying public finance for the first time, so that they can hit the ground
running. They concepts are explained to help provide greater understanding of
the principles of public financial management and how the concepts interact in
the economic system. The concepts are as follows:
i. Government Spending and Taxation
ii. Labour Supply
iii. Savings
iv. Physical investment
v. Tax Shifting
vi. Tax Incidence
vii. Direct and Indirect Tax
viii. Disposable Income
ix. Classification of tax

Government Spending and Taxation

Government may spend or invest on a project or infrastructure for the purpose
of producing goods or provide services, but beyond that, it may directly affect
the overall performance of the economy. For example, if government increases
spending to build a new highway, construction of the highway would create
jobs. Jobs create income that people spend on purchases, and the economy tends
to grow. The opposite happens, when the government increases taxes, which
essentially might aim at raising revenue, but would create a different situation
where households and businesses have less of their disposable income to spend
and that would make them purchase fewer goods, and the economy, would tend
to contract or retard. The economic activity of government in one area may tend

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to affect the other areas not intended. This calls for greater vigilance when any
policy measure is being thought out.
Labour Supply
Labour supply means the number of hours that people work. Tax can affect
labour supply by influencing people's decisions about whether or not to work
and how much to work. Suppose, an individual earns ten thousand naira
(N10,000) per hour, and the government imposes a 40 percent tax on earnings.
If after tax, the individual receives only six (N6,000) per hour, that is (N10,000
minus N4,000 in taxes). The impact of such a tax is hard to predict. On one
hand, the tax lowers the cost to the individual of not working. For each hour of
leisure, the individual gives up only N6,000 instead of N10,000. In effect,
leisure has become cheaper, so the individual tends to consume more of it, that
is, to work less. On the other hand, with a lower wage, the individual must work
more hours to maintain the standard of living he or she had before the tax. Thus,
the tax has simultaneously led to two effects that work in opposite directions. If
government wants to encourage labour supply, it must keep tax low or else the
motivation to work will be weak since a major part of the income will go back
to government in form of tax.

Savings
Savings here refers to the portion of income that is not spent. In other words, it
is the money that is saved usually for the rainy day or for future use. Many taxes
levied on returns to saving such as interest and dividends, influence the amount
people save. When a tax is levied on interest or dividends, it reduces the reward
for saving. For example, if an individual earns 10 percent interest on a savings
account and faces a 20 percent income tax, then he or she makes only an 8
percent return, the other 2 percent goes to the government as tax. This effect
tends to reduce the amount of saving that an individual makes. On the other
hand, when interest is taxed, an individual must save more to achieve any
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particular saving’s goal. For example, if parents regularly save money to
accumulate enough to pay for their children’s education, and tax on interest is
increased, they must save more in order to reach their saving’s target. This
effect tends to increase the amount of saving, because the two effects work in
opposite directions. In theory an increase in tax on interest can increase or
decrease saving. For quite sometime, economists have devoted a great deal of
effort to studying people’s saving behavior and the above are some of the
outcomes.

Physical Investment
Physical Investment presupposes the purchase by businesses of manufactured
aids to production. It includes such items as machines, factories, computers,
trucks, and office furniture. The return on a physical investment is the amount
by which the investment increases the business’s revenues. How do taxes affect
physical investment? In effect, a tax on business income is a tax on the physical
investment’s return; the tax reduces the firm’s income and thus, the benefit from
making the investment. Most economists believe that, business taxes decrease
the amount of physical investment by businesses. There is no doubt taxes also
influence the types of physical investments that businesses make. This is so,
because government taxes returns on some types of investments are at higher
rates than others. These differences cause businesses to make investment
decisions based on tax consequences, rather than whether they are sound from a
business point of view. By distorting physical investment decisions, the tax
system leads to an inefficient pattern of investment, because it is no longer
neutral.

Tax Shifting
Shifting of tax is the process whereby the economic agent that is expected to
pay tax is able to pass the whole or part of the tax to another economic agent,
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through changes in price, rent, et cetera. To understand the effect of any tax, one
must first determine who bears the burden of the tax. This is not always an easy
task. Suppose that the price of a chocolate doughnut is N100. The government
then imposes on sellers a tax of N10 per doughnut. A few weeks after its
imposition, the tax causes the price to increase to N110. The doughnut seller
clearly receives the same amount per doughnut as he did before the tax, because
the tax has not made the seller worse off. Consumers pay the entire tax in the
form of higher prices. On the other hand, suppose that after the tax, the price
increases to N104. In this case, the seller keeps only N94 per doughnut, and is
worse off by N6 per doughnut. Consumers are also worse off, because they
have to pay N4 more per doughnut. In this case, retailers and consumers share
the burden of the tax.

Property or tenement rate can bring about this shifting situation when the
property rate is raised, the landlord may also raise the rent by transferring the
burden of paying the property rates to the tenants, who would in turn pay the
rent including the property tax built into it. In most cases, when the government
increases property rate, the landlord also increases his rent which his tenants
must pay. If that happens, then the tenants are paying the rents including the
property rate, even though the rent was meant to be paid by the landlord, he has
clearly shifted the burden to the tenants instead of paying the rate directly
himself.

Tax Incidence
When a tax is shifted, it gets to a point where the tax burden rests on a person
that bears the burden of paying the tax, who in this case is called an economic
agent. The person who bears the ultimate burden of the tax is the tax incidence.
Some scholars however argue that it is the way a tax affects people that is called
tax incidence. The statutory incidence of a tax refers to the individuals or groups
24
who must legally pay the tax. It reveals essentially nothing about a tax’s real
burden, because as previously illustrated; prices may change in response to a
tax. Similarly, the economic incidence of a tax refers to its actual effects on
people’s incomes. It also depends on how buyers and sellers of the commodity
react when the tax is imposed. To the more sensitive consumers when there are
changes in price, they turn to other products, in which case producers bear more
of the tax burden. On the other hand, if consumers purchase the same amount
regardless of price, they bear the whole burden.

Direct and Indirect Tax

Direct Tax: When tax is imposed and the person intended to pay actually pays
it without shifting the tax incidence to another, it is called direct tax. A good
example is pay roll tax (personal income), which is deducted from the payroll
directly.

Indirect Tax: When a tax is imposed and the tax incidence fall on an economic
agent not intended to, it becomes an indirect tax. This is because someone else,
who is not supposed to pay the tax, is doing so, though indirectly. Example,
when property rate is imposed on a landlord and the landlord decides to raise his
rent to cover the amount of property rate imposed, by implication the tenant is
paying his rent with the property rate along. This and that is an example of
indirect tax.
In-text Question
1. What impact will government spending and taxation have in the economy?
Answer
1. Greater spending will create employment opportunity and assist to grow the economy
and lack of spending will create unemployment and retard the economy.
2. High tax will discourage investors, while low tax will encourage them and this will
retard or grow the economy respectively.

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3.0 Tutor Marked Assignments
What are the types of Finance we have?

5.0 Self-Assessment Question

1. Differentiate between direct and indirect tax?

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube addhttps: [Link]
. Watch the video & summarise in 1 paragraph
b. View the animation on add/sitehttps:
[Link]
siness+Finance
and critique it in the discussion forum

Reference/Further Readings
ABUBAKAR, H.I. (1999), Revenue Generation and control in Local
Government. National Orientation Workshop for Local Government
Councilors, Produced by office of the Vice President, State and Local
Government affairs, Abuja.
ABUBAKAR, H.I. (2000), “Local Government Finance in Nigeria: Revenue
Right and Fiscal Jurisdiction”. National workshop on the Review of
1999 Constitution Office of the Vice President of Nigeria, Abuja.
ABUBAKAR, H. (1991) I, Local Government Finance: Its Sources
Management and Stewardship Background Paper Prepared For the
Orientation Workshop for Newly Selected Local Government Chairman
and Councilors

26
 STUDY SESSION 2
Comparing Public with Business Finance
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1Functions of Public Finance
2.2Government Role in Managing the Economy:
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
Public Finance is essentially guided by public interest and the clients of public
finance are treated as citizens. It can operate even when losing so long as the
interest of the citizenry is met. On the other hand the overriding interest of
business finance is to make profit and clients are treated as customers. Above all
business finance is within the ambit of public finance and so can be regulated by
it.

1.0 Session Learning Outcome

At the end of this session, you should be able to:
1. Describe what the functions of public finance are,
2. Explain what should be government’s role in the economy.

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2.0 main Content
2.1 Functions of Public Finance
Public and private sector companies’ finances operate in different perspectives
to achieve different objectives; Business Finance is essentially guided by profit
and corporate interest, public financial management is guided by social justice
and public interest. The role of government in the economy is necessary to fill
the lacuna created by the failure of the market system. The state ensures
resources are allocated to meet the criteria of equity and justice, by moderating
the wealth of the rich and improving the lot of the poor, providing full
employment as well as social services, even at the pain of not making any
monetary gain.

Public finance is vast in nature involving the entire economy, its policies are
macro in nature and they affect the entire economy and even impact on business
practices in various ways to the extent that they set agenda for the operation of
private businesses. The government might direct banking institutions to channel
loans to certain areas and failure to do so could attract sanctions by the
government through the Central Bank of Nigeria. Government budget to a large
extent an agenda and direction on how the private sector would operate and
further determines the fortune of the business sector through its policies. It is
not out of place to state that business finance is within the ambit of public
finance. Business or private finance is micro or limited in size and its operation
is restricted to a limited area such as the firm itself. A company can set out a
policy, which would only affect the firm.

The ultimate goal of public finance is to prudently apply financial resources to

achieve public interest. It entails maximizing the welfare of the citizenry,
redistribution of income, etcetera. The government would want to put in place
good roads, build bridges linking communities, provide potable water, build
28
public schools and hospitals and so on to meet the yearnings and aspirations of
the people. Although the private sector carries out social responsibility
activities, yet that is done to create goodwill and to further enhance their
chances of commercial success.

Public finance provides public goods, which are hardly quantified and which
give rise to benefits of non-exclusion (externalities). This makes it difficult for
the principle of quid pro quo (give and take or in exchange) to be applied.
Conversely, the outputs of private finance are goods that are tangible, easily
measured and the principle of quid pro quo can be applied. In fact it does not
have benefits of non-exclusion, to the extent that what you have paid for the
benefit accrues to you alone. Example when you buy a car, the car essentially
becomes yours. If anybody wants to use it, you can restrict him from doing so,
because you have a title to that car. That means,
there is benefit of non-exclusion. However, if
government carries out the role of defending the
territorial integrity of the nation in the face of
foreign aggression, and the government put in
place measures to provide defence, how do you
exclude other people from benefiting from what
the government has done? Or can you measure the
quantity of defence you have enjoyed or impute price on it? How do you also
enjoy its benefits and exclude others from doing so?

Other functions of government that fall into this category are maintenance of
law and order, regulatory services like health etcetera. Government has
responsibility in safeguarding the health of the nation through National Food
and Drugs Administration Commission (NAFDAC). Everyone knows that as an
agency of government, NAFDAC, did well under Prof Dora Akunyili, the great
29
and fearless Nigerian Amazon in terms of regulatory activities, but could such
activities be measured or quantified monetarily? Or could you say this was how
much in monetary value NAFDAC has safeguarded the health of the nation
monetarily? Therefore, government services are mostly immeasurable and
geared towards saving us from ourselves and reduce the tendency of man
inhumanity to man, even if the services were of no financial value.

In-text Question
1. What is the major difference between public and business finance?
Answer
1. Public finance is meant to achieve the best interest of the people regarded as citizens.
Business finance on the other hand is meant to make profits and thus treats its clients as
mere customers.

There are certain areas the private firms cannot do because of their very nature
such as capital intensive projects in developing economies, where the
entrepreneurs do not have enough capital; providing social goods that prices are
difficult to impute; projects where gestation period takes a long time. With this
scenario, if the private sector is unable or unwilling to invest in them and the
government stands aloof, a vacuum would be created or some areas might be
left unattended to. Therefore, the government is left with no alternative than to
intervene. This is what is regarded as apparent market failure in the economy
and the need for public or government to intervene to provide a remedy.

Public finance can operate in losses and its credit worthiness is guaranteed
because government is a continuous process. In other words, government can
borrow even on top of debts or when it is still indebted. Private finance capacity
to borrow in that situation is doubtful.

Public finance creates money by printing notes and minting coins. However, if
the stock of money is increased through this way, production must also increase

30
in order to curtail inflation. Business finance does not have that kind of leverage
of creating or printing money, but could even be required by public finance to
participate in such exercise, anyway. A private firm cannot create money nor
compel its clients to loan money to it, because it lacks the legal backing to carry
out this function. The government can borrow money internally and externally.
It could from the stock market through the buying and selling of bonds and
securities through which banks and members of the public can buy or sell.
Government raises domestic debts in this way from banks and tax payers. The
private sector cannot raise money from its customers this way, although it could
raise money from the capital market. In other words, the government can reduce
or add to the stock of money in circulation to regulate inflation or deflation
respectively at any time the need arises through the Central Bank of Nigeria.
Some few years ago the government of Nigeria directed all banks to recapitalize
their asset base, to the tune of N25 billion or face liquidation. Many of them
entered the capital market to raise capital through selling of shares or merger
option to do that. It shows therefore, that public finance has sweeping powers
that envelop even private finance.

On the areas of similarities, government and the business community all use
money and money is viewed as scarce and should be prudently utilized to
ensure value for money is obtained at all times.

The government and the private sector all collaborate to run the economy, each
in an area it has greater competence. What role is assigned to any will depend
on the economic system the country adopts. In a communist system, the role of
the state is dominant if not absolute, affecting the ownership, production and
distribution of means of production in the economy, whereas the private sector
has just a limited role. In a capitalist system, the reverse is the case: The
economy is private sector driven, while the traditional role of the state is
31
confined to tax collection, maintenance of law and order and providing the
infrastructures necessary for private sector operation. In a mixed economy, the
government and the business sector all carry out substantial role in the
economy. In fact the 2008 economic melt down in the international financial
system was a fall out of the capitalist system.

While reacting to the international financial crisis Western Europe, Sarkozy, the
President of France, called for the scrapping of the capitalist system at the floor
of the G20 conference. Before George Bush bow out of office, he lamented the
apparent challenges capitalism posed to the world, but warned of the danger of
abandoning it, rather it should be reformed. Obama, the President of the United
States of America and the new leader of the capitalist world, was welcomed into
office by the financial crisis to the extent that his popularity started to nosedive
as Americans were helplessly losing their jobs and homes. Obama in
desperation, tinkered with the capitalist principles by temporarily abandoning
the laissez faire policy of non-interference in the market system. Granted bail
out of $800 billion to save giant private institutions like Lever Brothers, General
Motors (GM) and others from collapse. This was necessary a a clear case
collaboration that served the interest of both. The implication of this suggests,
the difference between public and private finance is not water tight because
occasionally the public and the private encroached into each other’s territory,
whenever occasion demands as demonstrated during that international financial
meltdown.

Every public policy decision takes into consideration the issue of efficiency and
equity. Government is anxious to achieve efficiency in production and benefits
accruing to the society in terms of income and wealth are equitably distributed
among members of society. Economic consideration, though important, is not
necessarily the main thing. It is at times sacrificed on the altar of political
32
expediency. There are times the government would embark on projects or cite
projects in areas that go against advice of economic experts, but are accepted for
political expediency and national integration. Conversely, business finance
would insist on expert advice on investment, since the major consideration is
business viability and profit making.

2.2 Government Role in Managing the Economy

The reasons behind government intervention in economic activities are as many
as many societal demands. Government seeks to create conducive atmosphere
for individuals, groups and corporate bodies to conduct their daily businesses by
providing a number of goods and services to regulate their activities as well as
to conduct and create employment opportunities etcetera. Some of the areas
government has often operated because of the reluctance of the private sector to
invest in them or because they can only handle them inefficiently and
ineffectively to avoid a vacuum are as follows;
i. projects with low profit margin
ii. projects with prolong period before they break-even
iii. projects that require huge capital to handle or are capital intensive in
nature
iv. Projects with low delay turn over rate.
v. Projects whose outputs are social or public goods, that are difficult to
impute price on them, or when the goods produced cannot be easily
quantified on the basis of quid pro quo.
vi. Projects with strategic national significance to the economy or security.

Since the government manage the economy to fill the

vacuum created by the public sector, it is important we treat
in greater detail the areas the government operates. This is

33
what is called the tripartite functions of public financial management or the
layer cake model. Abubakar (1986) sees the functions of public finance as
indicated below; figure 2.2
i. Allocation
ii. Distribution
iii. Stabilization

i. Allocation function
Governments provide public goods, financed items and services such as roads,
military forces, lighthouses, and streetlights. Usually private citizens would not
voluntarily pay for these services, and therefore businesses have no incentive to
produce them. Furthermore, if the market system is allowed to operate freely
according to Ogunjimi (1997) it would lead to stern, cruel and unjust
consequences. It would penalize those who are lacking and award its favour to
those who are already endowed. In other words, the rich would become richer,
while the poor would become poorer or nosedive deeper into the abyss of
poverty. Public finance also enables governments to correct or offset
undesirable side effects of a market economy. These side effects are called
spillovers or externalities. For example, households and industries might
generate pollution and release it into the environment without considering the
adverse effect pollution has on others. If it costs less to pollute than not to,
people and businesses have a financial incentive to continue polluting or would
be encouraged to pollute the more. Pollution is a spillover because it affects
people who are not responsible for it. To correct such a spillover, governments
would need to encourage or restrict certain activities such as to sponsor
recycling programmes to encourage less pollution, pass laws that restrict
pollution, or impose charges or taxes on activities that cause pollution. The case
of Sun Seed Company located at Dakace Industrial Layout in Zaria, Kaduna
state, Nigeria, is a case in point. Some years ago, Sun seed industry discharged
34
waste to the neigbourhood and the offensive odour was life threatening. This
was a crass display of insensitivity by the Indian company and the Nigerian
government to the plight of those living in the neigbourhood. After some years,
this was discontinued apparently after government must have intervened. Two
things might have happened; pollution tax was imposed or relevant law
prohibiting pollution must have been enacted. Either way, government corrected
undesirable effects of business operation.

Government makes use of resources at its disposal to provide a number of

public goods and services particularly those that might not be efficiently
provided and equitably distributed through an alternative arrangement such as
the price system. The public goods which government provides using allocation
function include education, health services, water and power supplies, postal
services, police protection, defence and even labour/workers relations. Even in
terms of labour/management relations, where workers apart from being under
paid, might be exposed to serious personal hazards on their jobs. Government
would direct employers of labour to put in place safety devices to safeguard
workers.

On the side of social services, there is apparent market failure to take charge of
externalities in production and consumption; just as the principle of “quid pro
quo” or the benefit of non-exclusion cannot be applied. Example, a fisherman
might need to pour poisonous chemical into a lake to catch fishes. Admittedly
the cost of fishes caught includes the cost of the chemicals and net labour
employed. There is however a cost to the society which he ignores. The
government can direct that the contaminated water be purified before it can
again be made safe for human consumption. The fisherman might not care
about the plight of the people, unless the government compels him to do so.

35
Government intervention in this situation is necessary and that shows
government exists to safe us from ourselves.

i. Distribution function
In every society we have the rich and the poor; the privileged and the
underprivileged; the haves and the have-nots living side by side. The tendency
within the context of human behavior, the rich are likely to become richer, while
the poor become poorer. Leaving the situation to degenerate like that is likely to
trigger the kind of upheavals that took place in the Maghreb and some other
Arab nations in 2012, where governments were brought down through mass
revolts. Usually there comes a time in people’s lives when the have got to seize
control from the power that be as a result of intolerable and miserable lives they
live. In this circumstance the government must put in place policies that
moderate the incomes of the wealthy and improve the lot of the poor such as
social security, and other welfare related programmes to maintain equilibrium.
For example, some elderly people or people with disabilities require financial
assistance because they cannot reasonably earn a living or fend for themselves.
Governments can also redistribute income by collecting taxes from their
wealthier citizens to provide resources for the needy ones. Subsidy is meant to
achieve the same result. Government uses public finance as an instrument of
ensuring a fair distribution of income and wealth not only among different
classes in society but also among geo-political units of the country. The
government would have to try to equalize and balance existing cleavages or
imbalances between the rich and the poor, between the developed sector and the
undeveloped to ensure equity and distributive justice.

Lorenz Curve of Income Distribution

45
35 Line of Absolute equality
36
 Lorenz Curve
25

15
0 15 25 35 45
Source; Conrad Lorenz (1956) Curve of Income distribution in society.

It shows the relationship between income and population at a given time.

Lorenz Curve is presented below for more illustration. According to Conrad
(1956) the diagram above shows a diagonal line (45%) in the box, which
represents the line of absolute equality. On this diagonal line, it shows income is
evenly distributed within the society to the extent that 45% of the income
recipients or population is receiving 45% of all incomes in the society. In other
words, at every point at the diagonal line the percentage of income received is
exactly equal to the percentage of income recipients. This represents the ideal
situation in a society that is classless. In real life, the situation is not so.

Though, the line of absolute equality represents the ideal income distribution in
a given society. The Lorenz curve slopping to the right of the diagonal line
shows the actual or real world quantitative relationships between the percentage
of income recipients and the percentage of total income, which they did in fact
receive during the period. In essence, the more the Lorenz curve tilts away from
the diagonal line (line of absolute equality), the greater the inequality it
represents. Where the Lorenz curve tilts closer to the line of absolute equality, it
shows the incomes equalization policies of government are improving or
redressing the imbalances. Government policies within this context would
therefore be geared towards pushing the Lorenz curve towards the line of
absolute equality, which seeks to reduce income inequality between the rich and
the poor. At any time the government embarks on a given policy the overriding
37
consideration is equity, justice and fair play. According to Browning (1969) in
Abubakar (1996) “although everyone approves of equity, very few people
interpret the term in the same way”.

There are many reasons that are responsible for inequality in society. In fact the
views of Abubakar (1986) on the causes are very cogent. Hear him “many
reasons are responsible for inequality in society. They include differences in
ability, education, training, factor endowments and most important of all is the
access to opportunity particularly that occasioned by circumstances of birth”. Be
that as it may, government should endeavour to moderate differentials in
income as it poses serious danger to peaceful coexistence. President Kennedy
warned of the danger of government being complacent in the face of the need to
reform or redress injustice. He warns “those who make peaceful change
impossible would make violent change inevitable.” McNamara in Abubakar
(1996) re-echoed a similar warning that when the highly privileged few and the
majority desperately poor are…………., and when the gap between them is
worsening rather than improving, it is only a matter of time before a decisive
choice is made between the political cost of reform and the political risks of
rebellion.

ii. Stabilization
Most world economies particularly those under capitalism experience what is
regarded as periods of economic fluctuations such as economic boom,
recession, depression, recovery etcetera. This state of fluidity as shown below in
economic parlance, makes planning in the economy extremely difficult. There is
the need for a reasonable economic stability at least to make planning and
budgeting realistic. A typical economy manifests this trend as depicted in this
diagram below;

38
Economic Trend
Boom
Recession
Recovery/Upswing

Time Path 2000 2001 2003 2004 2005 2006

Depression
Source: Abubakar, Public Finance: Principles and Issues (1986)

The reasons for economic fluctuations are explained along ideological lines.
Keynes views represent the capitalist viewpoint according to him,
“…….appreciable decline in aggregate demand, affect the level of investment,
which leads to unemployment, and eventually cause depression”. Conversely if
there is increase in aggregate demand, it leads to more investment and by
extension creates more job opportunities resulting in economic boom. The
process leading to depression is called recession, while the process that leads to
boom is called recovery or upswing. Be that as it may, the major concern of
government is to stabilize price, ensure economic growth and full employment
in the economy to enable effective planning and budgeting.

To tackle this firstly, there must be increase or decrease in the stock of money
which in turn increases or decreases aggregate demand and influence the rate of
interest. Secondly, spending, savings, investment and output decision in the
economy must be influenced. For instance government might use taxation
where individuals would be heavily taxed to reduce their disposable income and
purchasing power. The consequences would be reduction in effective demand
and invariably a downward pressure on prices. Conversely, when taxes are
generally reduced, the disposable income increases and thereby ensures
effective demand as well as results in upward pressure on prices. Interest and
39
discount rates can be used to reduce or increase the volume of money in the
hands of individuals and corporations.

In-text Question
1. What does distribution function seek to achieve?
Answer
1. Redisdtribution of income, reducing inequality among classes of people and above all
endanger the cause of distributive and social justice.

3.0 Tutor Marked Assignments

1. What are the major world events that brought Public Finance to
prominence?

5.0 Self-Assessment Question Answers (SAA)

i. What are the areas business finance is reluctant to operate and if
left alone could create a vacuum?

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
siness+Finance
and critique it in the discussion forum

7.0 Reference/Further Reading

Read Chapter Chapter 1 and 2 Ndan JD (2013). Public Financial Management:
A Nigerian Perspective (5th Edition). Prentice Hall. Available online at
[Link]
40
ADEBAYO ADEDEJI; (1979) Financing Local Government in Nigeria, an
Over-View University of Ife Press Nigeria.
ADEBAYO, A & ROWLAND, (1979) L; Local Government Finance in
Nigeria Problems and Prospect University of Ife.
ANYANWU J. C. (1997) Nigerian Public Finance, Joanne Educational
Publishers Ltd Onitsha, Nigeria
BHATIA H. L. (1980) Public Finance, Vikas Publishing House (Pvt) Ltd, 5 th
Edition, New Delhi (India)

41
 STUDY SESSION 3
Government Revenue and Taxes
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Allocation from Federation Account
2.2 Oil and Non-Oil Revenue
2.3 Crude Oil Sales
2.4 Gas Sales and Oil Taxes
2.5 Royalties
2.6 Petroleum Profits Tax
2.7 Rents and Other Oil Taxes
2.8 Non Oil Revenue
2.9 Companies’ Income Tax
2.10 Customs and Excise Duties
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
Revenue refers to all the incomes that accrue to the government at the federal,
states, local government and their agencies. Revenue enables the government to
carry out its expenditures and to achieve the best result is to ensure there is
available tax base and tax efforts. It is important to note that bulk of Nigerian
Revenue is from crude oil. The economy is not doing well because there has

42
been a dramatic drop in the price of crude oil in the in the international market.
Government wants to rescue the situation through diversifying the economy.

1.0 Session Learning Outcomes

At the end of this session, I shall expect you to be able to explain the following
concepts:
1. Allocation from Federation Account
2. Oil and Non-Oil Revenue
3. Crude Oil Sales
4. Gas Sales and Oil Taxes

2.0 Main Content

2.1 Allocation from Federation Account
The Nigerian Constitution provides that there shall be an account called the
Federation Account, into which shall be credited all taxes, except those
collected from the incomes of personnel of the armed forces, the police,
residents of the federal capital territory and personnel of the ministry in charge
of foreign affairs. This federation account belongs to the entire federation and
not exclusively to any one tier of government. The federal government is merely
a custodian of the fund. The proceeds therein are meant to be shared among the
three tiers of government based on revenue allocation formula approved by the
national assembly

The Federal Government, like the States and Local Governments, draws its
main source of funding from the Distributable Pool Account which was later
referred to as the Federation Account. Revenues are then shared among the
Federal, States and Local Governments every month at the Federation Accounts
Allocations Committee meetings, in accordance with the prevailing revenue
sharing formula as the current one below indicates:
43
Federation Account Distribution Formula currently in use is thus;
Federal Government 52.68%
State Governments 26.72%
Local Governments 20.60%

Oil Revenue is the most important source of revenue to the Federation Account
and it is made up of;
i. Crude Oil Sales,
ii. Oil Taxes, and
iii. Royalties.

2.2 Oil and Non-Oil Revenue

It should be noted that while we have Federal Inland Revenue Service at the
federal level, we also have Board of Internal Revenue at the state level and a
committee at the local government level all in charge of revenue generation.
A look at the federal government level shows it raises revenues through three
main sources. These are:
i. Federal Government’s share of the Federation Account,
ii. The Value Added Tax Pool and
iii. Independently Generated Revenue.

2.3 Crude Oil Sales

Nigeria has significant crude oil and gas resource deposits which the
government exploits through a number of business arrangements with oil
producing companies. The Nigerian National Petroleum Corporation (NNPC)
represents the government's interests in these business arrangements. The most
important of these arrangements is the Joint Venture, under which oil
companies, in partnership with NNPC, work to find and produce petroleum.
Here, the oil companies and NNPC (through the Budget) contribute money to
44
operate the business, and then share the crude oil that is produced. The moneys
contributed are referred to as Joint Venture Cash Calls. NNPC takes the
Government's share of the crude oil and sells this in the international and
domestic markets yielding a major source of revenue to the Federation Account
In-text Question
1. Revenue is divided into three types. What are they?
Answer
1. Tax and non Tax Revenue
2. Internal and external revenue
3. Oil and non Oil Revenue

2.3 Gas Sales and Oil Taxes

Sales of Natural Gas have increasingly become an important source of revenue
for the government. Government imposes for as flaring (burning) on oil
companies so as to make it as a major source of foreign exchange. Russia’s
economy is based on Gas supply to Europe and Nigeria can from it too.
Added to this source, are the Oil Taxes generated when the Government
imposes taxes on the oil producing companies. These taxes include;
(1) Royalties,
(2) Petroleum Profits Tax,
(3) Rents and Other Oil Taxes.

2.4 Royalties
Oil producing companies are required to pay a fee for every barrel of crude oil
they produce in recognition of government's sovereign ownership of the Crude
Oil. These fees are referred to as Royalties and are paid whether or not
government shares in the crude oil production. Presently the rate of Royalties
averages about 20% of the value of crude oil produced, but the exact rate
depends on the location of the field (whether onshore, offshore or deep offshore,
etc).

45
2.5 Petroleum Profits Tax
A high tax is levied on the profits of oil producing companies under the Joint
Venture and Service Contract business arrangements while a tax of 50% is
applied to profits under the Production Sharing Contract arrangements. This
constitutes the second most important source of revenue to the Federation
Account.

2.6 Rents and Other Oil Taxes

Government charges Rent as a fee for the use of the land (or oil acreages) from
which oil is extracted. There are also other charges and levies (Other Oil Taxes)
paid by oil companies to government including penalties for gas flaring and fees
for the right to lay pipelines to transport the oil produced.

2.7 Non Oil Revenue

The second category of revenue to the Federation Account is referred to as Non-
Oil Revenue. This covers revenue that is derived from sources other than oil.
These include
i. Companies' Income Tax
ii. Customs and Excise Duties
iii. Value Added Tax
iv. Levies and
v. Others miscellaneous sources.

2.8 Companies’ Income Tax

People form companies to carry on various businesses which yield profits for
them. Companies that operate in Nigeria but which do not produce oil still pay
tax but at a lower rate of 30% of their profits as at when due. Companies
Income Tax or corporate income tax is one of the most controversial taxes.
Although the law treats corporations as if they have an independent ability to
46
pay a tax, many economists note that only real people, such as the shareholders
who own corporations should bear the tax burden. In addition, it is argued that
corporate income tax leads to double taxation of corporate income. Income is
taxed when the corporation is operating and a second time when it is paid out to
shareholders in the form of dividends earn from it.

Thus, corporate income faces a higher tax burden than income earned by
individuals or by other types of businesses. Some economists have proposed
abolishing the corporate income tax and instead taxing the owners of
corporations (shareholders) through the Personal Income Tax. Other scholars
see the corporate income tax as the price corporations pay in return for special
privileges from society. The most important of these privileges is limited
liability for shareholders. This means that creditors cannot claim the personal
assets of shareholders, because the liability of shareholders for the corporation’s
debts is limited to the amount they have invested in the corporation.

II) Customs and Excise Duties

Tariffs are taxes imposed on goods imported into a
country. A tariff might be specific, when it is levied as a
fixed sum per unit of the imported good and ad valorem,
when it is applied at a percentage rate with reference to
the value of the import. Custom and excise tariffs are
indirect tax revenues of government. Generally customs duties are related to
imported and exported commodities and excise duties to domestically produced
goods. The motives for imposing these charges are: (1) to raise revenue, (2) to
protect domestic or infant industries and (3) to give preference to imports from
certain countries. Of the arguments advanced for the imposition of tariffs which
are only two, the anti-dumping and the optimal tariffs, find support in economic

47
analysis. The objectives sought by the others (employment, development of
infant industries) are better attained by other means.

In-text Question
1. What is companies income tax?
Answer
[Link] is tax paid by companies operation in the country based on the income they generate?

Optimal tariff is the name given to the tariff, which maximizes elasticity of
supply of a good or services when it is infinite, it is normally possible for a
country to improve its terms of trade by imposing a tariff on the import of the
good, for the fall in demand for the imported goods which would cause a fall in
the world price of the good. The country imposing the tariff conducts smaller
volume of trade buot on a more favourable term. The optimum is where the gain
from the better terms, of trade is offset by the losses from the smaller volume of
trade. A tax on the export of a good from the country has the same effect on
welfare, where foreign demand for the good is price inelastic. The major
difficulty likely to be encountered in imposing the optimum tariff or exports tax
is the danger of retaliation.

Tariffs, also called duties or customs duties, are taxes levied on imported or
exported goods. Import duties are considered consumption taxes because they
are levied on goods to be consumed. Import duties can be manipulated to
protect domestic industries from foreign competition by making imported goods
more expensive than their domestic counterparts. The above sources treated are
not exhaustive. The federal, states and local governments all have revenue
sources as demonstrated here

Excise Duties: An excise tax is levied on specific products, such as alcohol and
cigarettes. The tax is usually included in the purchase price. Excise duty is

48
imposed in the main, on home produced or manufactured goods. It is an indirect
tax and government uses it vastly to regulate the economy by way of
determining consumption and production of goods and services. Indigenous
infant industries are encouraged to operate by granting them tax holiday or
reduced tax. Federal, state, and local governments levy excise taxes, which are
sales taxes on specific goods or services. Excise taxes are also called selective
sales taxes.

Import Duties: When importers bring goods into Nigeria, their goods are
charged import duty. Import Duty presently varies from 0-35% of the value of
the goods. In order to support local industry and engender employment, the
importation of certain items like tobacco attracts higher duties and additional
surcharge while the importation of items like wheat flour, wheat grain, and rice
are to attract additional levies ranging from 15% to 65% from July 2012 in
order to help develop the agricultural sector.

Export Duties:
These are duties imposed on exporters who export goods outside the country

III) Operating Surpluses of MDAs

There are some federal agencies and corporations that generate huge revenue in
sufficient quantity that after meeting their operating cost and other expenditures
do have surplus to remit to the federal government. Most public parastatals are
meant to do that. Failure of some of them to break even and make these
remittances is the main reason why they had to be privatized. Others like the
Nigerian National Petroleum Corporation, Federal Inland Revenue Services,
Nigerian Port Authority, are viable public corporations that generate huge
revenue but remitted just a part to the federation account or consolidated
account. On 15th June 2013, N58 billion hidden funds were found not remitted
49
to federation Account. This was revealed by the Coordinating Minister of the
Economy, Dr. Ngozi Okonjo-Iweala. A period of reckoning is here for all
Federal Government’s Ministries, Departments and Agencies (MDAs) which
have been generating revenues and diverting them instead of remitting them
into the Federal Government’s Consolidated Revenue Fund ( CRF) Account
maintained at the Central Bank of Nigeria (CBN). For such MDAs, their
accounts at both the CBN and banks across the country are to be frozen until all
their obligations to the CRF are liquidated. This is real and the enforcement
takes effect on June 17, 2013. The action was taken by the Coordinating
Minister for the Economy and Minister of Finance, who revealed that a
preliminary search had already identified N58 billion of such funds by some
MDAs which was kept away from the Consolidated Revenue Fund. The
revelation is contained in a statement by the minister herself Thursday in Abuja.
It reads in part:
“It has come to the attention of the Federal Ministry of Finance that
some Federal Government’s agencies that generate independent
revenue, in collusion with some banks, have refused to remit monies
to the Consolidated Revenue Fund (CRF) of the Federal Government
which they are obliged by law to do…We have identified about N58
billion of such monies which rightfully belongs to the CRF. This
unwholesome practice has persisted despite the efforts of the Office
of the Accountant General of the Federation (OAGF) to encourage the
agencies and the affected banks to do the right thing. Rather than
comply, the agencies and banks, through their lawyers have engaged
in all manner of legal subterfuges to ensure that monies which are due
to the Federal Government are not remitted. The objective of this
conspiracy against the national interest is clear: to keep government
monies indefinitely in accounts earning interest for individuals at the
expense of the Federal Government and the Nigerian people.“
50
This is totally unacceptable she fumed and threatened to stop it forthwith.
Starting Monday, June 17, 2013, the Office of the Accountant General of the
Federation, in exercise of its powers under the extant laws and rules, will close
the accounts of agencies involved in this practice in all banks. This process of
systematic closure will continue until all monies that should be in the
Consolidated Revenue Fund are retrieved.
In-text Question
1. What is the issue of ministries and agencies in remitting revenue to the federation account?
Answer
1. The stash government revenue in personal accounts in various banks to generate personal
interest for them at the expense of government?

The action is coming on the heels of a similar probe of banks collecting the
Federation Account revenue from the Nigeria Customs Service and the Federal
Inland Revenue Service belonging to the three tiers of government which began
last month, owing to the establishment of the fact that some of the revenues
were being diverted by the banks with the connivance of officials of the two
revenue agencies.

IV) Sales/Consumption Tax/Value Added Tax

Sales tax is also a major source of government revenue. Many states and local
governments levy sales tax on the purchase of certain items. Consumers usually
pay a percentage of the sales price as tax. Sales tax is imposed on a wide range
of commodities and services. It is also called consumption tax. Sales tax is
equitable on the ground that people are taxed on what they consume rather than
what they earn. A general sales tax imposes the same tax rate on a wide variety
of goods and services.

Although sellers are legally responsible for paying sales taxes, sellers collect
sales taxes from consumers through increase in price of their merchandize; the
51
burden of any given sales tax is often divided between sellers and consumers.
Most states exempt certain necessities from sales tax, such as basic groceries
and prescription drugs. Sales tax is on a single stage basis. Where it is on multi-
stage basis, it loses its character of sales tax and assumes that of Value Added
Tax (VAT).

In Nigeria Value-Added Tax (VAT) has seemingly replaced sales tax and it
provides significant revenue. VAT is levied on the value added to a product
during production as its components are assembled into final goods. For
example, a clothing manufacturer might spend N500 on fabric, thread, zippers,
and other goods required for making dresses. The manufacturer then adds
N1,000 to cover the costs of labour and the use of machines and equipment and
sells the dresses for a total of N1,500. The value-added tax is paid on the
additional N1,000. Value Added tax is therefore, a multi stage tax where price is
raised as tax to every value that is added at each stage. The value added at each
stage of production is the difference between the seller’s costs for materials and
the selling price. In essence, a VAT is just a general sales tax that is collected at
multiple stages.

Another example is in the production of apple pies, for example, the farmer
grows apples and sells them to a baker, who turns them into a pie. The baker
sells the pie to a restaurant owner, who sells it to a consumer. At each stage, the
producer adds value to the commodity by processing it with capital (machines)
and labour. The farmer, the baker, and the restaurant owner each charge their
customer a VAT. However, they can each claim a credit to recover the tax they
paid on purchases related to their commercial activities. Encarta (2003-2008)

52
In some countries government exempts certain goods and services from value
added tax, including most food, most medical and dental services, child-care
services et cetera.

Most of the goods and services purchased in Nigeria are also taxed at 5% on the
value of these purchases. This Value Added Tax (VAT) is also called
consumption tax meaning that it is only charged on actual purchases made.
However, VAT is not paid directly into the Federation Account but is credited
into an account called the VAT Pool from where it is shared in accordance with
the formula indicated:
Federal Government 15%
774 Local Governments 35%
36 FCT State Governments 50%

Federal Government receives 15% of VAT revenues, out of which 1% goes to

the Federal Capital Territory. The balance of 85% goes to States and Local
governments as indicated above.

A breakdown of Average Non-Oil Revenues from 2005 to 2011 shows Customs

and Excise had 23%, Companies Income Taxhad39%, Value-Added Tax
had10% and Independent Revenue contributed 28%

V) Levies/Community/Poll Tax
Poll tax is a flat rate that is charged irrespective of the income levels of the tax
payers. It is also called “Development Levy”. A poll tax is another name for
Community tax or a Lump-sum tax or Head tax. It is a good example of
regressive tax. It collects the same amount of money from each individual
regardless of incomes or circumstances; hence its burden falls hardest on the
poor.
53
The importance attached to tax by citizens is far reaching. It could pull down
government, determine electoral victory and so forth. In fact Poll tax caused the
downfall of Margaret Thatcher, influenced John Major’s policies and caused the
famous Aba riot in the 1920s in Nigeria. According to Havemen in Encarta
(2004).

When the British government implemented a system of local poll taxes in 1990,
citizens considered the tax so unfair that they held demonstrations—some
violent—around the country. The extreme unpopularity of the tax contributed to
the downfall of Prime Minister Margaret Thatcher. Her successor, John Major,
repealed the tax in 1991. In the United States, the 24th Amendment, ratified in
1964, prohibited the payment of poll taxes as a requirement for voting in federal
elections. Until that time, a number of Southern states had used poll taxes to
deny poor blacks the right to vote.

One of the first things the civilian Governors of Kaduna and Kano state Alhaji
Balarabe Musa and Alhaji Abubakar Rimi under the Peoples Redemption Party
(PRP) did on assumption of office was to abrogate Community and Jangali
taxes in Kaduna and Kano States in the 2nd Republic which triggered wild
jubilation among the citizens but also had its economic implication in form of
dwindling revenue also. As indication of the oppressive nature of the tax,
demonstrations were held along the streets in support of the government.

Though poll tax is criticized for being regressive, it does however possess some
milk of human kindness in exempting some weak members of the society like
the following;
i. The very young, below the age of 18 years of age.
ii. The very old and weak in the society.
54
 iii. Those who are disabled or crippled and cannot fend for themselves.

VI) Others Miscellaneous Sources.

Governments at all levels throughout the country collect license fees and fines
from various works and service provided by them. These include advertisement
fees, bakery house license, dog license fees, bicycle licenses, slaughter fees,
hunting license and fees, birth, death and marriage registration fees etc. Most
states require people to buy licenses to engage in certain activities, such as
hunting and fishing, operating a motor vehicle, owning a business, and selling
alcoholic beverages.

Stamp duty is a tax imposed on a written instrument e.g. conveyances, etc.

Stamp duties are either ad valorem duties or are fixed in amount. Where a
stamp is essential to legal validity of agreement, such cannot be presented as
evidence in civil proceedings if it is unstamped, or is insufficiently stamped,
except on complying with the conditions which are the payment of the penalties
specified in the stamp Act. However, this rule does not apply to criminal
proceedings.

Fees are charges or payment for professional advice or services. Government

derives a reasonable amount of revenue through selling its services to users
particularly in those cases in which the benefits accrue directly to individuals;
the services being of such character that they can be segmented into amounts
which can be provided separately to particular individuals and withheld from
those persons who do not wish to pay for them.

VII) Independent Revenue

The third major source of revenue is known as Independent Revenue. It
includes revenue which is not derived from either the Federation Account or the
55
VAT Pool, but accrues directly to the Federal Government. These revenue
sources include;

VIII) Dividends on Government's Investments Companies

Governments have shares in some public enterprises, just like other share
holders, and are entitled to receiving dividends and profits that accrue to such
investments. The dividends are paid to share holders at periodic interval as well
as interest accruing from the business operation of the firm.

In-text Question
1. How is Value Added Tax shared
Answer
It is shared in accordance with the formula indicated:
Federal Government 15%
774 Local Governments 35%
36 FCT State Governments 50%
Federal Government receives 15% of VAT revenues, out of which 1% goes to the Federal
Capital Territory. The balance of 85% goes to States and Local governments as indicated
above.

IX) Other Internally Generated Revenue of MDAs

There are other revenues that are generated internally from the activities of
ministries, departments and agencies of government.

Data from the Budget Office of the Federation (BOF) and Office of Accountant-
General of the Federation (OAGF) clearly demonstrates, Oil Revenue,
accounting for up to 66% of total Federal Government revenues over the 2005-
2011 periods. The following is the percentage the revenue sources averagely
funds the budget;
- Oil revenue 66%
- Non oil revenue 26%
- Independent revenue 8%

56
The federal government has been making efforts to cope with the International
Oil Price fluctuations for many years now and this is likely to continue in many
more years to come. As Nigeria's oil and gas is sold in the international markets,
their international prices determine how much money the Federal Government
obtains from oil and how much it could spend to finance its Budget. Oil prices
tend to be very unpredictable and as they rise and fall, oil revenue accruing to
the Government also varies and makes planned spending unpredictable.
Consequently, the Government has, in recent years, implemented measures to
protect its spending plans from the periodic swings in the price of crude oil.

Instead of using the current or forecast market price of oil as its basis for
budgetary planning, the government uses a lower, notional price that is
considered to be realistic and sustainable in the long term. This lower price is
referred to as the Budget Benchmark Price. If oil is sold above the Budget
Benchmark Price, the extra revenue is saved in the Excess Crude Oil Account in
the same way that individuals and households try to save money for their future.
These savings are then available to finance future spending shortfalls in case the
price of oil later falls below the Budget Benchmark Price or where other
pressing spending needs arise. Be tat as it may, the government could reduce the
dependency of its spending plans on the periodic swings in oil prices.
Furthermore, Government has been trying to diversify its revenue sources and
reduce its dependency on the oil sector by developing the non-oil sectors of the
economy. Citizens Guide to the Federal Government Budget (2012)

X) Personal Income Tax

An important source of tax revenue in most industrialized countries and less
developed countries is the personal income tax. In modern usage, it can be seen
as Pay As You Earn (PAYE). A specific rate is fixed which results in income
57
earners paying a portion of their earnings according to their income. Income tax
is imposed on activities that generate income, such as wages and salaries. This
meets equity principle in taxation in which taxpayers are expected to contribute
in support of government according to their respective income levels. The
burden of paying this tax is relatively equitable. Where there is absence of
equity in distributing tax burden, tax evasion and avoidance are usually
common.

XI) Capital Gain Tax

Capital gain tax refers to tax resulting from the sale of capital assets. If an
individual who buys a landed property at N50,000 and resells it at N120,000,
the difference of N70,000 as a gain, is subject to capital tax in many countries.
Items or facilities that generate profits, such as factories, business machinery,
and real estate are components of capital gain tax. Some capital taxes are known
as “profits” taxes. The sale of government properties or even privatization of
public enterprises generates revenue to the government and could also fall under
this category. In recent years many government property were auctioned during
monetization of fringe benefits to public servants and government made a
fortune out it, but whether it translated to increase government revenue and
expenditure is yet another.

XII) Property Tax/Tenement Rate

In principle, a property tax is imposed on an individual’s property such as land,
building, and the value of all of the person’s assets, both financial (such as
stocks and bonds) and real (such as houses, cars, and artwork). In practice,
property taxes are usually more limited. In the United States, municipal councils
generally levy property taxes on buildings, such as homes, offices, factories and
land and earn huge revenue from them that is why their councils are financially
viable.
58
In fact, this is a huge potential source of revenue where so much could be
generated by local governments in Nigeria, but they have practically abandoned
it making their annual internal revenue to fall below an average of less than
20%, while the balance of over 80% or more usually comes from the federation
account.

Property tax is often unpopular among homeowners. For one, because homes
are not sold very often, governments must levy the tax on the estimated value of
the dwelling. Some citizens believe that government overvalues their homes,
leading to unfair high property tax burden. It is important to re-emphasize that
property tax is a capital tax under the jurisdiction of local governments,
unfortunately, despite its huge potentials; it is yet to be fully utilized by local
governments in Nigeria.

Property taxes though are levied on houses and land after they have been
valued, there are certain buildings that are exempted from property tax, such as:
i. Churches
ii. Mosques and
iii. Charitable Homes

It is assumed that buildings used as worship centers and charitable activities do

not operate for profit and thus are exempted from property tax. Some Nigerians
have been clamouring for the introduction of tax
on worship centers. They argue that worship
centres are very rich and are calling the shots in
terms of wealth. It is realized that it is only in for
such a cause would an individual sink millions into

59
with no hope of immediate return, yet would be filled with high sense of
euphoria and fulfillment in the belief that he is investing in the hereafter.
However, because of the volatile nature of religion, successive governments in
Nigeria have not been able to muster the courage to impose tax on worship
centers.

XIII) Loans
The federal, states and local government take loans to meet expenditures that
the current revenue accruals cannot support. Loan could be taken from foreign
governments, International financial institutions, the International Monetary
Fund (IMF), the Paris Club and the London Club of creditors. It can also be
taken internally through the sale of securities such as Treasury Bills, bonds
etcetera and at the end maturity the government pays the bond holders with
interest.

To go for loans or credit facilities is not wrong especially when it is utilized on

productive ventures or spent prudently, but when the money is spent on
unproductive activities like serving as chairman to every social gatherings like
wedding, naming, birthday ceremonies and dolling out money and adding wives
with concomitant increase in number of children may produce a boomerang to
service the debt one might end up bankrupt.

Nigeria’s experience with foreign debt was very bad until Obasanjo made
deliberate and bold efforts to reduce significantly the excruciating debt burden
couple with a growing huge foreign reserve. The foreign reserve as at February
2007 stood at $46.36 billion. The huge amount of money that was used to
service debts should be directed to other areas like power (electricity) that beg
for attention in the economy. We must ensure that going for any further loan
must be absolutely necessary, and the proceeds must be prudently and
60
efficiently managed. Also the fight against corruption must be given a pride of
place.

XIV) Payroll Tax

Whereas an income tax is levied on all sources of income, a payroll tax applies
only to wages and salaries of employees in the payroll of an organization.
Employers automatically withhold payroll taxes from employees’ wages and
forward them to the government. Payroll taxes are the main sources of funding
for various social insurance programmes in developed societies, such as those
that provide benefits to the poor, elderly, unemployed, and disabled.
Although the legislators who set up payroll taxes intended to divide the tax
burden equally between employers and employees, this is not necessary the case
in practice. Some economists believe that the tax causes employers to offer
lower pretax wages to employees than they would otherwise do, in effect
shifting the tax burden entirely to employees.

XV) Earnings from Commercial Undertakings

Commercial undertakings are ventures run by government for profit.
Advertisements in the Nigerian Television Authority, Rent from Guest Houses,
Operations of Nigerian National Petroleum Corporation (NNPC), Nigerian Port
Authority (NPA), and Nigerian Maritime Authority (NMA) are all revenue
generating activities. At the local governments’ level ventures like markets,
motor parks, abattoir, transport services, trade industries and other related
business also attract revenues.

XVI) Death Tax/Estate Duty/Inheritance Taxes

Death tax does not mean the dead should resurrect from dead to pay tax to
government. What it means, however, is that, property of the deceased person,
which is passed on to the heir apparent, is valued and taxed. The heir apparent
61
pays the tax on behalf of the deceased person. In other words, when a person
dies, the property that he or she leaves behind is valued and subjected to tax. An
estate tax is a tax on the deceased person’s estate, which includes everything the
person owned at the time of death, money, real estate, stock, bonds, and
proceeds from insurance policies, and material possessions. Most governments
levy estate taxes before the deceased person’s property passes to the heir,
although many governments do not impose an estate tax on property inherited
by a spouse.

An inheritance tax also taxes the value of the deceased person’s estate, but after
the estate passes to the heir. The inheritor pays the tax. Estate and inheritance
taxes are sometimes collectively called death taxes. For anyone to die, death
certificate must be paid for allowing himself to die. For depositing the corpse of
the death, payment must be made for the number of days the corpse stays in the
mortuary as well for embalmment or else the corpse would rot. In fact, the piece
of land to bury the dead must be paid for. From every indication it is cheaper to
live than to die.

XVII) Pollution tax

This is a tax levied on a company that produces air, water, or soil pollution over
a certain level established by the government. In fact even producing disturbing
sound or noise is meant to attract tax. The tax provides an incentive for
companies to pollute less and thus reduce damage to the environment. The
United States, France, Germany, and The Netherlands all levy taxes on some
types of pollution. However, these taxes account for just a tiny amount of total
tax revenue. In Canada, some provincial governments levy pollution taxes.
While not much is known about pollution tax in Nigeria, perhaps due to our low
level of industrialization, and perhaps government failure to pay attention to it.
The time has come that something needs to be done to control high level of
62
environmental pollution and degradation by some textile factories specifically
United Nigeria Textile plc at Nasarawa/Kakuri, Kaduna, Sun Seed at Dakachi,
Zaria, and Oil companies in the Niger Delta region, that have constituted some
of the reasons why the youths have taken up arms, against the government and
oil workers.

Grants are usually provided to beneficiaries in order to ameliorate certain

problems that impinge on the good governance and wellbeing of the people. It
can also be provided if government has identified areas that beg for government
attention. In this case, it is done at the pleasure of the donor nation or level of
government or agency. It is not backed by any constitutional provision, but
disbursed at the pleasure of the donor. It can also be provided to tackle
unexpected emergencies or natural disasters like earthquake, famine, storm,
tsunami, crisis, drought etcetera. In some cases, it is tied to a specific project,
like the N1 million disbursed to all local governments across the federation
during Babangida regime for the rehabilitation of rural roads. States and local
governments receive grants from the federal government, foreign government
and organizations, the federal government receive from foreign government and
institutions too.
In-text Question
1. Is government allowed to engage in commercial activities for profit?

Answer
1. Yes government is allowed to invest its fund wherever it can get more revenue.

3.0 Tutor Marked Assignments

In which areas does Public Finance operate mostly?

5.0 Self-Assessment Questions

The Revenue that is credited to the Federation Accounts is meant to be shared
among whom?
63
6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
axes
and critique it in the discussion forum
c. Take a walk and engage any 3 students on ???????????; In 2 paragraphs
summarise their opinion of the discussed topic. etc.

7.0 Reference
ADEBAYO ADEDEJI; (1979) Financing Local Government in Nigeria, an
Over-View University of Ife Press Nigeria.
ADEBAYO, A & ROWLAND, (1979) L; Local Government Finance in
Nigeria Problems and Prospect University of Ife.
ANYANWU J. C. (1997) Nigerian Public Finance, Joanne Educational
Publishers Ltd Onitsha, Nigeria
BHATIA H. L. (1980) Public Finance, Vikas Publishing House (Pvt) Ltd, 5 th
Edition, New Delhi (India)
BUHARI A. L. (1993) Straight To The Point; Ican/Polytechnic Public Finance,
Unilorin Press, Ilorin.
DALTON, HUGH-Principles of Public Finance, Routouteledge and Keegan
Paul Ltd., London, 4th Edition, 1961.

64
 STUDY SESSION 4
Approved List of Tax Revenue According to Tiers of Government in
Nigeria
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Approved Taxes for Federal Government
2.2 Approved Taxes for State Governments
2.3 Approved List of Taxes for Local Governments
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
Tax is a charge or form of financial levy imposed by the government of a
country on all kinds of property, persons and transactions, to raise money for
various public needs. The generation of additional revenue is a key function of
taxation as additional revenues to government enables the government to
provide qualitative and quantitative services and utilities to its people. Nigeria’s
over dependence on oil revenues has encouraged tax avoidance and inhibited
the development of other sectors of the Nigerian economy including an efficient
and effective tax administration system. Prior to the global economic meltdown,
local governments and state governments who have very low internally
generated alternative sources of income outside the revenue derived from the
federation account have resorted to illegal methods of collecting fictitious taxes
whose practices have among other things inhibited small and medium scale
65
enterprises. To curb these multiple and unlawful tax practices, the Taxes and
Levies (Approved List for Collection) Act 1998 No. 21 was enacted thus:

Session Learning Outcomes

At the end of this session, I shall expect you to be able to:
1. Describe taxation and approved government taxes
2. Explain taxes approved at various tiers of government.

2.0. Main Content

2.1 Approved Taxes for Federal Government
Part 1 of the Schedule to the Approved List of Taxes Law enumerates the
traditional taxes authorized for collection by the Federal Government of Nigeria
to include:
i. Companies Income Tax
ii. Petroleum Profit Tax
iii. Value Added Tax
iv. Education Tax
v. Capital Gains Tax for employees and residents of the Federal Capital
Territory, Abuja (“FCT”), with non-residents and corporate bodies included;
and
vi. Withholding tax on the income of companies, residents of FCT and non-
resident individuals.
vii. Personal Income Tax in respect of the remuneration of members of the
armed forces, the Police, residents of FCT, staff of the ministry of foreign
affairs and non resident individuals are authorized to be collected by the
Federal Government of Nigeria.

2.2 Approved Taxes for State Governments

66
Part II of the Approved List of Taxes Law authorizes State Governments to
charge and collect:
i. Personal income tax on the income of individuals only.
ii. Withholding tax for individuals only
iii. Capital gains tax for individuals only
iv. Stamp duties fees on instruments executed by individuals only.
v. Pool betting and lotteries tax
vi. Gaming and casino taxes,
vii. Road taxes
viii. Business premises registration fees for urban and rural areas
ivx. Development levy for individuals only
ix. Street naming registration fees in the State capital only.
x. Right of occupancy fees on land owned by government in urban areas of
a State, and
xi. Market taxes and levies where State finance is involved.

2.3 Approved List of Taxes for Local Governments

i. Shops and kiosks rates
ii. Tenement rates on and off liquor license fees
iii. Slaughter slab fees
iv. Marriage, birth and death registration fees
v. Street naming registration fees for non urban areas.
vi. Right of occupancy fees on lands in rural areas
vii. Market taxes and levies excluding where the State used its finances to
construct the market.
viii. Motor parks levies
ivx. Domestic animals license fees
ix. Religious places permit fees

67
x. Signboard and advertisement permit fees
xi. Wrong parking charges
xii. Vehicle, radio license fees is imposed by the local government where it
is registered,
xiii. Merriment and road closure levy.
xiv. Collection and Related Offences
xv. Business Premises Registration/Renewal Fees and Development Levy

Any business premises in an urban area of Nigeria is required to be registered

on the payment of a N10,000 registration fee in the first year of registration, and
N5,000 per annum as renewal registration fees in the subsequent years.
For rural areas, the business premises registration fees is N2,000 for the first
year of registration, and N1,000 per annum as registration renewal fees for the
subsequently years.

A development fee of N100 per annum per individual is also liable for payment
by each taxable individual in the entire country.
In-text Question
1. List two revenue sources that fall within the jurisdiction of the state government?

Answer
1. Right of occupancy fees on land owned by government in urban areas of a state.

3.0 Tutor Marked Assignments

What are the functions of Public Finance in the economy?

4.0 Conclusion/Summary
Subject to the provisions of the Constitution of the Federal Republic of Nigeria,
1999 the Approved List of Taxes Law is the most comprehensive and
authoritative legislation on taxes that can be collected by each level of
government – i.e. Federal, State or Local Government – in Nigeria. Legal
68
challenges on the taxing powers of the various tiers of government especially
with respect to which tier of the government has the taxing authority to charge
and collect value added tax (“VAT”), lottery and gaming fees licences, vehicle
registration fees, etc are pending in some courts of law. The supreme should
make a clear cut pronouncement on this matter to ensure every tier of
government knows its powers and their limits.

It is a mandatory provision of the Approved List of Taxes Law that no person

other than the legally authorised tax authority of either the federal or state or
local government area, as applicable, can access and collect any tax except as
authorised under the Approved List of Taxes Law.

The unlawful mounting of road blocks on express ways in any part of Nigeria
for the purpose of collecting any tax or levy with or without Policemen or other
law enforcement agents is forbidden and punishable under this referenced Law.

Any person who collects or levies any tax or levy, or who mounts a road block
or causes one to be mounted for the purpose of collecting any tax or levy
contravenes Section 2 of the Approved List of
Taxes Law and is liable on contravention to a fine
of N500,000 or three years imprisonment or to
both the fine and the term of imprisonment.
Enforcement of Section 2 of the Approved List of
Taxes Law, being the unlawful mounting of road
blocks with or without the security agents of the
government, need to be strictly enforced as are the other provisions of the Law
in order for the level of tax compliance to increase appreciatively.

5.0. Self- Assessment Question

69
Discuss the Approved List of Taxes for Local Governments

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
ue+according+to+Tiers+of+government+in+Nigeria
and critique it in the discussion forum

7.0 Reference
ECKSTEIN OTTO; (1987) Public Finance 4th Ed Prentice Hall of India Private
Limited, New Delhi,
HERBER, B.P. (2004) Modern Public Finance 5th Edition, Aitbs Publishers and
Distributors, Delhi, India Articles and other Publications Constitution
of the Federal Republic of Nigeria 1979 Federal Government Printer,
Lagos.
HARVEY S. ROSEN; Microsoft ® Encarta ® Encyclopedia, 2004
HAVEMEN AND MARGOLIS (Eds) Public Expenditure and Public Analysis,
R and Mcnally Publishing Company, 1977
KOLEADE O AND PETER N. D (1984) Financial Management in the Nigerian
Public Sector, Pitman Publishing Pty Ltd, Massachusetts in Nigeria.
LOUIS FISHER, Budget Microsoft ® Encarta ® Encyclopedia 2004
M. SHADE KENDRICK, (1951) Public Finance, Principles and Problems
Boston Houston Mifflin Company.
MALCOLM, G. (1989) Tax Reform in Developing Countries USA Duke
University Press.

70
 MODULE 2
Content
Study Session 1: Tax Administration
Study Session 2: Principles of Effective
Study Session 3: Government Expenditures
Study Session 4: Macro-economic Policies

STUDY SESSION 1
Tax Administration
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Functions of Taxation
i. Raising revenue
ii. Income Redistribution
iii. Stabilization of the economy
iv. To regulate production and consumption of certain goods
v. Protection of Infant Industries
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
In every civilized society, two things are certain; death and tax. The subjects of
the state must exercise their civic responsibility of paying tax in support of the
government according to their respective incomes. This would best be achieved
71
if the tax burden is equitably distributed and the proceeds therein prudently
managed to encourage the keenness of tax payers in exercising this civic duty.

The International Encyclopedia of the social sciences defines tax “as a general
concept or device used by government to extract money or other valuable things
from people and organizations by use of law.” To writers like Dalton, tax is a
“… a compulsory contribution imposed by a public authority irrespective of the
exact amount of service rendered to the taxpayers in return and not imposed as a
penalty for any legal offence”. Tax is neither a fee, fine, nor a price, even
though it looks so but a civic responsibility exercised by citizens of a state. It is
however compulsory. It legitimizes government and depicts a symbol of
civilization. The two things that are inevitable in life in a famous folktale are
death and tax.

Tax is the most important source of revenues for modern governments, typically
accounting for about 90% or more. The remainder of government revenue
comes from borrowing and from other like charging fees for services, Licences
from time. Countries differ considerably in the amount of taxes they collect.

In addition to using taxation to raise money, governments might raise or lower

taxes to achieve social and economic objectives, or to
achieve political popularity with certain groups. Tax
could redistribute a society’s wealth by imposing a
heavier tax burden on one group in order to fund
services for another. Also, some economists consider
taxation an important tool for maintaining the stability
of a country’s economy as indicated in its functions below.

Session Learning Outcomes

72
At the end of this session, I shall expect you to be able to describe:
1. the various functions/justifications for taxation

2.1 Functions of Taxation

Taxation performs many functions in the economy. They include among others
the following; raising revenue, redistributing income, regulating production and
consumption of certain goods, protecting infant industries and stabilizing price
among others:
i. Raising revenue
Raising revenue in support of the state is a basic responsibility of the citizens
and a necessary requirement of government from time immemorial. According
to Adams Smith, the subjects of the state are expected to contribute in support
of the government as nearly as possible and in accordance with their respective
abilities. This contribution is part of the revenue the government uses to
maintain law and order, carry out massive infrastructural development and so
on. Without adequate revenue the state apparatus can grind to a halt. Even
though many functions of tax exist, no doubt this is the most important of all.

ii. Income Redistribution

Tax can be used to redistribute income in the society. A marked difference in
economic ability and status exists in every society even though they vary in
degree. We usually have in society the haves and the have-nots, the rich and the
poor and the privileged and the under privileged. The tendency is for the rich to
become richer, while the poor become poorer within the context of market
system. When you impose tax that is flat, demanding people to pay the same
amount as tax when their economic endowments are not the same, you are
worsening an already bad situation. While the rich would become richer, the
poor would become poorer. In this situation, there is a looming danger if

73
something is not done to redistribute income to remedy the income inequality to
a reasonable extent.

Tax can be an instrument used in order to ensure that the wealthy people in the
society do not become richer at the expense of the poor. Tax is imposed on the
basis of ability to pay, where the rich would pay more than the poor and
government might provide health and social services, where the major
beneficiaries would be the poor. Government might exempt those who are very
poor and cannot fend for themselves in the society from paying tax. Consumer
items that are patronized mainly by the poor or what is regarded as basic needs
are charged with low tax viz a viz luxury goods mostly consumed by the rich.
This would make the rich to pay more and the poor to afford more.

iii. Stabilization of the economy

Tax is used to stabilize the economy in conjunction with other policy measures.
When taxes are raised the disposable incomes of people would reduce and
would reduce their propensity to spend. A situation where there is inflation
caused by too much money pursuing fewer goods, a reduction in the quantity of
money in the economy through raising taxes, would reduce the inflationary
pressure and would force price to drop. On the other hand, if there are tax cuts,
the disposable income of the people would increase and that would also increase
their propensity to spend.

When there is a tax cut, disposable income increases, which also increases the
propensity to spend. If for that reason individuals have effective demand,
chances are that, prices would go up on account of the simple fact that the
demand is more than the supply. On the other hand, if there is increase in tax,
people would have less disposable income and consequently would have no
effective demand. This would collapse the prices of goods and services. When
74
we have an inflationary situation, money in circulation should be reduced using
tax or whatever other measures. If on the other hand, there is deflation, where
there is lack of enough money in circulation to buy available goods and
services; government could use tax cuts so that individual disposable income
would increase and by extension increase the propensity to spend. In this way
inflation and deflation can be regulated using taxes.

iv. To regulate production and consumption of certain goods

Through tax, government can discourage the production of certain goods that
are considered inimical to the well-being of the citizens. It can also encourage
the production and consumption of certain goods and services that are vital.
Example, Cigarette smoking as we all know
is dangerous to health and had been proven in
medical science to be the major cause of
Cancer. Government might want to
discourage the production of cigarette to
safeguard the health of the citizens, by making sure that tax related to cigarette
production and consumption is increased. When that happens, the cost of
production becomes high which would translate to high cigarette prices.
Smokers would be discouraged from smoking cigarette on account of high
price. This means, if you must smoke, you must be prepared to pay more. The
same applies to alcohol that causes liver disease. If Breweries are excessively
charged high tax and when that is built into the cost of production, the price of
Beer would go up and that would discouraged a sizeable number of people from
drinking alcohol.

v. Protection of Infant Industries

Industries in developing nations are just coming up. Ordinarily, they cannot
compete with those of advanced countries in terms of quality and durability
75
with low price occasioned by low cost of production in the advanced world. If
local or infant industries are not protected from undue competition with the
developed ones, through the use of taxation, they would forced our industries to
fold up, because the goods produce by them are inferior and costly viz a viz the
more qualitative and cheap ones produce by more advanced industries of high
technology. Government must decide to use tax by way of banning products of
advanced countries or tax them heavily to give comparative advantage to the
local ones.

Granting tax holiday for infant industries and excessively taxing those of
developed countries to make it difficult for them to flood the markets with their
cheap products, if the infant industries must survive. Chinese products like
Generators, Handsets, have flooded the markets at cheaper prices even though
with questionable quality. When Nigerian products are inferior and cost more,
there is no way our products can compete with foreign goods in the market.
Hence all measures including import restrictions, outright ban or placing high
tariffs are ways products of infant industries or local industries could be
protected.
In-text Question
1. What is legal reserve requirement?
Answer
1. Is the money banks are required to deposit with the C.B.N

3.0 Tutor Marked Assignments

What is the major difference between Public and Private Finance?

5.0 Self-Assessment Question

1. Name four functions of taxation.

76
6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
and critique it in the discussion forum

7.0 References
BARLOW, J., ROEHRICH, J.K. AND WRIGHT, S. (2013). Europe Sees
Mixed Results from Public-Private Partnerships for Building and
Managing Health Care Facilities and Services. Health Affairs.
32(1):146-154
VIRGINIA TAN (ALLEN & OVERY) Public-Private Partnership (PPP),
(Advocates for International Development, June 2012)
ZHENG, J. ROEHRICH, J.K. AND LEWIS, M.A. (2008). The dynamics of
contractual and relational governance: Evidence from long-term
public-private procurement arrangements. Journal of Purchasing and
Supply Management. 14(1): 43-54
MUHAMMAD, S. (2008) Public Private Partnership: Niger State Leads
Northern Nigeria, Kaduna, Nigeria - January 21, 2008
Central Bank of Nigeria (2006), Central Bank of Nigeria Annual Reports and
Financial Statements, published annually by the Central Bank of
Nigeria
HASSAN M.M. (2001), Financial Management in Nigeria Local Government,
Muhas Associates P.O. Box 16599, Ikeja, Lagos
Hepworth, N.P. (1978), The Finance of Local Government, George Allan and
Unwin, London.

77
 STUDY SESSION 2
Principles of Effective Taxation
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Canon of Equality
2.2 Canon of convenience
2.3 Canon of economy
2.4 Canon of certainty
2.5 Canon of productivity
2.6 Canon of buoyancy
2.7 Canon of flexibility
2.8 Canon of simplicity
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
A Seventeenth-century French statesman Jean-Baptist Colbert declared: “The
art of taxation is the art of plucking the goose so as to get the largest possible
amount of feathers with the least possible squealing.” Today’s economists agree
with the above view point that the cost of tax administration should be kept to
the barest minimum.

Most economists believe that, a tax system should follow two main principles:
fairness and efficiency. British economist Adam Smith (1776) with his famous
78
“Canons of taxation” in his landmark treatise “The Wealth of Nations” had this
to say on the best way to administer tax; “…….because of the compulsory
nature of taxation, its selection, levying and collection methods might have
significant effects on the behaviour of individuals and functions of the
economy.” If tax is administered in a whimsical inconsistent manner and in
violation of the canons of taxation propounded by Adam Smith and other
scholars, it might cause the following problems;
i. ignite political unrest, like it did in the Abba women riot of the
1920s
ii. produce negative incentive on certain economic undertakings
iii. affect individual consumer preference and
iv. place heavier burden on some individuals relative to others

To avoid these harmful effects, Smith (1776) argued, tax must be levied and
collected according to certain principles or canons
evolved over the years. The first four Canons were
propounded by him, while the remaining ones were
propounded by other writers.

1.0 Session Learning Outcomes

At the end of this session, I shall expect you to be able to:
1. explain what is meant by effective taxation.
2. Describe the concept and principles of effective taxation.

2.0 Main Content

2.1 Canon of Equality
According to Adam Smith, the subjects of every state are expected to contribute
towards the support of the government as nearly as possible in proportion to
79
their respective abilities, or their respective incomes, which they individually
enjoy under the protection of the state. It presupposes that, individuals, who
earn the same amount of income, should pay the same amount of tax and those
whose incomes are not the same should not be made to pay the same amount,
bearing in mind vertical and horizontal equity. It means those who earn same
amount of income, should pay same amount as tax, those who are unequal in
terms of income must of necessity pay unequal tax. Your wealth is protected by
the state using the police, the courts etcetera, hence you must give back to the
state in return.

2.2 Canon of Convenience

It is argued, the mode and timing of tax payment should be as far as possible
convenient to the tax taxpayers. In Pay-As-You-Earn (PAYE) system, is
designed to make tax payment more convenient to the taxpayer. This canon
recommends that unnecessary trouble to the taxpayers should be avoided;
otherwise, various ill effects might result in terms of resentment, delay or
procrastination. Convenience here refers to, timing of collection and the mode
of collection should be convenient to the tax payers. Collecting tax from the
farmers during harvest is more convenient than during the period of planting.
This is because, during planting, they are concerned about clearing the land,
buying agricultural inputs; the left over grain is sold to buy most of these things.
They would resent any attempt to collect tax from them at that period, no matter
what. Conversely, they would be very willing to pay after harvest especially
bumper harvest. Then they would have enough to pay for subsistence and to sell
to attend to other needs and payment of tax. Also, deduction from the pay roll is
more convenient than when the employees collect their salary and pay
personally afterwards. If everybody would be allowed to collect his salary and
afterward pay tax to the government, many would default for one problem or
the other. However, if the tax is deducted from the source directly, then, they
80
have no alternative but to accept whatever is left as net pay or disposable
income.

2.3 Canon of Economy

Administering tax collection by the authorities’ costs money. The government
must hire tax collectors to gather revenue, data entry clerks to process tax
returns, auditors to inspect questionable returns, lawyers to handle disputes, and
accountants to track the flow of money. Every tax has its administrative cost of
assessment and collection. It is expected that the total cost of collection should
as much as possible be kept to the barest minimum. It would be an act of
profligacy or wasteful spending, for the government to pursue tax as revenue
while the cost of collection has substantially been frittered away by cost of tax
administration. When taxes are unnecessarily multiplied or too wide spread
even when they are not viable, then, we would have violated the canon of
economy.

2.4 Canon of Certainty

This is meant to safeguard the taxpayers from undue harassment by the tax
collectors and any other person concern. What amount of tax, at what time of
payment, to whom and in what medium to pay, must be clear, plain and direct.
If at any time in the process of tax collection, the tax payer is uncertain about
what to do, then there is no doubt the canon of certainty has been violated. This
would definitely affect the process of smooth collection of tax. The following
other were added later by other writers.

2.5 Canon of Productivity

Canon of productivity is also referred to as canon of fiscal adequacy. It
presupposes that, the tax system should be able to yield enough revenue for the
treasury and the government should not be forced to resort to deficit financing.
81
Taxation must meet its leading objective, which is to raise enough revenue to
enable the government prosecutes its programmes and projects, so that the
government should try as much as possible to avoid borrowing like a plaque.

2.6 Canon of Buoyancy

It means the tax revenue should have an inherent tendency to increase along
with an increase in national income, even if the rates and coverage are not
revised. The rate here refers to the percentage of tax, which should be increased
or decreased as the income rises or falls. In this case proportional and
progressive taxes should be built into the tax system; so as to serve as automatic
or in-built stabilizers to enable the size of tax reflects income.

2.7 Canon of Flexibility

It should be possible for the authorities without undue delay, revise the tax
structure, both with respect to its coverage and rates, to suit the changing
requirements of the economy and of the treasury. The tax structure in the area of
rates and coverage should be amenable to change and not unduly rigid. When
you could easily and swiftly effect necessary changes on the tax structure
involving the rates and coverage, it shows it is flexibility.

2.8 Canon of Simplicity

The tax system should not be too complicated to make it difficult to administer
and understand otherwise it would breed problems of differences in
interpretation and unnecessary legal disputes. There should no room for
ambiguity which often leads to prolong legal tussles.

2.9 Canon of Diversity

It would be unreasonable for the state to depend upon too few a source of public
revenue. Such a system is likely to breed a lot of uncertainty for the treasury.
82
On the other hand, if the tax revenue comes from diversified sources, then any
reduction in tax revenue on account of any one source is bound to be very small.
However, too much multiplicity of taxes is also to be avoided or else it would
violate the canon of economy. Admittedly, crude oil is the mainstay of Nigeria’s
economy, which makes it a monolithic economy. Our over dependence on it is a
dangerous gamble in total exclusion of other sources of revenue that supported
the economy before the discovery of crude oil in commercial quantity. Anytime
the price of crude oil in the international market falls, it affects adversely our
budget. This is a clear case of not opening up on non-oil revenue sources like
agriculture to supplement crude oil revenue.

J) The Complexity of Distributing Tax Burden amongst Tax Payers

The tax structure is part of the economic organization of the society and should
therefore fit into its overall economic philosophy. In the world over, there is no
tax system that does not satisfy this basic philosophy would be regarded as
good. Although what constitutes a good tax nowadays unlike before, are no
longer couched in traditional canons since they were devised with reference to
their compatibility with the requirements of the authorities on the one hand and
the needs of a private enterprise economy on the other. Modern economy
philosophy of a good tax has certainly been slightly modified with the passage
of time like we have here.

Ability to pay and Benefits principle are

not entirely new, but merely reemphasized
earlier principles to stress their importance.
They are concerned on the best way the tax
burden could equitably be distributed among tax payers and of course benefits
derived by them.

83
2.10 Ability-to-Pay Principle
The ability-to-pay principle holds that people’s taxes should be based upon their
ability to pay, which is usually measured by income or wealth. One aspect of
this principle is horizontal equity, which states that people in the same income
level should pay the same amount of tax. If two people both have incomes of
N50,000, then horizontal equity requires that they pay the same amount as tax.
Suppose, however, that two individuals both have incomes of N50,000 but one
has huge medical bills due to his poor health condition and the other has little or
no health challenges, they are in equal position in terms of income but not the
same position in terms of medical bills. He that pays higher medical bill should
have a reduced tax and if that is the case, by how much? Suppose this analysis
is carried further, you might be concern and ask, how do we know that the
person, who presents information to tax authorities about his health status is not
exaggerating just to have his tax liability reduced? This example illustrates a
fundamental dilemma in tax design and raises a million poser questions, whose
answer would be difficult to find.

A second challenge is on ability-to-pay principle to meet vertical equity (those

whose incomes are not the same); the idea is that a tax system should distribute
the tax burden fairly among the people with different income abilities to pay.
The idea implies that a person with higher income should pay more in taxes
than one with less income. Be that as it may, by how much more or less? Should
families with different incomes be taxed at the same rate or at different rates?
This is the danger. Tax authorities should carefully watch in the course of
pursing fairness, they might find it difficult to achieve, if all the necessary
information are available and reasonably analyzed.

2.11 Benefits Principle

84
The benefits principle of taxation posits that only the beneficiaries of a
particular government programme should have to pay for it. The benefits
principle regards public services as similar to private goods and regards taxes as
the price people must pay for these services. In practice, the application of the
benefits principle is extremely difficult, because the community as a whole
consume most government services. For example, one cannot estimate the
benefit received by a particular individual for general public services such as
national defence and local police protection viz a viz other members of society.
There is no doubt, in some taxes, there is a relationship between what is paid
and benefits received. Gasoline taxes, for example, are used to finance highway
construction. Though the link between taxes and benefits is weak, some drivers
have more fuel-efficient cars than others. They might use the roads as much as
other drivers but buy less gasoline and thus pay less tax. In another example,
merchants who operate stores along the highways benefit from the presence of
the roads, but the benefit has nothing to do with the merchants’ gasoline
consumption. Though the benefit principle appeals a lot, it is not practicable and
it plays little role in the design of tax systems.

In-text Question 1. Name the canons of taxation as propounded by Adam Smith

Answer
[Link] of Equality
[Link] of Certainty
[Link] of Economy and
[Link] of Convenience

3.0 Tutor Marked Assignments

Value Added Tax is credited to which Account?

5.0 Self-Assessment Question

1. According to Adam Smith if tax is not carefully imposed according to the
right principles, what would it cause?

85
6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
and critique it in the discussion forum

7.0 Reference/Further Readings

OREWA G.A, (1966).Local Government Finance, Ibadan University Press
MUSGRAVE R. Public Finance in Theory and Practice, International Student
Edition, McGraw Hill, 1976.
PREST A. R. (1985) Public Finance in Developing Countries 3 rd Edition,
London
ROBERT H. Haveman; (2004) Public Finance Microsoft ® Encarta ®
Encyclopedia 2004.
LOUIS FISHER, Budget Microsoft ® Encarta ® Encyclopedia 2004
HARVEY S. ROSEN Microsoft ® Encarta ® Encyclopedia 2004
Kaduna, Aug. 28, 2013 (NAN) The Kaduna State Government on Wednesday
called on the private sector to invest in the tourism industry to
develop the sector.

86
 STUDY SESSION 3
Government Expenditures
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Types of Public Expenditure
2.2 Growth of Public Expenditure
2.3 Theories of the Growth of Public Expenditure
2.4 Cost Benefit Analysis
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
Government expenditures have been increasing not because of actual increase
relating to development but increases occasioned mostly by reckless spending,
mismanagement and corruption. Many people see government property as
nobody’s property and thus command nobody’s attention and care. Projects are
carried out without rigorous feasibility and cost benefit analysis or they are
treated with levity only to realize when it is too late that money has been

87
invested hugely on projects that are not viable. It is sad that though Nigeria is
abundantly blessed, yet majority of our people are still living below the poverty
line. We need attitudinal change, which the author feels is beyond rebranding
Nigeria as it looks cosmetic.

According to Bhatia (1976), Public expenditure refers to the expenses which the
government incurs for its own maintenance and also for the society and the
economy as a whole. Public expenditure refers to government spending. If you
look around, there exist numerous infrastructural projects and programmes that
were put in place or are still being put in place by the government, be it federal,
states or local governments and their agencies. In other words, government
expenditure is the expenses incurred by the government for maintenance of
itself, the economy and the society. Public expenditure is an important
mechanism which Government can uses to have significant effects on people’s
lives in terms of standard of living and better opportunities.

1.0 Session Learning Outcomes

At the end of this session, I shall expect you to be able to:
1. Explain government expenditure in the context of the types and nature.

2.0 Main Content

2.1 Types of Public Expenditure
Public expenditure can be classified into two broad terms;
i) Capital Expenditure
These are expenses on goods and services that involved huge capital outlay to
put in place. These expenditures could be building a dam, constructing roads,
building a new university like the recent approved universities by the federal
government, building estate involving units of houses and so on. In other words
Capital Expenditure is used to provide infrastructures such as roads, water and
88
power; fund educational services such as schools, colleges and universities; and
provide healthcare facilities and services among others.
The benefits of capital expenditure are its longer durability and capital intensive
nature. Most times government takes credit facility to finance such a project.

ii) Recurrent Expenditures

These are expenses carried out by the Government on the day-to-day basis. The
amount involved might not be much, but occurs more frequently, which
explains the name “recurrent expenditure” Examples of recurrent expenditures
are buying of stationery, payment of salaries, renovations, furnishing of offices
or residence of senior officers in the service, maintenance of social services,
rent and rates, and so many others.

Apart from classifying public expenditures into capital and recurrent, they can
also be further classified in the budget under the following headings:
i. Administration
ii. Economic services,
iii. Social and community services and
iv. Transfers

It is important to provide more details on the above classifications;

Administration: This expenditure is undertaken in order to ensure effective
organization of the whole society. Expenditures on administration comprise
general administration (e.g. wages and salaries), defence (armed forces) and
internal security (maintenance of law and order).

Economic Services: Government incurs expenses on economic services like

agriculture, construction, transportation and communication, mining,

89
manufacturing and others. The purpose of this expenditure is to achieve
economic growth and development in the country.

Social and Community Services: Government spends money on the provision of

social amenities, which reduce the cost of production in the other sectors of the
economy. This comprises expenditures on education, health, housing, etc.

Transfers: These are expenditures that are made not on direct productive
activities but money spent on debt repayment, both the principal and the
interests. While transfers under recurrent expenditure, consists of public debt
charges (domestic and foreign), pensions and gratuities, contingencies and extra
budgetary expenditure as well as the transfers under capital repayment and loan
to parastatals, outstanding liabilities and others.

Each year the federal, state, and local governments prepare budgets to determine
how much money they will spend during the upcoming year. The budget
determines which public goods to produce, which spillovers to correct, and how
much assistance to provide to financially disadvantaged people. The chief
executive of the government, that is the president, governor, or chairman
proposes the budget. However, the legislature, that is the Senate/House of
Representatives, state legislature, or local government council, ultimately must
pass the budget.

Federal government spending comprises

several major categories. One of the
largest government expenditures is
national defence. The most important non-
defence programme in advanced countries
is social security. It provides income to
90
retirees and the jobless in the society. Another major programme for the benefit
of the elderly is medicare, a health insurance programme. Social welfare
programmes include unemployment insurance and payments of cash and food to
the poor as well as account for a large slice of the federal budget. States and
local governments spend the largest share of their tax revenues on public school
systems. Other important expenditures include welfare programmes, police and
fire protection, maintenance of roads and highways, and public hospitals. They
also spend heavily on education, transport and communication, security, health,
personal emoluments or salary and wages, manufacturing, provision of goods
and services etcetera.
In-text Question 1. What do you understand by capital expenditure?
2. What about recurrent Expenditures?
Answer
1. Capital expenditure refers to expenditures that attract huge capital and can last for
years. Example is building a Refinery.
2. Recurrent expenditure refers to purchases that are done at short periodic interval. It
could be daily, weekly, monthly, quarterly as the case may be. The money involved in such
purchases are usually smaller than that of capital expenditure

a. Salaries, Pensions and Overheads.

The Federal Government employs people to work in the various Ministries,
Departments and Agencies (MDAs) and pays them salaries in order to maintain
the administration of government and continue to provide public goods and
services. In addition to the pension contributions paid on behalf of workers
under the Contributory Pension Scheme, the Federal Government continues to
pay the pensions of existing pensioners under the old Pay-As-You-Go System.
Finally, the Government incurs overhead costs (such as payment for electricity,
water, telecommunications, office rent, office equipment and consumables, staff
training, transportation, etc.) just like any ordinary business.

b. Debt Service

91
This refers to the payment of domestic and foreign debt obligations of the
government to creditors. Nigeria was in serious excruciating debt trap but the
efforts of President Obasanjo significantly ensure dramatic reduction of the debt
we owed.

c. MDAs Expenditure
The various ministries, departments and government agencies (MDAs) that
essentially implement government policies required massive spending to
achieve its mandate. Government spends money to run the ministries,
departments and agencies of government that implement government policies;

2.2 Growth of Public Expenditure

i) Factors Responsible for the Growth of Public Expenditure: One cannot
study the public sector in any country without examining the composition of the
total government expenditure, the growth in total expenditure over time as well
as the factors responsible for such growth. In virtually all countries, the state has
absorbed a steady increase in the share of the national output. Nigeria is no
exception when relevant figures over time are examined. The search for
explanation for the increasing share of output going to the public sector has
caused considerable debate among experts. The various explanations given by
economists are not only important, but also help in understanding the growth of
public expenditure.

Before examining some existing theories used in explaining the growth of

public expenditures, it is necessary to identify the factors responsible for the
growth in public expenditure in general;

ii.) Urban Growth - History is replete with evidence of urban growth that
accompanies urban development. Usually, government is called upon to
92
contribute its own quota in urban development. Such urban growth tends to
increase the level of government spending over time. Typical expenditures
incurred by government during urbanization, include transportation, health,
sanitation, waste disposal expenditures, electricity etcetera.

iii.) Providing Infrastructure - Government is usually in the forefront of

creating the necessary economic environment for technological and innovative
change to take place in most economies. In capitalist countries, this may only be
indirect since private entrepreneurs need innovation to survive intense
competition. In developing countries, government spending tends to be direct in
this regard.

iv.) Wars or National Calamities -In periods of wars or national calamities,

expenditure of government increases. Crises and wars always necessitate huge
government spending and these serve as catalyst for growth of public
expenditures. In Nigeria, the civil war and other sectarian crises and the
resultant reconstruction expenditures contributed significantly to the growth in
public expenditure. Also, the ECOMOG military intervention in Liberia and
Sierra Leone in which Nigeria and more recently in Mali was reported to have
contributed over seventy percent of the total budget has no doubt increased
government expenditure growth.

v.) Inflationary Trend - There is no country that does not experience inflation
over time. Indeed, when comparing countries on this platform, it is the different
rates of inflation that are discussed and not a suggestion that one country does
not experience inflation at all. Thus, when we examine government expenditure
of countries over a period, such expenditures would necessarily exhibit a rising
trend because of rising price levels, caused by inflation.

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vi.) Expansion of Public Bureaucracy - The steadily expansion of Nigerians
public bureaucracy and political structures are also responsible for the growth of
public expenditure. In Nigeria changes started from a four regional structure to
twelve-state structure, and then to nineteen, twenty-one and later thirty-six
states. This has led to increases in government spending during these periods
occasioned essentially by creation and expansion of public bureaucracy.

vii.) Corruption - If the productive resources used in the public sector rise less
sharply than that of similar resources used in the private sector, then there is a
greater relative need for inputs to produce a given output in the public sector,
which tends to increase over time. Above all, widespread corruption has
brought about unique increase in government expenditure; as huge amount of
government resources are embezzled, mismanaged or diverted, making
government to spend extra to normal expenditures. The states show desperation
in their penchant for borrowing from local banks, foreign loans, sale of bonds
and by flexing their strong political muscles to cause the depletion of the Excess
Crude Account. All these resources are not acquired mainly for development
but because the need much revenue in order to have more room perpetrate
corruption to leave little or no trace. For example in 2008 seven governors took
the late President Yar’ Adua to court over the Excess Crude Account and other
deductions. President Obasanjo government resisted the pressure from the
governors to share what was in the account, the political influence the
Governors’ Forum seem to wield over President Jonathan appears to have
compelled him to occasionally share part of the proceeds.

Steady Rise of Personnel Wage Bill- Usually drastic increases became glaring:
With the migration of all staff from the Harmonized Salary Structures to the
Consolidated Salary Structures regime with its attendant increase in salary; and
the increase in salaries of political, public and judicial office holders which
94
resulted in agitations for salary relativity by labour unions all in 2007. These
agitations resulted in an agreement in 2009, to significantly increase salaries of
academic and non-academic staff of Universities in the country. Predictably, the
Health sector also secured a large wage increase. On similar grounds, in 2010,
shortly after concluding negotiations with the Health sector, the FGN approved
a 53.3% increase in the salaries of Civil Servants, following heightened threats
of industrial actions. This had the impact of increasing the total wage bill by
75% between 2009 and 2011. In 2011, the Minimum Wage Act of 2011 was
implemented, bringing total personnel cost from N1.5trillion in 2010 to
N1.659trillion. More recently, additional pressures have started to emerge,
which can only make the situation worse if granted.

It is argued that as the level of income of an individual rises, the level of his
expenditure rises too, all things being equal. As the level of national income of a
country rises, it is argued, so is the level of government expenditures.

Government Expenditure can also be divided into two main types, which are the
following:
i. Capital expenditures and
ii. Recurrent expenditure.

With the migration of all staff from the Harmonized Salary Structures to the
Consolidated Salary Structures regime with its attendant increase in salary; and
the increase in salaries of political, public and judicial office holders which
resulted in agitations for salary relativity by labour unions all in 2007.

2.3 Theories of the Growth of Public Expenditure

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Economists have propounded a number of theories explaining the growth of
public expenditure the world over. The more popular ones include the
following:
I) Wagner’s Law of Expanding State Activity
Adolph Wagner towards the end of nineteen-century formulated the famous
‘Law of Expanding State Activity’. According to him, as the per capita income
in industrializing countries rises, the relative share of the public sector in
national output rises too. Wagner’s law categorizes government expenditure
into three areas;
i. Administrative and protective functions
ii. Cultural and welfare functions of the state (education and income
distribution)
iii. Direct provision of services by the government.

i. Administrative and protective functions of government;

Wagner argues, increase expenditure from inevitable centralization of economic
functions and the increase complexities in legal relations automatically result,
when there is economic development. Wagner’s argument rests on the
philosophical of sociology. Sociologists argue that population growth, increases
urbanization and division of labour that characterize economic development,
which tends to increase alienation. This, therefore, necessitates increased
government spending.
ii. Cultural and welfare functions of the state (education and income re-
distribution; Wagner believes that industrialized nations spend on culture and
welfare based on the increased need for industrialization. Education is one of
such needs, which the government spends money on. Government is the only
institution that can organize resources for supplying skilled manpower to
industries and commerce in sufficient and competitive quantity. In addition,
welfare expenditure increases as industrialization and urbanization destroy the
96
informal welfare system that was based on families’ ties and private charity and
government is made to assume the new responsibility. Thus, the growth of the
welfare activities even in capitalist countries is not only as a result of more
enlightened liberal thinking, but it is also necessitated by the disruption of social
relations brought about by industrialization and urbanization over time.

iii. Direct provision of services by the government; Wagner links the

growth of public expenditure to the need to increase economic development
where there exists apparent market failure. The more industrialized an economy
becomes, the greater the degree of monopoly, and thus, the greater the market
failure. Thus, rather than allow private monopolies, government inevitably sets
up statutory corporations (public enterprises) in the areas of transportation
(roads, railways, and aviation), communication (postal, telegraphic, radio and
television, telephone) and in connection with public utilities for the supply of
water and electricity. In these areas, public investment tends to increase either to
safeguard consumers against private monopolies or because the initial huge
capital investment required cannot easily be provided in sufficient quantity by
private entrepreneurs. In Nigeria for instance, public expenditure growth takes
two patterns, while government parastatals provide goods and services to the
society, they are also swimming in the ocean of corruption thereby serving as
drain to the national treasury. It is for this reasons that massive investment is
made on public parastatals for years making increase in government expenditure
inevitable.

II) Peacock and Wiseman Displacement Hypothesis

Allan Peacock and Jack Wiseman propounded public expenditure growth theory
called “Displacement hypothesis”. The displacement hypothesis of Peacock and
Wiseman provides an explanation for the time pattern of change in the level of
public expenditures. They observed from various time series data in Britain, that
97
public expenditures grew in step-wise fashion. During these periods when there
were some catastrophic occurrences such as wars, famine, large-scale social
disaster, public expenditure grew rapidly and settled on a plateau in the
catastrophic periods. Thus, catastrophic expenditures appeared to have what
Peacock and Wiseman called a “displacement effect. The displacement effect is
explained as follows.

Public expenditure is largely financed from taxes especially in normal

circumstances. Over the years, people built up a certain degree of tolerance to
what they regard as acceptable levels of taxation. Thus, it is only during
catastrophic times that individuals are willing to accept a rise in tax rates.
During the period of conflict, they growth is brought about by new tax burdens,
although in the immediate post-crisis periods, tax rates are reduced, they do not
fall back to pre-crisis level. In this way, the level of public expenditure for
civilian purposes, supported by taxation, has been displaced upwards, by the
greater tax effort of the public necessitated by crisis. In other words, Peacock
and Wiseman are suggesting a displacement effect, a shifting of government
expenditure and revenue to tax levels that were previously thought intolerable,
and hence government is able to implement programmes that would otherwise
not have been possible prior to the displacement. This theory is understandable,
when you reflect on the Nigerian civil war and other social upheavals that had
happened in the country. Everyone was concern more about survival and not
how much one paid as tax to government. Since people can only tolerate
increase in tax during catastrophic periods, it is argued, government might
sometimes trigger a crisis to find opportunity of increasing tax and expenditures
as well or might do little to curb crisis prone situations, just to have the
opportunity to increase tax and expenditure as well.

III) Musgrave Theory of public Expenditure growth

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Musgrave in his theory found changes in income elasticity of demand for public
services in three stages of per capita income. At low levels of per capital
income, typical of pre-industrial societies or in developing countries, the
demand for public services is generally very low. This is because at such a stage
nearly all income is devoted to satisfying primary needs. When per capita
income starts to rise above these low levels, demand for services supplied by the
public sector such as health, education and transport, would rise, forcing
government to increase expenditure on them. Finally, at the high levels of per
capita income typical of developed economies, the rate of public sector
expenditure growth tends to fall as the more basic wants are satisfied. From past
experiences, the world over, the demand for goods and services is essentially
influenced by income so that when income increases, the demand for primary
products increases and when income decreases, the demand for primary
products decreases too.

Whenever the Federal Government spends more money than revenue it earns, it
must find the financial resources to pay for this additional spending. Usually,
the government borrows the money used for this additional spending. Monies
borrowed within Nigeria are referred to as Domestic Debts while moneys
borrowed from outside Nigeria are referred to as External or Foreign Debts.
When the government pays interest and principal on its debts, this is referred to
as Debt Service.

Although many years ago, the Government used to spend much more money
than it earned, in recent years, the Government has saved up money (in the
Excess Crude Account) as its earnings from oil sources are based on a projected
Budget Benchmark Price (BBP) using moving averages. This is usually lower
than the actual oil price in the international oil market. Lower public domestic
borrowing is good for the economy as it leaves room for credit to private sector
99
businesses that need loans. Furthermore, with a controlled borrowing plan,
funds that would have been spent on debt service would be saved or used for the
provision of essential public goods and services. Statutory Transfers and Debt
Service currently make up on average about 18.73% of Federal spending. The
balance of 81.27% is MDA Expenditure, that is, money spent by the Ministries,
Departments and Agencies (MDAs) of Government to provide public goods and
services.

D) Cost Benefit Analysis

Financial resources are assumed to be scarce and that calls for prudent
management to obtain value for the money spent. In many countries of the
world today, the application of the most efficient and less costly method of
carrying out government expenditure has become an international best practice.
Cost Benefit Analysis means determining the economic desirability of a
government investment; an expenditure
outlay yielding its returns over a period
of time and analysis of costs and
benefits over the entire economic life of
the investment. Everyone in every
situation is expected to subject every
expenditure outlay to a one million question to justify why money should be
spent at all. Better still, we are expected to challenge every policy proposal
based on cost benefit analysis principle by asking ‘… do they gains to the
people exceed the sacrifice required of them? If the answer is in the affirmative,
the proposal is an efficient one; if it is negative, the proposal would misallocate
scarce resources and such an expenditure would not be in the public interest
from a resource allocation point of view.

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In-text Question 1. What are the theories that sought to explain the growth of public
expenditures?
Answer
1. Wagner Theory of State Expanded Activity,
2. Peacock and Wiseman Displacement Hypothesis

3.0 Tutor Marked Assignments

What does Adams Smith Refers to as Canon of Taxation?

5.0 Self-Assessment Questions

1. What are the two major types of Revenue?
2. Mention three functions of Taxation.

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
and critique it in the discussion forum

7.0 Reference/Further Reading

1. Read Chapter 3, 4 and 5 text ; Ndan, JD. (2013). Public Financial
Management: A Nigerian Perspective, 3rd Edition, Published by Ahmadu
Bello University Printing Press.

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 STUDY SESSION 4
Macro-economic Policies
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Monetary Policy
2.2 Open Market Operation
2.3 Legal Reserve Requirement
2.4 Discount Rate
2.5 Interest and Lending Rates
2.6 Selective Credit Control
2.7 Fiscal Policy.
2.8 Moral Suasion:
2.9 Income Policy
2.10 Price Control
2.11 Administrative and Related Measures
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
The government through the Central Bank of Nigeria uses
macroeconomic policies like fiscal, monetary, income,
price, moral suasion and other miscellaneous
administrative measures to keep the economy under
control. These are mostly outlined in the budget but have not been very
102
effective because of defects in the structures of our economy as well as the
negative attitude of most Nigerians on issues of national significance.

Session Learning Outcomes

After completing this session, you should be able to:
1. explain government’s macroeconomic policy
2. describe the relevance of the various components of the policy viz:
Monetary Policy, Open Market Operation, Legal Reserve Requirement
Discount Rate, Interest and Lending Rates, Selective Credit Control,
Fiscal Policy, Moral Suasion, Income Policy, Price Control as well as
Administrative and Related Measures

2,0 Main Content

2.1 Monetary Policy
Monetary Policy is a set of actions taken by government through the Central
Bank of Nigeria, but carried out by other institutions called financial
intermediaries like Commercial and Merchant Banks, Discount Houses and
other specialized Banks in pursuit of certain economic objectives concerning
monetary parameters. These parameters relate to the amount and prices of
various financial assets and liabilities and the impact of changes in them on
economic activity in general.

The Federal Government operates through the Central Bank of Nigeria, which is
regarded as banker to the government and lender
of last resort to the commercial banks, is charged
with the responsibility of regulating the supply of
money in the economy. When the economy is
facing a slump and jobs are getting scarce, the

103
Central Bank of Nigeria can expand money supply. On the other hand, if
spending by both individuals and government threatens to become excessive so
that prices are rising and there are many job vacancies, then the CBN would use
some of the instruments available to slow down the economy by contracting
money supply. There exists a Monetary Policy Committee that is specifically
charged with the responsibility of taking monetary policy decisions to regulate
the economy.

2.2 Open Market Operation

Open market Operation is the process whereby the federal government operates
through the Central Bank of Nigeria (CBN) controls the level of money supply
in the economy through a process of buying and selling securities and bonds to
members of the public who pay through cheques drawn on the commercial
banks. In other words, it means the buying and selling of government bonds and
securities like treasury bills and certificates of development stocks and
commercial papers largely through the money market. When these bonds are
bought by the central bank, money supply is increased with the commercial
banks and members of the public. This in turn would make them increase their
spending activities. Conversely, if they are sold by the CBN, the supply of
money is contracted or reduced because money held by banks and members of
the public are reduced and that could moderate inflationary pressures.

In-text Question
1. Whose works librated the capitalist apologists to tinker with laissez Faire Policy and
encouraged greater government in economic activities?
Answer
1. Maynard Keyness

2.3 Legal Reserve Requirement

All commercial banks are expected to maintain a special deposit with the central
bank. Through this the bank is able to influence the lending activities of the
104
commercial banks to members of the public and organizations. By raising or
reducing the level of the deposit with the CBN, it determines or regulates
lending activities of these commercial banks. Thus, if the economy is getting
overheated as a result of excessive lending activities of the commercial banks,
the central bank might require the commercial banks to raise the legal reserve.
This has the tendency of reducing liquidity and thereby contracting the level of
lending. For instance in 2006, all commercial banks were directed to
recapitalize to the tune of N25 billion to safeguard depositors’ funds. Banks
were forced to enter the capital market to raise money to meet the CBN
directive, others engaged in merger with other banks to meet the new
requirement. Those who could not meet up were declared distressed and
accordingly liquidated. At that time, even mere requests for over drafts were
turned down by banks due to cash squeeze. The issues of loans were completely
out of the question as they were all concerned about the desire to mobilized
funds to meet their target.

2.4 Discount Rate

Usually commercial banks borrow from the central bank in the same way
individuals and corporate bodies borrow from commercial banks too. The
capacity of the Central Bank of Nigeria to modify or change the discount rate,
which is the cost of borrowing from the central bank, the bank is able to control
the commercial bank’s liquidity, which in turn influences their lending ability.
Discount rate is the cost of loans when commercial banks borrow from CBN,
just as how the commercial banks charge interest on loans they give to
organizations and members of the public. This is the same rate at which
commercial banks discount government securities holding from the central
bank. The importance of discount rate lies in the fact that other rates of interest
are largely dependent on it.

105
2.5 Interest and Lending Rates
Another instrument of monetary policy is interest rate, which is the rate
commercial banks pay on depositor’s savings. If banks raise interest on deposits
savings more people would save and if it reduces, it would discourage
individuals from saving. Most countries operate what is called multiple and
discriminatory interest rates structure; whereby different rates are fixed for
different types of banking transactions (loans and advances) all these depend on
what economic objectives the government seeks to achieve.

Lending rate represents the interest individuals pay when they borrow from
commercial banks and other financial institutions. When government wants to
expand money supply, discount rate would be reduced and that would
invariably means commercial banks would lower interest rate on lending to
encourage people to borrow. When the interest rate is raised, it discourages
people from borrowing for the simple fact that borrowing from banks is no
longer cheap.

2.6 Selective Credit Control

Government influences banks’ lending policies by mapping out areas of
priorities, and direct where the bulk of loans and advances must be channeled
to. For instance, government might favour concentration of investment on
productive sectors like manufacturing and agriculture. Pursuant to this policy,
commercial banks and other financial intermediaries would be advised or even
directed to accord priority to these sectors or activities in their lending policies.
In Nigeria for instance, the government not only maps out priority areas, or
‘preferred sector’, it goes further to indicate in percentage terms, the minimum
of loans and advances which should go to the priority sector. To ensure strict
adherence to the regulation, a number of fines and other penalties are imposed

106
on banks that refuse to comply with government lending policy. Abubakar
(1986).

2.7 Fiscal Policy.

Fiscal policy, relates essentially to taxation and public spending. Fiscal policy
and monetary policy are the two most prominent overall economic policies of
governments that are used to maintain economic growth, create employment
opportunities, control inflation and deflation and so forth. Buhari (1993) defines
fiscal policy as the
….deliberate actions which the government of a country takes in
the area of spending money and or levying taxes with the objective
of influencing macro-economic variables, such as the level of
national income or output, the employment level, aggregate
demand level, the general level of prices and so on in a desired
direction.

By increasing spending or cutting taxes, the government leaves individuals and

businesses with more money to purchase goods or invest in new equipment.
When individuals or firms increase their purchases, they raise demand, which
requires additional production, create jobs and generate more spending. These
expenditure patterns create employment opportunities that make people to have
effective demand to spend and trigger more production; the resultant effect is
making the economy to grow.

On the other hand, when fiscal policy wants to ensure contraction of money
supply, tax is increased and public spending is reduced in order to restrict
demand and slow down the economy. A tight fiscal policy is more likely when
inflation is high. A contraction in fiscal policy reduces the amount of money in
circulation for purchasing fewer goods and services, thus decreasing demand
107
and that tends to put downward pressure on prices. The major objectives of
fiscal policy are to:
i. Influence the rate of growth of the economy
ii. Mobilize financial resources for financing economic development
iii. Maintain reasonable economic and price stability,
iv. Ensure a healthy balance of payments account.
v. Raise the level of national income, output and employment.
vi. Protect infant industries from “unfair” competition with foreign ones;
vii. Moderate inflationary pressure
viii. Minimize existing inequalities in wealth, income and consumption
standards, which might tend to undermine production efficiency,
ix. Offer a sense of social justice and ensure political stability.
x. Promote a rapid expansion of agricultural and manufacturing production
as well as the promotion of exports and the use of local raw materials in
industrial production and the dispersal of industrial projects.

For government to decide on its fiscal policy, it must first of all decide on a
number of factors such as the future level of economic growth and
unemployment. These factors would affect the amount of revenue raised
through taxes and the amount of money required for government expenditures.
Once these decisions have been made, the government can decide how to raise
revenue and how to allocate it.

Another important decision government must make regarding fiscal policy is

whether or not to run a budget deficit by spending more money than the
government can generate. Deficit is financed in two ways, through borrowing or
printing more money. If government borrows money from banks and individual,
it would decrease money supply in the economy and usually lending would be
hard and the cost of borrowing money would be high as well. In other words,
108
the interest rate on loans would be high. If the government prints more money,
it would increase the supply of money in the economy, without a corresponding
increase in available goods and services and this might cause inflation.

Decisions on fiscal policy are inevitably influenced by political considerations,

such as beliefs about the size and the role of
government in the economy, or the likely public
reaction to a particular course of action. Few
governments like that of Nigeria could take
people for granted and raise taxes with ease or
decrease funding for programmes that have
strong support from the public, such as
government subsidy, security or defence, but in others countries where there is
high level of education and public awareness like the developed world, the
public can successfully resist the government and rendered unpopular or even
vote government out of power as was done in the case of Margaret Thatcher of
Great Britain, when her policy on tax was disapproved by the public, she lost
election afterward.

In today's global economy, governments consider fiscal policies of other

countries and thus fashion theirs to be more attractive to investors to make them
relocate by offering them generous tax reliefs and assuring them of government-
controlled benefits. Some countries might find their fiscal policy decisions
constrained by the requirements of the International Monetary Fund (IMF),
which often grant aid packages, subject to meeting certain preconditions.
Fiscal policy operates in the development process in the following ways:
109
 i. The level of taxation affects the level of public savings and thus yields
volume of resources for capital formation.
ii. Both the level and the structure of taxation affect the level of private
savings.
iii. Public investment is needed to provide infrastructural facilities.
iv. A system of incentives and penalties might be designed to influence
efficiency in resource utilization.
v. The distribution of tax burden (along with the distribution of expenditure
benefits) plays a large part in promoting an equitable distribution of the
fruits of economic development.

2.8 Moral Suasion:

It involves appealing to the moral conscience of the people to exercise restraint
in daily activities that might jeopardize attainment of national objectives from
being achieved. Moral suasion usually works through the invocation of some
nationalistic or patriotic sentiments as basis for rationalizing the behaviour of
individuals and organizations. By appealing to the conscience of the people to
identify with government and its programmes or policies, government is in
effect using the instrument of moral suasion. The problem with this policy, is
that it depends almost entirely on the willing compliance or cooperation of the
people to be effective.

Commercial and merchant banks are aware that, if these subtle appeals are not
heeded, it might be followed by directives which are mandatory. Examples
associated with moral suasion include “buy made in Nigeria goods”, “Buy
Nigeria fabrics”, “War Against Indiscipline”, “Corruption is not in our
character” cleaning the environment every weekend etcetera. Sometimes they
are relayed in form of jingles in the Radio and Television to appeal to Nigerians

110
to be patriotic in promoting anything that could advance the cause of national
interest.

2.9 Income Policy

According to Abubakar (1986) another measure is Income policy, which is a set
of measures that operate through a series of guidelines usually legislative to
regulate the rise in incomes to a rate compatible with productivity level,
standard of living and stable prices. The objectives have been geared towards
acquiring effective control of the level and structure of remuneration of all
factors of production in the economy, achieving greater price stability and more
equitable distribution of income.

The attempt at regulating wage has only succeeded in the public sector but not
in the private sector. Obasanjo has done well in terms of salary review for
federal workers. Another is the consolidated salary scale in operation, which is
the 15% increase, which was implemented at graduated level with the lower
income earners benefiting more than the higher Income earners. Most top
university workers got a paltry sum of about N800 in that exercise.

J) Price Control
On price control, it is usually a direct and deliberate attempt by government to
control the price level by fixing a ceiling- or a level beyond which the producers
or distributors must not sell at legally in the market. During the regime of
Buhari/Idiagbon it was taken too far and it boomeranged. The government fixed
prices for essential commodities to a certain ceiling beyond which it must not
sale. In a bid to beat the government’s order on prices, sellers resorted to selling
“below the counter” or in the black market and others hoarded their
merchandize thereby causing artificial scarcity of essential commodities. The
government rolled out soldiers who broke into the various warehouses across
111
the country and sold the essential commodities at government controlled prices.
It resulted in long queues some as long as half a kilometer and the quantity sold
to an individual was restricted or rationed to a specific quantity to enable the
commodities go round. Those who sold behind the counter or in the black
markets, the prices were at cut throat levels. In other words, the prices
eventually paid by consumers for these articles in the black market were by far
higher than they were, when such government control was not imposed. A case
in point is the recurring excruciating fuel scarcity in Nigeria occasioned by the
independent marketers and occasionally major marketers. They hoard petroleum
products to cause artificial scarcity and sell at an outrageous rate to black
marketers who in turn sell at cut throat prices to members of the public.

While in the capitalist system such government control is restraint by lasses

faire policy as prices are allowed to be dictated by the market forces of supply
and demand to encouraged entrepreneurs to recoup their investment with little
or no stress. It is this profit from investment that attracts more investment and
greater profit. In the communist world, the means and mode of productions
were owned and managed by the government and such control could easily be
understood.

2.10 Administrative and Related Measures

There are many policies that do not easily lend themselves to classification
within the purview of conventional policy instruments of macroeconomics,
particularly in a developing economy like Nigeria. They are often called
“administrative policies” for want of a better name. Some of these small and
fragmented policies include - exchange control measures, “licensing
restrictions” importation of final goods, import waivers, restriction of raw and
intermediate imports, import inspection - pre – shipment, destination inspection,
the restriction of Basic Traveling Allowance (BTA) for individuals and
112
corporate bodies and the Guidelines for purchase of foreign exchange by the
Central Bank of Nigeria. Example a mere guidelines decision on foreign
exchange that seemed so harmless, triggered chain reaction that affect prices
and well being of many individuals and organizations as demonstrated here:
This is how a policy can have far reaching implication in the economy. For this
reason, every policy of government must be assessed based on its implication
on other sectors of the economy and impact on investment, before they are
implemented. It is argued most policies of government are adopted without
critical analysis of the impact on the people and the economy.

There are some macro-economic policy instruments that would be responsive to

changes in public policy in some developed societies, but when they are applied
to tropical African economies, the response would not be the expected outcome,
because the economic system is structurally defective. In other words, Abubakar
(1986) opines, “With the high external dependency nature of these African
economies, policies, even if the best designed, are often intentionally frustrated
by external forces and the author dare add, even the internal ones. This is as a
result of improper value orientation and indiscipline.

Recently, there was brouhaha over the lifting of ban on the importation of
toothpicks and other textile materials. It was argued government should not
have done that, in view of the fact that our textile industries were not doing well
and many had shut down. Instead of reviving the textile industries, the
government through that policy was putting the final nail on the coffins of these
textile industries. This is because the local textile industries that are usually
called infant industries have been abandoned and not given the protection they
badly need to survive, compete and grow. In any case, these concerns are
genuine, but with due respect to those who hold this opinion, the author begs to
differ. The attitude of Nigerians sometimes makes good policies to fail due to
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what is traceable to poor value orientation. The government earlier banned
textile fabrics to protect our infant industries from undue competition.
Unfortunately, the import duties were not collected and the goods that
government was trying to keep at bay, were everywhere in our markets. This is
a case of losing the battle at two fronts, due to the activities of smugglers. In
order to remedy part of the problem, government unbanned them to collect
import duties on them.

As for tooth picks we need to ask ourselves whether it is not a tragedy that
Nigeria is importing tooth picks when we have a large army of unemployed
youths puncturing the peace in the land due to lack of work. It should be a
means of creating employment for our teeming youth and even corps members
should be engaged to make tooth pick commercial quantity. This would create
jobs and provide them means of livelihood and ensure greater security for our
nation. This is more apparent when we realized that idle minds are devils
workshops.

In-text Question
1. Fiscal Policy consists of two things
Answer
1. Government spending and Taxation

3.0 Tutor Marked Assignments

Name three Theories of Public Expenditures

5.0 Self-Assessment Question

1. What does an administrative and related measure mean?

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]

114
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
and critique it in the discussion forum

7.0 Reference/Further Reading

Read Chapter 3, 4 and 5 text ; Ndan, JD. (2013). Public Financial Management:
A Nigerian Perspective, 3rd Edition, Published by AHmadu Bello University
Printing Press.
ABUBAKAR, H.I. (2000), “Local Government Finance in Nigeria: Revenue
Right and Fiscal Jurisdiction”. National workshop on the Review of
1999 Constitution Office of the Vice President of Nigeria, Abuja.
ABUBAKAR, H. (1991) I, Local Government Finance: Its Sources
Management and Stewardship Background Paper Prepared For the
Orientation Workshop for Newly Selected Local Government
Chairman and Councilors
ADEBAYO ADEDEJI; (1979) Financing Local Government in Nigeria, an
Over-View University of Ife Press Nigeria.

115
 MODULE 3
Contents
Study Session 1: Public Debt burden on the Economy
Study Session 2: History of revenue allocation in Nigeria
Study Session 3: Criteria and formulae for revenue Sharing

STUDY SESSION 1
Public Debt and Debt Burden on the Economy
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 The Debt Burden
2.2 Debt management
2.3 Policy Aims of Debt Management Strategies
2.4 Strategies of Debt Management
1.5 Debt Management Strategies and its impact on the economy
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
Borrowing can be by issuing bonds as private company’s do, to finance it. In
doing so, it competes for borrowed fund in the financial market. This, in turn,
affects the quantity of such funds which private investor could lend. This is the
so called “crowding out” effect of government borrowing, since some private

116
sector projects become unviable as a result of rising interest rates occasioned by
government borrowing.

Internal debt might create income distribution problems, when the ownership of
internal public debt in the economy is not evenly distributed, a real burden then
arises since the cost of debt servicing involves a transfer from taxpayers to
security-holders. Since the upper income groups have higher propensity to save,
then this means a large proportion of the public debt is likely to be held as
securities by these groups and thereby denying the poor income earners the
resulting benefits. Conversely, as a result of their tax contribution, the
propensity to consume by the lower income groups would be reduced.

By and large, internal debt might aid government stabilization programmes if

the government sells bonds to members of the public, the result generally would
be less expansionary than if t prints money. By selling bonds to finance and
increase government expenditure and thereby increase the level of government
indebtedness, it takes an equal amount of funds out of the income stream. If the
funds are borrowed (through the sale of bonds) simultaneously with the
expenditures, the monetary base, and therefore, the money supply would remain
constant. Business and household have greater disposable income under
government borrowing than under the equivalent amount of taxation. Moreover,
with borrowing from individuals, who hold them as a form of wealth (bonds)
that is certainly not the case, if tax is used to finance expenditures, there would
be more demand for goods and services at prevailing prices and interest rates
when there is borrowing. This is because holders of wealth are more likely to
spend as if they had the money. Conversely, when there is taxation, wealth is
reduced, and consequently spending would decrease.

117
Debt financing might create inflation in two ways; in the first case, if debt
financing takes place at a time of full employment, inflation might result from
increases in aggregate demand brought about by debt
financing. The increased aggregate demand is due to
the capturing of previously idle funds and bringing
them into circulation. The wealth effect can also
increase aggregate demand. People who give out loans
to government increase their marginal propensity to
consume because they would believe they have wealth or assets to support their
spending habits.

The following effects could come about when it has to do with external debts.
The effects of the debt and its financing continue to generate debate on the
economic arena. Although people tend to concentrate on the negative effects of
debt in their discussions, there are positive effects as well that are often ignored
which include the following;

External debt has made the financing of certain projects possible: Whatever
might be said about external debt effects, there is something that cannot be
taken away from it. That is, the loan increases existing infrastructures in the
economy, which might in turn create job opportunities.

Debt helps in balance of payments support. In years past, when Nigeria

experienced deficits in the balance of payments, IMF loan and loans from other
foreign countries were used in adjusting the balance of payments
disequilibrium, although this has proved to be very costly.

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In-text Question
1. Must a country borrow?
Answer
1. No, except there is serious need and guarantee that the money fund would be judiciously
utilized

The debt and its servicing drain away resources which could have been used to
finance development projects and programmes. Some loans are contracted on
commercial terms, the interest rates have tended to move with the market rates.
The problem is that debt repayments as well as service charges in recent years
have constituted a significant proportion of total export earnings. This reduces
the ability of the government to undertake certain vital projects necessary for
development.

The inability of the Nigerian government prior to the effort of Obasanjo to

service debt as at when due, no doubt created crisis of confidence in the
Nigerian economy. The late Abiola sought for debt cancellation and demanded
reparation to be paid to developing countries for the many years of colonial
exploitation, plunder and slavery. He died during his incarceration when he was
purported to have won the freest and fairest election in Nigeria.

Usually when a country demonstrates inability to meet its debt repayment

obligations, creditors such as the Paris Club and the London Club, the World
Bank and the IMF would impose all kinds of difficult conditions for the
recipient nation which tend to jeopardize development efforts, thereby
worsening an already bad situation. It is pertinent at this stage to explain
creditors involved in providing credits to debtor nations around the world.

1.0 Session Learning Outcome

119
At the end of this session you should be able to:
1. Explain Public Debt and
2. The significance and extent of Debt Burden on the Economy

2.1 The Debt Burden

The burden of public debt is a complex one since it raises questions about the
nature of the burden and it’s inter temporal incidence, that is, which generation
bears the debt burden? The issues involve include the following: Just like tax
incidence, when someone else must bear the burden, so also, public debt burden
must be bore by some generations or a particular generation. When government
borrows to finance a capital project, the resources required for its construction
are drawn from the present generation in a manner similar to taxation. The
interest and the debt charges on internally held debt cannot be called a burden
because they are transfer payments from the taxpayer to the bondholders.

Redistribution of income between members of the present generation might

occur as they make interest and principal payments to bondholders through
taxation. Thus, unless individuals hold bonds in proportion to their tax
payments, there is no redistribution of income among the members of the
present generation. However, in practice, at least, people who hold government
bonds are mostly people with medium and high incomes. When the proceeds of
tax are used to settle interest charges to bondholders, questions about equity
arise, since it might mean transferring income from the poor to the rich.

2.2 Debt Management

The term debt management is used to describe strategies adopted by a
government to minimize the negative impact of debt on the economy as well as
the burden of the interest charges. The methods used in managing internal debts

120
are important since they have implications for both the money supply and the
structure of interest rates.

2.3 Policy Aims of Debt Management Strategies

Policies designed to regulate monetary variables. The governments bonds are
treasury bills, which are of paramount importance to financial institutions in the
country. This is because with respect to treasury bills in particular, banks
purchase them or dispose of their stocks in line with meeting their liquid asset
ratio as well as using them as hedge for their liquidity position. In a deregulated
market, the quantity of treasury bills offered for sale by government in the
financial market, influences the level and structure of interest rates throughout
the economy.
Consequently, if government aims to bring down the overall level of interest
rates, it sells the treasury bills. On the other hand, if it wants to raise the rates it
buys the bill. The Nigerian experience in using this type of debt management
strategy is limited. This is because it was generally held prior to the gradual
deregulation of the financial markets that debt management strategy would not
be effective in Nigeria. The basis for this argument was that the financial market
(money and capital markets) are not yet well developed to permit the use of this
strategy in the way it is used in advanced countries. However with the
auctioning system recently introduced in the sale of treasury bills, it has
become relevant as a tool for determining the interest rate structure.

The Central Bank of Nigeria acting on behalf of the government in a

deregulated financial market has a responsibility to ensure a stable market and a
growing demand for securities. If interest rates fluctuate, this runs counter to
this

121
Minimization of Debt Services Charges is done when the service charge of an
internal debt is determined by the size of the total debt and the interest rates
payable on the various components. A debt management strategy might attempt
to minimize the burden of the debt through lower interest charges. This can be
done through floating new debt instruments at lower interest rates and using the
proceeds to pay maturing debts.

2.4 Strategies of Debt Management

A number of policies have been put in place to tackle Nigeria’s external debt
crisis, others have been suggested by local and international experts. The
policies include the following:

I) Debt Rescheduling Strategy

It enables Nigeria to negotiate with its external creditors over the postponement
of the repayment of part of the principal and interest of maturing debts. This is
to enable the country to have enough time to generate resources to meet the debt
obligations. Debt rescheduling has its benefit in terms of the relief it provides
for the debtor nation. At least, it allows for additional time for the repayment of
maturing debts. However, this strategy according to some experts, only
postpones the ‘evil’ day, since the debts and service charges must still be paid
later. In addition, it is argued that the conditions usually imposed on the debtor
nations by creditors before agreeing to reschedule debts, sometimes
compromise the sovereignty of the debtor nation.

II) Place A Lid on external borrowing.

It means government out rightly ban further contraction of loans. The federal
government could ban the states and local governments from contracting any
foreign loan as Obasanjo did during his second term as president. In practice, it
122
is a very difficult policy to implement at least within the context of the federal
structure Nigeria operates. Also, with the resources for financing development
projects dwindling, it is difficult to see how this could be implemented
successfully. In Nigeria, what the federal government has been able to do, is to
insist on approval of any foreign loan by other lower levels of government. This
has reduced the tendency of state governments to substitute internal revenue
generation drive with foreign loans.

III) Economic Restructuring

It means restructuring of the economy in order to tackle the debt crisis. It is
argued, debts crisis was caused by poor performance of the economy. This poor
performance, in turn, was attributed in part, to structural disequilibrium of the
entire economy. Therefore, structural adjustment of the economy would make
the country to be self-sufficient and thereby, reduce the need for external loans.
It was against this background that President Babangida introduced the
Structural Adjustment Programme (SAP) in 1986. The major aim was to put a
lid on external borrowing and restructuring the economy. SAP, however, ended
up creating more problems than the one it was meant to solve, such as
depreciation of the Naira, unprecedented inflation and escalating production
cost coupled with the fact that the debt, which it was hoped SAP would reduce,
in fact piled up.

IV) Brady Plan: The United States former Secretary of State for the
treasury put forward a world acclaimed strategy in debt negotiations called the
Brady Plan. The proposal is that creditor nations should agree to write off a
certain percentage of the debts owed by developing nations, in return, the debtor
nations would pay the remaining balance in addition to the interest promptly
when they are due. The Brady Plan has been criticized on a number of grounds
such as;
123
i. Most creditor nations that have shown interest in the plan prefer a case-
by-case treatment rather than a wholesale cancellation of debts owed by the
developing countries.
ii. Debtor nations are not comfortable on the simple ground that they are
likely to be undermined politically. Besides, to mobilize huge resources to pay
the debt might not be realistic.

V) Debt Repudiation; This strategy was advocated by some radical

economists as well as radical political leaders in the developing countries, who
advocated for debt repudiation. Fidel Castro of Cuba does not see any ‘sense’ in
any developing country paying back the debts. Castro’s view is that, through
slavery, colonialism and neo-colonialism, the developing countries had more
than paid for the debts. Repudiation, of course,
means refusal to pay back the debts. The negative
consequences of this policy are many and might
include sanctions from international financial
institutions such as the World Bank and the IMF. It
might also mean that the country that repudiates
debts might be unable to obtain new credits in the future.

VI) Debt Conversion Strategy; Debt conversion is many forms. There are
debt for debt scheme, debt for cash or the more popular form, debt for equity
scheme. The one Nigeria has experimented is the last one, that is, debt-equity
swap. In debt for equity arrangement, some part of the debtor country’s debt is
offered for sale in secondary markets. Buyers of the debt instruments purchase
them at a discount and later convert them into local currency for the purpose of
equity of direct investment in the debtor country’s economy. The Central Bank
of the debtor country, after charging transaction cost (about 1 percent of the
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debt ensures that the naira amount converted is use for round tripping. Round
tripping is said to occur when, after converting the debt instrument into naira
through the Central bank, the buyer reconverts back to foreign currency at the
black market. He is then set for another round of purchase of the foreign
currency denominated debt instrument at the secondary market. This enables
the buyer to make a fortune without real benefits to the debtor nation.

Very recently the Nigerian debt received the attention of President Olusegun
Obasanjo, in which multiple debt management strategies were adopted like
Brady plan leading to a situation where Nigeria is out of the debt trapped with a
growing foreign reserve which as at February, 2007 stood at $56.36. The writer
without prejudice to what opinion other people hold, commends Obasanjo for
his foresight in addressing public debt and stabilizing public financial
management in the country.

M) Debt Management Strategies and its impact on the economy

There are many ways debt is managed as demonstrated below:

Debt Equity Swap on Debtor Nations

In the first place, it is claimed that this strategy, by reducing the debt servicing
in the short run, provides some sort of relief for the debtor nation.

An advantage, which the debt equity swap bestows on the economy, is the
opportunity to use the funds the second time. This time around, the debtor
nation has the opportunity to plan the investment of the funds so as to ensure
optimum benefits to the nation.

It indirectly increases the volume of foreign investment in the country, which

might not come willingly.
125
There might however, be some negative effects of the debt equity swap. In the
first place, debt for equity strategy does not necessarily
remove external payment problem in the long run,
because what might be saved in the short run in terms of
reduced debt servicing, would be paid in terms of
dividends repatriation in the long run. Some experts have
expressed fears about likely inflationary effects of the debt equity arrangement.
This is because the scheme involves the conversion of foreign debts into local
currency debts which would ensure putting more money into circulation. Since
the supply of naira would have to increase with every debt converted, it might
fuel inflation.

The debt equity swap might compromise the 1977 indigenization scheme, even
though this has already been reviewed, with the amendments of the
indigenization decree to allow foreign participation in areas originally reserved
for Nigerians. Therefore, it is argued that the return of the so-called “technical
partners” which the debt equity scheme encourages would divert the
government’s attention from the pursuit of self-reliant policies which the
indigenization scheme was anchored on.

It is argued that the debt equity scheme prevents some amount of foreign
investments, which would have taken place on their own without the debt equity
con
version.

126
In-text Question
1. Which body coordinates public debt in Nigeria?

Answer
1. Debt Management Office (DMO)

4.0 Conclusion/Summary
A disagreement by the major actors in the management of public finance on
debt matters, sheds more light on the argument for and against a country going
for more debts. The writer here is referring to the position of the Coordinating
Minister of the Nigerian economy Dr. Nkonjo Iweala and the Governor of the
Central Bank of Nigeria (CBN) Mallam Sanusi Lamido as well as that of the
Debt Management Office (DMO).

While speaking at the 13th session of the Honorary International Investments

Council (HIIC) meeting in London recently, Sanusi (2012) urged the Federal
Government not to allow the present and unborn generations inherit the heavy
burden of foreign debts, cautioning that Nigeria, currently under the suppressing
weight of the heavy burden of foreign debts is in great danger.
He argues further; Nairaland Forum (2013).
We are borrowing more money today at a higher interest
rate, while leaving the heavy debt burden for our children
and grandchildren. For example, if you receive your salary
and every day the money is not enough, you have two
options to adjust yourself. Either check your expenditure or
check your wages.

He urged the ruling class and the older generations to set a good example and
educate the coming generations for a better and secured future, stating that such
example should be set by not accumulating debt for future generations to
inherit.

127
The Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, quickly
responded, there was no cause for alarm as the current loans are not from the
Paris Club, which comes with purely commercial interest rates but are highly
concessional loans with long periods of maturity. According to her, the country
was doing well in terms of its debt to Gross Domestic Product (GDP) ratio, now
at 17 per cent, but warned that the country should not go beyond the 25-30 per
ceiling it had set for itself.

On the other hand, the Director General of Debt Management Office (DMO),
Dr Abraham Nwankwo, argued that Nigeria will continue to borrow to meet
expenditure demands of government, just as every country does. He went on to
say, even the most financially prudent countries like Germany, United States
and others borrow. He even confirmed that the Federal Government would still
borrow more money the when there is need.

According to DMO, the country’s external debt profile as of September 30,

2012 was $6.2 billion, while domestic debt was standing at N6.3trillion. It also
stated that the debt sustainability indicators showed that the country’s debt stock
was sustainable.

It also said the country’s total debt profile might hit $25 billion by 2015, adding
that the debt gross domestic product (GDP) ratio was 18.65 per cent, as against
global ratio of 40 per cent.

The DMO Director General further said: “for 2012, Nigeria’s external debt is
projected at $9,021.53 billion; 2013, $12,165.10 billion; 2014, $14,585 billion
and 2015, $16,765 billion, adding that “a breakdown for domestic debt is
projected at, 2012, $6,483.81 billion; 2013, $7,125.93 billion; 2014, $7,792.41
billion and 2015, $8, 4441.86 billion.”
128
5.0 Self -Assessment Questions:
Is it necessary to borrow?

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
Economy
and critique it in the discussion forum

7.0. Reference/Further Readings

1. Read Chapter 3, 4 and 5 text ; Ndan, JD. (2013). Public Financial
Management: A Nigerian Perspective, 3rd Edition, Published by Ahmadu
Bello University Printing Press.

129
 STUDY SESSION 2
History of Revenue Allocation in Nigeria
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 History of Revenue Allocation in Nigeria
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
The sharing of revenue among the three tiers of government from the federation
account since the colonial period has been very problematic and contentious.
There are accusations of marginalization and greed, violent confrontations, acts
of pipeline vandalism, hostage taking, oil theft, skirmishes and a nosedive in the
revenue of government. This issue is getting out of hand and we must dialogue
together in objectivity and brotherhood to ensure justice in the distribution of
the national common wealth. It is expected, none should gain at the expense of
the other. We cannot afford to plunge our country into another needless civil
war again.

1.0 Session Learning Outcome

At the end of this session, you should be able to:
1. describe the origin and development of Revenue Allocation policies in
Nigeria.

130
2.0 Main Content
2.1 History of Revenue Allocation in Nigeria
In the history of a federal system, there are different levels of government, each
with its own set of constitutional responsibilities and fiscal powers. On account
that their corresponding expenditure obligations are often different from the
allocation of tax powers and revenue sources, a system of revenue allocation is
required as a mechanism for redressing the consequent mismatch between
expenditure, obligations and revenue sources. The overall objective of such a
system of revenue allocation would be to enhance economic development while
simultaneously minimizing intergovernmental conflicts.

The granting of internal autonomy to the regions under the Richards

Constitution of 1946 and the subsequent sharing of such responsibilities
between the federal and regional governments, provided the starting point for
what has continued to be a persistent and often controversial national debate on
revenue allocation. The need for new searchlight on revenue enhancement and
mobilization, overtime and space, also provides another sound justification for
the establishment of a permanent commission.

In the course of time and in view of policy instruments for the achievement of
national objectives, there were periodic reviews on ad hoc basis on the fiscal
jurisdiction of the various tiers of governments and the assignment of revenue
allocation. These reviews were carried out by eight ad-hoc revenue allocation
Commissions, viz: Philipson Commission (1946), Chick’s Commission (1953),
Raisman Commission (1958), Binns Commission (1964), Dina commission
(1966), Aboyade Technical Committee (1977), and Okigbo Commission
(1980). All these Commissions, excluding the Aboyade and Okigbo
Commissions, were able to ensure the establishment of region/state government
autonomy over certain revenue sources (e.g. personal income tax) and the
131
establishment of federal government’s exclusive control of some revenue
sources (e.g. Armed forces Income Tax). Also, they were able to ensure the
creation of a Distributable Pool Account into which other revenue (including
import and export taxes, mining rents and royalties, etc) were paid and which
was subsequently distributed between the federal and regional/state
governments and the development of Revenue Allocation Principles, such as
Derivation, Population, Even
Development, etcetera on the
basis of which fund in the
Distributable Pool Account
were shared between the centre
and regions. The Aboyade and Okigbo Commission on the other hand fine-
tuned the works of the previous Commissions toward equitable justification.

The government of General Ibrahim B. Babangida, guided by the desire to

depart from the narrow and transient objective of devising populist revenue
sharing formulae, inaugurated the then National Revenue Mobilization
Allocation and Fiscal Commission, on September 6th, 1988, which was
statutorily established by Decree No 49 of 1989. Equally, the 1999 Constitution
Section 153-subsection (1) provides for the establishment of the Revenue
Mobilization Allocation and Fiscal Commission (RMAFC). President Olusegun
Obasanjo inaugurated the new Commission on September 20th, 1999 with 37
Commissioners representing each State and Abuja.

The establishment of a permanent body was invariably a novel attempt by

Government towards ensuring prudent, efficient and stable revenue sharing
formula and fiscal policy for the nation.

132
The entire process of revenue allocation or fiscal federalism or
intergovernmental fiscal relations in Nigeria is a long historical one. In fact,
there have been several administrative commissions/committees that were set
up in the past to recommend appropriate ways and means of sharing “the
national common wealth” or federally collected revenue. The sharing started
between the central and regional governments, by 1976 after the Dasuki reform,
it expanded to sharing among the three tiers of government; the federal, states
and local governments. In between the civilian administrations we have had,
there were intermittent military regimes which promulgated military decrees to
serve as bases for revenue sharing from the federation account.

Past recommendations by these ad hoc committees did not receive unanimous

support from the various regions or states as each was out to ensure much was
allocated to them. The report that almost received unanimous rejection though
short lived, was Dina Report which was largely rejected by all the regions. The
Head of State and Commander in Chief of the Nigerian Armed Forces, General
Yakubu Gowon, implemented almost 80% of its recommendation using military
fiat especially during the civil war period. Conversely, Raisman’s Report was
unanimously accepted across the regions, even though it was short lived. Over
the years, the problems of revenue sharing have been like a recurrent decimal.
The Political Bureau Report sums up the problem of the various commissions,
when he argues that the series of “….. Committees and Commissions that were
set up in the past are remembered today more for the controversies they have
generated than the issues they were meant to settle” (Political Bureau 1987).

Abubakar (1986) observes all the Commissions or Committees that were set up
had the following common features. Each was set up to suit specific
administrative and constitutional changes in the country. Shuaib (2006) who
was one time member of Revenue Mobilization, Allocation and Fiscal
133
Commission (RMFC) observes, since the 1992 Revenue Allocation Formula,
the nation is yet to have constitutionally-backed sharing indices for the federal
government, states and local governments.

It is important we examine the various commissions/committees charged with

the responsibilities of recommending formulae for sharing the revenue from the
Distributable Pool Account (DPA) and later the Federation Account (FA) as
well as the various issues that influenced their positions under the circumstances
of those times;

In-text Question
the Richards Constitution is in
Answer
1946

3.0 Tutor Marked Assignments

Name four durable principles of Revenue Allocation in Nigeria?

5.0 Self-Assessment Questions

1. Government spending and Taxation represent which policy?

6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
n+in+Nigeria
and critique it in the discussion forum

134
7.0 Reference/Further Reading
Read Chapter 3, 4 and 5 text ; Ndan, JD. (2013). Public Financial Management:
A Nigerian Perspective, 3rd Edition, Published by Ahmadu Bello University
Printing Press.
ABUBAKAR, H.I. (2000), “Local Government Finance in Nigeria: Revenue
Right and Fiscal Jurisdiction”. National workshop on the Review of
1999 Constitution Office of the Vice President of Nigeria, Abuja.
ABUBAKAR, H. (1991) I, Local Government Finance: Its Sources
Management and Stewardship Background Paper Prepared For the
Orientation Workshop for Newly Selected Local Government
Chairman and Councilors
ADEBAYO ADEDEJI; (1979) Financing Local Government in Nigeria, an
Over-View University of Ife Press Nigeria.

135
 STUDY SESSION 3
Criteria and Formulae for Revenue Sharing
Section and Subsection Headings:
Introduction
1.0 Learning outcomes
2.0 Main Content
2.1 Criteria for Revenue Sharing
2.2 Tax Efforts
2.3 Efficiency
2.4 Previous and Current Revenue Allocation Formula
2.5 Horizontal Sharing of Revenue among States from States Joint
Account
3.0 Tutor Marked Assignments
4.0 Study Session Summary and Conclusion
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class
activities)
7.0 References/Further Readings

Introduction
The 1979 Nigerian Constitution provides in section 149 (1) how the financial
relations shall be and how money shall be sourced and shared among the three
ties of government. The Constitution provides that the federal government shall;
maintain a special account to be called the “Federation Account” into which
shall be paid all revenues collected by the government, except the proceeds
from the personal income tax of the personnel of the armed forces of the
federation, the Nigerian police force, the ministry or department of government
charged with responsibility for external affairs and the residents of the federal
capital territory.

136
This provision is not however the issue. The issue lies in section 149 (2) of the
same Constitution, which stipulates that “any amount standing to the credit of
the Federation Account shall be distributed among the federal and states and
local governments in each state on such terms and in such manner as might be
prescribed by the National Assembly”.

There have been two major considerations in the revenue sharing or the
“national common wealth” which are equity (politics) and efficiency
(economics). Okigbo (1979) warned on the danger of over relying on any one
criterion at the expense of others. Hear him”…..a relentless pursuit of efficiency
might lead to injustice to a large section of the community, while a ruthless
pursuit of equity might weaken the federation” He therefore advises that the
issues are sensitive and should be handled with utmost care.

Over the years, there have been various criteria or principles that determine
revenue sharing particularly at various periods./,
Ccommittees/Commissions/Decrees and RMAFC had used and are still using.
While many have been discarded, some have had their names changed, while a
few have been able to endure the series of changes in government in the past
years. They include the following:
i. Derivation
ii. Population
iii. Need
iv. Equality
v. Continuity of Government Services
vi. Minimum responsibility of government
vii. Financial comparability
viii. Even development
137
 ix. Equality of access to development
x. Geographical spread/Landmass
xi. Ecological problems/Terrain
xii. Rural Roads
xiii. Potable Water
xiv. Education
xv. Health
xvi. Independent revenues
xvii. Absorptive capacity
xviii. Fiscal efficiency

In-text Question
1. What are the four criteria for revenue sharing that have stood the test of time?
Answer
1. Equality
2. Population
3. Derivation and
4. Needs

All these criteria are all linked to economic or political issues and have some
justifications just as they have shortcomings. Some of these criteria have had
long and enduring history in the arena of revenue sharing in the country, while
others just made “brief appearances” Abubakar (1986). While many of them
have since been discarded and do not form any bases for sharing revenue from
the federation account today, except of course the few ones that have survived
these vagaries of modification.

The predominant and contemporary principles for revenue sharing, are

derivation, need, population and equality of states, are discussed here to assess
their desirability as bases for revenue sharing.

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1.0 Session Learning Outcomes
At the end of this session, you are expected to:
1. Explain the basis and criteria for government’s revenue sharing

2.0 Main Content

2.1 Criteria for Revenue Sharing
i) Derivation
Derivation is the most controversial criteria in the history of revenue sharing in
Nigeria. The principles of derivation rests on morality premise, that the location
from which the bulk of the revenue is obtained should receive an extra share
beyond what other states receive or should retain its proceeds and make
contribution to the centre on an acceptable percentage agreeable to all. In the
1950s and 1960s when the principle of derivation was applied mainly to the
proceeds of exports taxes on agricultural produce, the principle encouraged the
regional government to promote the cultivation of export crops: cocoa, cotton,
groundnut, oil palm etc. The government set up farms of their own and
extended assistance to the farmers. This principle of derivation promoted
exploration and internal revenue drive because of what was retained by the
various component units.

In other words, derivation requires that all revenues, which are derived from or
attributed to a particular area or state, should be allocated in part or in full to
such a state irrespective of the fiscal jurisdiction. The rationale behind this
thinking is that, while drilling or exploring crude oil there are myriad of
problems such as pollution of air, contamination of water, environmental
degradation, and social dislocation of both social and economic life of the
communities. It is argued, that revenue should be shared in such a way that it
takes into consideration the relative deprivation, social dislocation, oil spillage,

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contamination of water, pollution of air etcetera which results from these
activities.

Opponents of this criterion argue that sharing economic fortune in this manner
would accentuate regional or geopolitical inequalities. Those who are endowed
would gain at the expense of those who are less endowed or not endowed at all.
They also argue that such a principle can lead to apparent neglect of those areas
that are not endowed with natural resources and can create uneven development
and become a political liability to a federation like Nigeria that is anxious at
fostering national integration. Perhaps, it is because of this that Aboyade (1979)
in Abubakar (1986) argued that “….the principle of derivation has little or no
place in a cohesive fiscal system for national and social development”.

Whereas the position of Aboyade (1979) appeard hard, getting a suitable

alternative to address the concerns of all has not been completely successful.
The question that puzzles the minds of analysts, is what Abubakar (1986) asked
if derivation as a principle is deficient, what is the way out, since mineral
producing areas bear a cost of production? Put in another way, what should be
the right compensation? Abubakar (1986) suggests that the central government
should assume directly the development of such areas and rehabilitation of
persons who have been displaced as a result of revenue generating activity.
Alternatively, there should be financial allocation directly to the affected states.
But the setting up of defunct OMPAEDEC and now Niger Delta Development
Company (NDDC) which is a federal government intervention agency to
address fundamental problems facing the region has not yet taken the Niger
Delta people to Eldorado. In fact these agencies have been accused of
swimming in the ocean of iniquities where corruption and embezzlement swim
and flow freely, while the oil producing communities continue to wallop in

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abject poverty and deprivation. This perhaps explains the restiveness of the
youths in the Delta region.

ii) Need
The principle of need focuses on the expenditure requirements of government. It
is like the principle of ability to pay in taxation where, it tends to agree with
some basic notions of equity in the society.

The principle of need is used more to raise the level of deficient states, than to
push forward the level of the relative advanced ones. It is, thus, an equalizing
principle bases on equity rather than on efficiency considerations.

But how is need measured? This is one question that has been so controversial,
since the principle of need was first introduced into the revenue sharing arena in
Nigeria in 1951. Then it was measured simply by the number of adult male
taxpayers. It has been applied wholesome or applied under other guises at one
time or the other. The inability to define need in itself is a serious flaw. It is
very important to realize that the need principle is justified on the basis of
equity and justice.

iii) Population
Population here is used as a basis for revenue sharing and is rooted on the fact
that government is all about people, just like development itself is all about
people. It is justified on the simple fact that if the rational of human existence is
to maximize the welfare of mankind, using human population as a basis for
sharing, it is not out of place. Suppose we accept the above view point, there are
certain problems inherent in using population as a yardstick for revenue sharing
as can be shown below:

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The use of population is weak, ambiguous and unsatisfactory criterion for
revenue sharing, especially in a country like Nigeria where realistic population
figure is in doubt. The 1963 Census was relatively accepted as satisfactory,
though not to everybody. In 1973 the Census figures were largely rejected
hence we had to revert to the 1963 figures on serious national matters like
budgeting and planning etcetera. As a result of the lack of zeal and interest
people have on census, it was almost discarded completely. Obasanjo ordered
for another census under Sumaila Makama in 2006. It was carried out and when
the results were released, there was relative calm and optimism that at last
Nigeria was going to have a reliable figure about its actual population.
However, when the results were finally released and comparisons were made,
there were sharp reactions here and there condemning the figures as not
reflecting population growth. Lagos state did not accept the fact that Kano state
could overtake it in terms of population growth. In Kaduna State, the northern
part finds it difficult to believe that the southern part could be more in terms of
population. A similar complaint also was made by the southern part in an earlier
census that some constituencies were under counted or some areas were not
counted at all.

The southern part of Nigerian over the years has consistently opposed the use of
population as basis for revenue sharing. They opined that, the North has been
using numerical superiority to deprive them of adequate revenue, necessary to
pursue the cause of development. These and many others were the complaints
that often accompany head counting in Nigeria, thereby casting doubt on the
exercise. Whether the complaints are right or wrong, one thing is clear, the
argument that population as an effective basis for revenue sharing is being
undermined. In fact, no previous census had received total acceptance from the
various geopolitical units. In any case, the Government of President Olusegun
Obasanjo had since accepted the census figures. Unless population is accurate,
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reliable and acceptable to all, using it as basis for revenue sharing, budgeting
and planning would always be controversial.

iv) Equality
This is meant to empower the states irrespective of their peculiarities to carry
out basic minimum responsibilities of government to its people. It means a
given percentage of the amount going to the states is distributed equally among
the states irrespective of differences in physical size or population. This
principle is designed to take care of each state government. This affirms the
constitutional status of each state within the federation. There is no doubt; it
tends to promote internal cohesion in the federation.

v) National interest
The principle of national interest is used residually by the highest level of
government to intervene and transfer funds to lower levels of government or
units to serve various national considerations in all spheres of government.

vi) Independent Revenue

Since Phillipson Commission in 1946, the principle of independent revenues
has been applied in Nigeria, as “declared” revenue and later (in Hicks-Philipson,
1951). Aboyade (1977) Committee gave it more teeth in its recommendations. It
is an efficiency-inspired principle, which asserts that each level of government
should be able to raise and keep some revenue for its use. The bulk of the
revenue sources of the states come from what is raised and collected by the
government of the federation. The main revenue source to the state government
are taxes on personal income, capital gains and transaction by way of stamp
duties and quite recently share of Value Added Tax (VAT).

vii) Continuity of Government

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This principle is the same like that of minimum responsibility of government.
Both principles suggest that the level of government has a certain minimum
responsibility and that the level of service being provided by government for its
citizen must not be allowed to fall below a certain minimum level. It is largely
appropriately in vertical allocation between levels of government and on equity
considerations, in horizontal allocation among state. A minimum responsibility
of government refers to the functions assigned by the Constitution, which if
stressed further is like principles of need.

viii) Financial Comparability

Binn's Commission of 1964 considered the principle of financial comparability
as a criterion of revenue allocation. The principle stresses that any review of a
revenue allocation system should compare the financial position of the units
participating in the allocation: the level of independent revenue or tax efforts of
the units. It mixes efficiency and equity considerations. It seeks to compensate
or rather reward states or local governments that are making efforts in to
generate more revenue internally.

vix) Minimum National Standards

This criterion was first introduced by Dina Commission in 1968. It asserts the
maintenance of minimum national standards in allocation among states.
Government might set minimum standards in education, agriculture, health, etc
with the aim of lifting each unit in the federation at least up to that minimum
and if possible, beyond it. The standard would be revised upwards as the
federation develops and by so doing, the use of the principle can lead to
efficiency. However, for the purpose of sharing what now exists, or within a
given period, it is a principle that together with need, minimum responsibility
and even development, is satisfied principally on equity grounds.

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x) Absorptive Capacity
The principle of absorptive capacity is based on the capacity of a state or local
government to make proper use of their funds. It advocates that funds should on
grounds of efficiency, be provided more to those states best able to use their
resources prudently and judiciously so that at the end, value for money is
obtained. One of the purposes of fiscal transfer is to create and expand capacity
and if some states are denied funds due to inability to manage funds properly,
then the application of this criterion can create unintended outcomes such as
lopsided or uneven development.

However, it is the application of funds in the capital expenditure programme,

that the principle might be seen to apply. Since
development funds are often obtained at some cost to
the user the principle can be interpreted to mean that
state must show their capacity to service the cost of the
funds they obtain for their capital programmes, that is,
that they can carry the debt burden. This is similar to
counterpart funding and the inability of some states to access funds in Universal
Basic Education vault.

2.2 Tax Efforts

The principle of tax generating effort is designed to encourage state to make
maximum use of their tax capabilities. It is in essence, part of the principle of
independent revenues. If the system of taxation is sufficiently progressive, this
principle would aid efficiency while being equity.

2.3 Fiscal Efficiency

This principle asserts that we should minimize the cost of our fiscal
administration or obtain the maximum revenues from given cost. It satisfies the
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efficiency objective and is likened to the principle of tax effort independent
revenue under one umbrella. Fiscal efficiency reflects not only the ability to
raise taxes and collect them; it reflects the structure of the tax base itself as well
as the overall administrative machinery of government. There are some revenue
sources that governments, especially local governments have left them
untapped. If attention could be turned to them, certainly more revenue allocation
could be provided.

2.4 Previous and Current Revenue Allocation Formula

I) Phillipson Commission – 1946
This report prescribes horizontal distribution of federally collected revenues
amongst the various regions as follows:
Northern Region-----------------------46 percent;
Western Region------------------------30 percent and;
Eastern Region-------------------------24 percent.

This was based on the estimated relative contribution of the various regions to
the Nigerian treasury. Emphasis was mainly placed on the criterion of
derivation. The preference of Phillipson for the derivation principle was based
on the belief that there was need to inculcate in each region, a sense of
“financial responsibility” so that they would all learn to “cut their coat
according to their cloth” Dina Committee Report, (1969).

II) Hicks – Phillipson Commission - 1951

Hicks-Phillipson Report did not altogether jettison the derivation principle;
rather it retains it for the allocation of such taxes as could be allocated with
simplicity and certainty to the regions. An example was taxes on tobacco; it was
recommended that 50 percent of the revenue from it was to be allocated to the
regions on the basis of derivation. Non regional revenues, which constituted the
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majority of the Nigerian budget was however to be shared based on the
principle of ‘need’ and ‘national interest.’ In line with its second terms of
reference, the Committee also recommended the payment of a one off grant of
two million pounds to the northern region. This was to make up for what it
considered to be its relative deprivation in the past years. Essentially, the Hicks-
Phillipson Report materially altered the derivation focus of the 1948 Phillipson
Report. This new arrangement was received with mixed feelings. The west, for
instance was comfortable because of cocoa boom clamoured for a revision to
the issue of derivation; the east took an opposite stand.

III) Chick Commission - 1953

Chick Commission recommended that less emphasis should be placed on ‘need’
and ‘national interest’ as determinants of revenue allocation in the colony. The
Report showed strong preference for fiscal autonomy and materially increased
the weight allocated to derivation as a basis for revenue sharing. In detail, the
Report recommended that: the federal government should keep 50% of the
general import duty, while 50% should go to the regions on derivation basis; the
federal government should keep 50% of the import and excise duty on tobacco,
the rest went to the regions based on derivation; 100% of the import duty on
motor spirit went to the regions; 100% of the mining rent and royalty went to
the regions, and; both levels share the export duty on hides and skins on a 50-50
basis. The Report however enjoins the federal government to maintain a
discretionary power to make grants available to those in need.

IV) Raisman Commission - 1958

Revenue allocation formula was however fundamentally altered in 1958 with
the setting up of Raisman Revenue Allocation Commission. This also coincided
with the discovery of oil in Nigeria. Based on the above, the Raisman report
significantly reduced the use of derivation as a principle for sharing the
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Distributable Pool Account (DPA). In its place, it introduced four variables:
continuity, minimum responsibility, population and balanced development of
the federation. As stated above, oil was not the first natural resource to be
exploited in Nigeria. Prior to its discovery, tin and bauxite were being exploited
in the Northern region solely for the benefit of the north. The west could not be
bothered because it was the wealthiest of the three regions mainly because
cocoa was in commercial quantity. The east was however trailing in terms of
natural resources.

V) Binns Commission – 1964

The Binns Commission did not recommend any fundamental changes in the
existing revenue sharing formulae of the country. One of the main
recommendations of the report was that when excise duty is imposed on locally
produced motor spirit and diesel oil, the federation shall pay to the regions,
proceeds of the duty based on the consumption in the various regions 37%. The
above report formed the basis of the revenue allocation practice in Nigeria until
the military coup of January 1966 which brought General Aguiyi Ironsi to
power. Apart from the above-mentioned commissions, there were series of
military decrees whose existence were through military fiats; Decree No. 15 of
1967;The Federal Government subsequently promulgated the Constitution
(Financial Provisions) Decree Number 15 of 1967. Essentially, this Decree
divided the share of the Northern Region from the DPA equally amongst the six
states created from it. Those of the east and the west shared among their
emergent states on the basis of population. This marked the beginning of
population as criteria for revenue sharing in Nigeria. In other words this decree
recommended 7% to each of the northern states, while east and western states
shared in accordance with their respective population.

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 VI) Dina Commission 1968
Dina’s Commission among others renamed Distributable Pool Account (DPA),
States Joint Account (SJA) and Special Grants Account (SGA) was established.
Funds here were to be administered by the Planning and Fiscal Commission
which was to be established. Allocation of funds from this account was based
on the following principles:
i. tax effort,
ii. balanced development and
iii. national interest.

The Report, for the first time, also introduced the onshore/offshore dichotomy
in sharing of oil revenue in Nigeria. All revenues accruing from offshore
operations were shared using the following formula:
Federal Government, 60 %
States Joint Account, 30% and
Local Governments Joint Account, 10%

Royalties from onshore operations was assigned on the following bases:

Federal Government, 15%
State of derivation, 10%
States Joint Account, 70% and
SGA, 5%

Revenue from Excise Duty was allocated on the following bases:

Federal Government, 60%
SJA, 30% and
SGA, 10%

Import Duty was to be shared on the following basis:

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Federal Government, 50%
SJA, 50%

Finally, revenue from Export Duty was to be shared as follows:

Federal 15%
State of Derivation, 10%
SJA, 70%
SGA, 5%

In other words, Special Grant Account was introduced, the establishment of

permanent planning and Fiscal Commission was recommended among others.
However, all these were flatly rejected.

VII) Decree No. 9 1971

Despite the rejection of Dina’s report, the Federal Government under General
Yakubu Gowon eventually implemented 80% of the recommendations of the
Committee Report, through the back door using military fiat. This was done
with the promulgation of Decree Number 9 of 1971. Essentially, this transferred
rents and royalties of offshore petroleum mines from the states to the federal
government. It should be understood that this period was the civil war years and
government could do anything in the name of prosecuting the war.

VIII) Decree No 20, 1975

In 1975, the Government promulgated the Constitution (Financial Provisions)
Decree Number 6. By this Decree all revenues shared by the states, with the
exception of the 20 percent of onshore mining rents and royalties belonging to
the states of origin, based on the derivation principle, should pass through the
DPA. In other words, 80 percent of mining rents and royalties, 35 percent of
import duties, 100 percent of duties on motor spirits, tobacco and hides and skin
150
and 50 percent of excise duties, all had to pass through the DPA. The Decree
further stipulated that the DPA be divided among the states on the following
basis:
i. Equality 50%
ii. Population 50%
100

Shortly after the promulgation of the above decree, General Gowon was
overthrown and replaced by a new Head of State late General Murtala
Mohammed.

IX) Aboyade Technical Committee of 1977

The committee made the most far-reaching decisions and changed significantly
the structure of revenue sharing in Nigeria. It was set up by General Obasanjo
who had succeeded Murtala Mohammed barely just six months after he was
assassinated and in preparation to handing over the mantle of leadership to a
democratically elected government. The Committee had Professor Ojetunji
Aboyade as its Chairman. For the first time revenue was shared among three
tiers of government, federal states, and local governments instead of the
erstwhile practice of sharing revenue between the centre and the regions. This
was as result of the recommendations of Dasuki 1976 Local Government
reforms. Distributable Pool Account was replaced with Federation Account.
States Joint Account and Local governments Joint Account.

The Aboyade committee was very thorough and detailed but its
recommendations did not go down well with some vocal members of the
national assembly, such as Okigbo. In fact its report was regarded as too
technical and unrealistic in the face of prevailing socio-economic and political

151
circumstances. Okigbo at the floor of the House as cited by Abubakar (1986)
while contributing to a discussion on Aboyade’s Report had this to say;
We have a Report prepared by a formidable array of Nigerian
talents, six of them in all, five of whom are Professors in our
Universities and one comes from the world of business. From such
a distinguished panel, we have received a report that is
distinguished by its elegance, but perhaps dominated by the pursuit
of novelty rather than political intuition… The report before us now
is, in my view, academic and doctrinaire in the extreme and cannot
be made the basis for clear working procedures outside the purview
of a military administration.

This masterful assessment on Aboyade Technical Committee’s Report by

Okigbo, prompted President Shagari in 1979 to set it aside and another
Committee headed by Okigbo himself was inaugurated.

Meanwhile Aboyade Committee’s Report of 1978, castigated by Okigbo,

recommended that funds standing in the credit of the Federation Account should
be shared among the three tiers of government as follows:
Federal - 57%
State - 30%
Local Government - 10%
Special Grants Account- 3%

Okigbo’s Committee that was set up to review the formula surprisingly rolled
out its recommendation that did not show any marked difference from what
Aboyade’s Committee had recommended. It would interest you to know that the
harsh criticism was not justified as the Report did not appear significantly
different from Aboyades. In fact, only 4% of the federal share was transferred to
152
that of Special Account, otherwise everything was retained. It is interesting to
have a look at Okigbos recommendation below and compared with that of
Aboyade’s Committee above.

Okigbo Revenue Formula of 1981:

Federal - 53
State Joint Account - 30%
Local Government - 10%
Ecological problem - 1%
Special - - - 7%

The 13% derivation revenue for oil producing states is on first line charge of the
amount standing on the credit of the federation account to address problems
adversely affecting the Niger Delta region.

But several revenue formulae were adopted with controversy others were
vehemently resisted by the other tiers especially the states using their newly
formed Nigerian Governors Forum. However, the following formula which is
the current in use has been able to endure the test of time;

X) July 10, 1992 Revenue Allocation

Federal 54.68%
States 24.72%
Local Governments 20.60%

Controversy has not always been experience in vertical sharing among Federal,
States and Local Government but horizontally among states themselves.

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2.5 Horizontal Sharing of Revenue among States from States Joint Account
Another dimension to revenue allocation is the horizontal sharing were states
share proceeds from their States Joint Account and Local Government from
Local Government Joint Account. The horizontal sharing has indices just as the
vertical sharing among the states. The indices for horizontally sharing among
states and Local Government are as follows:;
Minimum responsibility (Equality)---- 40%
Population---------------------------------40%
Social Development factor-------------- 15%
Internal Revenue effort------------------ 5%

Each state is also required to allocate to remit 10% of its own internally
generated revenue to its Local Governments.

Reports however indicate that it exists only on paper. Many states governments
hardly do that and go ahead to temper with local governments allocation from
the federation account. The excuse the states give is that when Poll tax and
Jangali tax are collected by the local governments, they do not remit their own
share to them either.

A committee was set up to review the existing indices for "horizontal" sharing
came up with a new set of indices as follows. The current set of indices for the
sharing is an improvement on the earlier criteria, yet there are still agitations for
a review by those concerned. The "horizontal" sharing among states based on
the following ten indices, are the current indices for horizontal sharing in use:
Equality of states, 45.23%
Population, 25.60%
Population density, 1.45 %
Internal revenue generation effort, 8.31 %
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Land mass, 5.35 %
Terrain, 5.35 %
Rural roads and inland waterways, 1.21 %
Potable water, 1.50 %
Education, 3%
Health, 3%

Many states, especially in the South, have often complained about the prime
position given to population (25.60 per cent) in the "horizontal" sharing - a
major factor in the perennial disputation of census figures in Nigeria.
Conversely, many states in the north feel the 13% allotted to derivation is on the
high side. As the exchange of banters continues, the Oil Producing States are
asking for 50% as the 13% is considered in adequate. Who is right and who is
wrong?

In-text Question; In-text Question

1. Which body replaced the various adhoc committees or commission in revenue sharing?
Answer
1. Revenue Mobilization, Allocation and Fiscal Commission (RMAFC)

3.0 Tutor Marked Assignments

What is the basis of sharing revenue among the three tiers of government?

5.0 Self-Assessment Questions

1. Mention the two major microeconomic policies of government?
2. Government spending and Taxation represent which policy?
3. What is the opinion of some radical leaders of the developing countries
concerning debt repayment?
4. Who were these radical leaders?

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6.0 Additional Activities (Videos, Animations & Out of Class activities) e.g.
a. Visit U-tube [Link]
Watch the video & summarise in 1 paragraph
b. View the animation on
[Link]
venue+Sharing
and critique it in the discussion forum

7.0 Reference/Further Reading

Read Chapter 3, 4 and 5 text ; Ndan, JD. (2013). Public Financial Management:
A Nigerian Perspective, 3rd Edition, Published by Ahmadu Bello University
Printing Press.
ABUBAKAR, H.I. (2000), “Local Government Finance in Nigeria: Revenue
Right and Fiscal Jurisdiction”. National workshop on the Review of
1999 Constitution Office of the Vice President of Nigeria, Abuja.
ABUBAKAR, H. (1991) I, Local Government Finance: Its Sources
Management and Stewardship Background Paper Prepared For the
Orientation Workshop for Newly Selected Local Government
Chairman and Councilors
ADEBAYO ADEDEJI; (1979) Financing Local Government in Nigeria, an
Over-View University of Ife Press Nigeria.

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