Prioritising subnational government revenue expansion in Nigeria

All levels of government in Nigeria face unique challenges regarding revenue generation, despite the country’s abundant natural resource endowments. The challenges primarily revolve around the political will and capacity for structural economic transformation on the one hand and the prioritisation of internally generated revenue (IGR) expansion on the other. It gets worse with a lower level of government. However, we cannot overstate the significance of IGR expansion in Nigeria’s context. The federal system of government vests considerable autonomy and responsibility in subnational governments. At the federal level, significant efforts to fine-tune the policies and vehicles for revenue generation have been ongoing since the swearing-in of the new government. It does not appear as if the same tempo of urgency exists at most of the subnational levels of government since the change of baton. Ironically, these subnational governments need these revenue improvements more desperately to deliver on the developmental expectations of their people. Fortunately, the removal of petroleum subsidies considerably enhanced the size of revenue shared by the Federation Account Allocation Committee when compared with the size of envelopes before the adoption of the measure. Nevertheless, revenue collection repercussions are also beginning to weigh in, as economic hardships may significantly counter the net gains from an increased share of statutory allocations.

Nigeria’s fiscal federalism landscape is the biggest explanation for why subnational governments must prioritise IGR expansion. Fiscal federalism in Nigeria empowers subnational governments to take charge of their own financial destinies, tailor revenue-generation strategies to local conditions, and promote economic development. Subnational governments therefore have the responsibility to provide essential services to their citizens within their spheres of influence and revenue-generating powers. Unluckily, poverty in Nigeria concentrates disproportionately in the states and local governments due to various factors such as unequal distribution of resources, limited access to education and healthcare, and a lack of economic opportunities. Rural areas face higher poverty rates, often lacking basic infrastructure and services. Corruption and mismanagement also exacerbate the issue, with the prevalent diversion of funds meant for development. Additionally, there are numerous conflicts and insecurity in many states and local governments, hindering economic progress. Effectively managing these challenges requires targeted policies, investment in human capital, infrastructure development, and effective governance. IGR is indisputably a significant component of the funding required to make successful interventions.

IGR represents a vital financial resource for subnational governments, serving as a critical complement to federal allocations. Accordingly, a primary reason why subnational governments must prioritise IGR expansion for revenue diversification. Over-reliance on federal allocations from the Federation Account Allocation Committee (FAAC) has proven to be unsustainable. Firstly, this dependency leaves the nation vulnerable to volatile oil prices, as witnessed during the 2014 oil price crash, and also during the 2020 COVID-19 oil glut, causing severe economic crises. Secondly, it discourages states and local governments from pursuing diverse revenue sources, hindering economic growth and self-sufficiency. Moreover, the FAAC distribution formula does not consider individual states’ efforts, resulting in fiscal irresponsibility and a lack of accountability. This unsustainable reliance stymies the nation’s development and perpetuates disparities, as exemplified by Nigeria’s struggles to provide basic services and infrastructure due to inadequate, inconsistent funding. Consequently, subnational governments find themselves vulnerable to economic shocks when oil prices decline. By expanding IGR, subnational governments can diversify their revenue sources, reducing their susceptibility to external economic shocks and allowing them to become more financially self-sufficient and less reliant on the federal government’s allocations.

Without a doubt, prioritising IGR expansion offers a myriad of benefits to subnational governments and Nigerian society as a whole. The first is the opportunity for improved service delivery. Sufficient IGR enables subnational governments to provide better public services in areas such as education, healthcare, and infrastructure. This, in turn, enhances the overall quality of life for citizens. The second is the growth of subnational economies. Through good governance and the provision of better public services, IGR expansion contributes to economic growth by creating a conducive environment for businesses to thrive. Subsequent stimulation of economic activities also leads to the creation of jobs. The third is the maintenance of fiscal sustainability. Subnational governments that prioritise IGR expansion are better equipped to weather economic shocks and maintain fiscal sustainability. Lagos and Rivers state governments are very good examples. More than any other state government in Nigeria, they are less reliant on federal allocations, making them more resilient in times of economic downturns. The fourth is poverty reduction. Enhanced revenue generation at the subnational level leads to poverty reduction through the implementation of targeted poverty alleviation programmes and social interventions that are feasible through additional revenue mobilisation.

Two notable case studies of states in Nigeria that have made significant strides in expanding their IGR through innovative policies and strategies are Lagos and Ogun States. Lagos State consistently ranks as one of Nigeria’s top revenue-generating states. This achievement is contingent on a combination of factors, including robust tax reforms, efficient revenue collection systems, and aggressive economic diversification efforts. The state government has effectively leveraged its status as Nigeria’s commercial hub to attract investments and generate revenue from various sources, including taxes, land sales, and service fees. Ogun State, on the other hand, as a neighbour to Lagos State, has also made remarkable progress in IGR expansion. The state government implemented tax reforms and improved its revenue collection mechanisms. Additionally, Ogun State has attracted industrial investments and positioned itself as a strategic location for businesses, which has contributed to increased IGR. These case studies demonstrate that with the right policies, administrative reforms, and strategic investments, subnational governments can achieve substantial IGR growth.

While the benefits of IGR expansion are evident, states and governments in Nigeria face numerous challenges in achieving this goal. The first is the low level of tax compliance and enforcement. We can attribute low tax compliance at the state and local government levels in Nigeria to a range of interconnected factors. A primary cause is the pervasive issue of corruption and mismanagement of public funds, which erodes trust in government institutions. Additionally, citizens often view their tax payments as yielding minimal returns in terms of public services and infrastructure. For instance, despite tax collection, inadequate healthcare and education facilities persist. Moreover, the informal sector dominates the Nigerian economy, making it challenging to track and tax incomes effectively. These factors combined create a disincentive for tax compliance, perpetuating a cycle of underfunding and hampering socio-economic development at the subnational level. The second challenge is limited economic diversification. Subnational governments often grapple with limited economic diversification within their jurisdictions. Overreliance on a few agricultural products can hinder IGR’s expansion efforts. Encouraging economic diversification through policies that promote agriculture, industry, and services is essential for sustainable IGR growth.

Furthermore, inadequate administrative capacity at the state and local government levels poses a significant impediment to the expansion, collection, and effective management of internally generated revenue (IGR). Firstly, there is a chronic shortage of skilled personnel with the requisite expertise in revenue collection and financial management. This deficiency results in ineffective tax assessment, weak enforcement of tax laws, and a high prevalence of tax evasion. For instance, businesses may exploit loopholes due to a lack of knowledgeable tax administrators, leading to reduced revenue yields. Secondly, outdated technology and inefficient processes further compound the problem. Many state and local governments still rely on manual record-keeping and outdated software for revenue collection. This not only slows down the process but also makes it susceptible to errors and fraud. Modernising revenue collection methods through the implementation of digital tools and systems is imperative to streamline operations and improve revenue generation. Additionally, there is a lack of coordination and harmonisation among different revenue-generating agencies within the states and local governments. This can lead to confusion, duplication of efforts, and even revenue leakage.

To overcome the challenges associated with IGR expansion, subnational governments in Nigeria must adopt a multifaceted approach that encompasses both policy and administrative reforms. Subnational governments should engage in comprehensive tax reforms aimed at simplifying tax codes, eliminating tax evasion, and enhancing tax collection efficiency. This could involve reviewing tax rates, introducing electronic tax payment systems, and improving tax education programmes. Diversification of the economy must be a priority. This may include investing in infrastructure that supports agriculture and industry, attracting private sector investments, and promoting entrepreneurship and small and medium-sized enterprises (SMEs). Thirdly, collaboration and coordination among subnational governments can help create economies of scale and reduce duplication of effort. Sharing best practices, jointly pursuing development projects, and pooling resources can be effective strategies for IGR expansion. Fourthly, investing in the capacity building of revenue-generating agencies is crucial. Subnational governments should provide training for tax officials, auditors, and revenue collectors to enhance their skills and knowledge. Additionally, the use of technology and data analytics can improve revenue collection and management.

Finally, the expansion of internally generated revenue (IGR) is imperative for the sustainable development of subnational governments in Nigeria. It not only reduces their reliance on federal allocations but also empowers them with fiscal autonomy to address the unique needs and priorities of their citizens. While challenges exist, they can be overcome through tax reforms, economic diversification, capacity building, and collaboration. By prioritising IGR expansion, subnational governments can improve service delivery, foster economic growth, achieve fiscal sustainability, and contribute to poverty reduction. The success stories of states like Lagos and Ogun serve as examples of what is achievable through concerted efforts and effective governance.

In conclusion, IGR expansion is not merely an option but a necessity for subnational governments in Nigeria if they are to fulfil their role as catalysts for development and ensure a brighter future for their citizens and the nation as a whole.