FISCAL FEDERALISM AND THE CRISIS OF LOCAL GOVERNMENT UNDERFUNDING IN NIGERIA: A CRITIQUE OF THE FEDERATION ACCOUNT AND REVENUE ALLOCATION FRAMEWORK

Abstract

Fiscal federalism in Nigeria has produced systemic imbalances that disproportionately disadvantage local governments, creating a crisis of underfunding that undermines grassroots governance and democratic consolidation. This seminar paper critically examines the structural and institutional determinants of local government underfunding within Nigeria's fiscal federal architecture, focusing on the Federation Account, vertical revenue allocation formula, and State Joint Local Government Account (SJLGA). Drawing on fiscal federalism theory particularly Oates' Decentralisation Theorem and Musgrave's framework for intergovernmental fiscal relations the paper analyses how constitutional design, political dynamics, and institutional weaknesses have produced chronic fiscal subordination of the third tier. The paper argues that the SJLGA, rather than serving as a fiscal conduit, functions as a mechanism of state-level fiscal control that diverts, delays, and withholds statutory allocations from local councils. The vertical sharing formula allocates only 20.60 per cent of Federation Account revenues to local governments despite their constitutionally mandated responsibilities for primary education, healthcare, and rural infrastructure. Structural constraints on internally generated revenue, administrative incapacity, and over-reliance on volatile oil revenues compound the crisis. The paper evaluates the transformative potential of the 2024 Supreme Court ruling affirming direct allocation to local governments and proposes reforms including the abolition of the SJLGA, revision of allocation criteria to incorporate fiscal effort and infrastructure deficits, strengthening of local revenue generation capacities, and institutional reforms to enforce fiscal accountability. The paper concludes that meaningful fiscal decentralisation requires not merely increased transfers but a fundamental restructuring of intergovernmental fiscal relations to align expenditure assignments with revenue-raising powers at the local government level.