BECANS WORKING PAPER 3

Budget and
Public Expenditure
across Nigerian States
BECANS WORKING PAPER 3

Budget and
Public Expenditure
across Nigerian States
 BECANS WORKING PAPER 3

Budget and
Public Expenditure
1
across Nigerian States

Eric Eboh

Uzochukwu Amakom

Moses Oduh

AFRICAN INSTITUTE FOR APPLIED ECONOMICS

128 Park Avenue, GRA, P.O. Box 2147 Enugu, NIGERIA
Tel: +234 (042) 256644, 256035, 300096. Fax: 256035
E-mail: [email protected] website: www.aiae-nigeria.org

1 BECANS is acronym of Business Environment and Competitiveness across Nigerian States. BECANS is a flagship
initiative of the African Institute for Applied Economics (AIAE). It is implemented in collaboration with government and
private sector organizations. BECANS is designed to carry out research, survey and advocacy in support of business
environment reforms at sub-national level in Nigeria.
BECANS WORKING PAPER SERIES

No 3: Budget and Public Expenditure across Nigerian States

Published by
AFRICAN INSTITUTE FOR APPLIED ECONOMICS
128 Park Avenue, GRA,
P. O. Box 2147 Enugu, NIGERIA
Phone: (042) 256644, 300096
Fax: (042) 256035
Email: [email protected]
www.aiae-nigeria.org

FIRST PUBLISHED, 2006

© African Institute for Applied Economics

ISSN 0975-3755

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any
means, electronic or mechanical, including photocopying, recording or any information storage and
retrieval system, without permission in writing from the copyright owner.
 Table of Contents
List of Tables...........................................................................................................................6

List of Figures .........................................................................................................................7

ABSTRACT ..........................................................................................................................10

1.0 CONCEPTUAL ISSUES...........................................................................................10

1.1 Public Spending and Public Goods......................................................................10

1.2 Public expenditure, economic governance and macroeconomic stability............12

2.0 FISCAL FEDERALISM AND PUBLIC FINANCES AT THE STATE LEVEL..............15

2.1 Principle underlying fiscal federalism ....................................................................15

2.2 Division of development functions (expenditure responsibilities) across levels of

government ...........................................................................................................16

2.3 Sharing of revenue among the tiers of government ..............................................18

3.0 SPENDING BEHAVIOUR OF STATES ....................................................................20

3.1 Overall States' Finances 2001-2005 .....................................................................20

3.2 Spending Behaviour of Nigerian States.................................................................22

4.0 REVENUE PATTERNS ACROSS STATES..............................................................32

4.1 Sources of Revenue..............................................................................................32

4.2 Revenue Trends across the tiers of Government..................................................34

4.3 Internally Generated Revenue (IGR) across states ..............................................35

5.0 BUDGET AND FISCAL MANAGEMENT ACROSS STATES ...................................38

5.1 Critical Budget and Pubic Spending Decisions .....................................................39

5.2 Recent Evidence on Budget and Fiscal Management in the States......................39

6.0 CONCLUSION AND IMPLICATIONS.......................................................................41

REFERENCES .....................................................................................................................43

5
List of Tables

Table 1: Distribution of development responsibilities among federal, state and local

governments ............................................................................................................17

Table 2: Vertical allocation of Nigerian government revenues..............................................19

Table 3: Summary of state governments' finances (2001-2005) ..........................................21

Table 4: Summary of local governments' finances (2001-2005)...........................................22

Table 5: Classification of state governments' pooled recurrent and capital expenditure into
broad sector categories (2001-2005) .......................................................................23

Table 6: Classification of pooled state governments' recurrent expenditure into sector

subgroups ................................................................................................................24

Table 7: Classification of pooled state governments' capital expenditure into sector

subgroups ................................................................................................................24

Table 8: Sector shares in public expenditure estimates across states (2001-2005).............26

Table 9: High and low performing states in average annual sector allocation of public
expenditure ..............................................................................................................28

Table 10: Budget variations in selected states across Nigeria .............................................31

Table 11: Taxes collectible by the three tiers of government ................................................33

Table 12: Performance of states on revenue, recurrent expenditure and loans, 2001-2005....

.................................................................................................................................35

Table 13: States' performance on capacity and commitment indicators of budget and fiscal
management ............................................................................................................40

6
List of Figures

Figure 1: Sector shares in public expenditure estimates across states, 2001-2005...........27

Figure 2: Average annual capital and recurrent expenditure estimates across the states,
2001-2005 (%) .....................................................................................................29

Figure 3: Average annual IGR and FAR across the states, 2001-2005 ..............................36

Figure 4: IGR to recurrent expenditure ratio across the states, 2001-2005 (%) .................37

Figure 5: Loan to IGR ratio across the states, 2001-2005 (%) ...........................................38

7
List of Acronyms and Abbreviations

BECANS Business Environment and Competitiveness across Nigerian States

CBN Central Bank of Nigeria
FAR Federation Account Revenue
FCT Federal Capital Territory
GDP Gross Domestic Product
IGR Internally Generated Revenue
MDAs Ministries, Departments and Agencies
MDGs Millennium Development Goals
MTEF Medium-Term Expenditure Framework
NEEDS National Economic Empowerment and Development Strategy
NPC National Planning Commission
PAYE Pay As You Earn
PSIA Poverty and Social Impact Analysis
RER Real Exchange Rate
RMAFC Revenue Mobilization, Allocation and Fiscal Commission
SEEDS State Economic Empowerment and Development Strategy
TOT Terms of Trade
UNDP United Nations Development Programme
VAT Value Added Tax

8
 ABOUT BECANS WORKING PAPER SERIES

BECANS Working Paper Series publishes the technical outputs from research, survey and
analysis of the business environment and competitiveness across Nigerian states. It
disseminates both theoretical and empirical research. The objective is to enrich policy debate
and stimulate evidence-based dialogue between government and the private sector for
improved investment climate across Nigeria. The Papers provide up-to-date literature, statistics
and empirical analysis to situate and enlighten business environment reforms throughout
Nigeria.

Manuscripts considered for the Series are subjected to scientific review by independent
examiners and revised accordingly prior to publication.

Papers in the Series bear the names of the authors and should be used and cited accordingly.
The findings, conclusions and interpretations expressed by the papers are those of the authors
and do not necessarily represent the views and policies of AIAE or of the collaborating
organisations.

9
Budget and Public Expenditure across Nigerian States

ABSTRACT

This paper examines budget and public expenditure across Nigerian states, from 2001-2005. It
is divided into six sections. Section One discusses the conceptual definitions and theoretical
arguments. It contains two sub-sections. The first subsection deals with public spending and
public goods. The second subsection describes the role of public expenditure in economic
governance and macroeconomic stability. Section Two outlines the principles and practice of
Nigeria's fiscal federalism and the structure of public finances among the levels of government.
It reviews the assignment of development functions, tax jurisdictions and expenditure
responsibilities across the tiers of government. Section Three presents and discusses evidence
on budget and public spending at the state level. It analyses the budget orientation and spending
behaviour of state governments and implications for economic governance and business
environment at the state level. Section Four reviews the revenue sources and patterns of state
governments, in relation to expenditure and loans. Section Five is an overview of budget and
fiscal management at the state level. It recapitulates comparative evidence from recent
comparative analysis across states. Section Six gives the conclusion and implications.

1.0 CONCEPTUAL ISSUES

1.1 Public Spending and Public Goods

1
Governments, all over the world, seek to provide public goods. Public goods encapsulate
allocation, distribution and stabilization objectives. The allocation function refers to assignment
of roles between public and private sectors. The distribution function involves sharing incomes
and resources to promote national unity and equity, while under the stabilization function,
government ensures social, economic and monetary stability (Jimoh, 2003). The distribution of
functions across the levels of government is shaped by the kind of public goods in question. For
example, stabilization functions are usually assigned to central government, as the function
would be inefficiently performed by lower tiers of government because of the divergence
between national benefits and local benefits, divergence between national costs and local costs
and free rider problems (Musgrave and Musgrave, 1989).

1 Public goods are of three kinds, namely, pure public goods, impure public goods and private goods. Private (publicly
provided) goods are consumed individually and its consumption is contingent upon payment. Impure public goods are
those collectively consumed but its consumption is contingent upon payment. Pure public goods are collectively
consumed but consumption is not contingent upon payment - characterized by non-exclusivity and non-rivalry
(Musgrave and Musgrave, 1989).

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Budget and Public Expenditure across Nigerian States

In line with the public goods argument, the Nigerian federal government would provide national
public goods whose spatial incidence of externalities (positive or negative) covers the entire
country, e.g. defence, immigration, etc. Extending the reasoning, state and local governments in
Nigeria would provide local public goods whose spatial incidence of benefits is limited to a state
or local area and conform to a unique taste or preference pattern. Sometimes, a local public
good may provide substantial economies of scale and externalities. In such situations, efficiency
objectives would be promoted if that public good is provided by the federal government rather
than by the subnational levels of government (Musgrave and Musgrave, 1989, Jimoh, 2003).

In promoting development, the state provides common goods and services which among others
facilitate the growth and development of private enterprise, through the creation of good
business environment. One strategy for creating the right investment climate is for governments
to intervene to correct market failures and maintain confidence in the market system. Market
failure arises from the divergence between private and social costs or benefits and leads to
inefficient resource allocation as well as development outcomes that may not be socially optimal
(Eboh, 1999). Ample evidence on investment climate in Nigeria reveals that infrastructural
weaknesses, institutional deficiencies and regulatory bottlenecks act as disincentive to private
investments and businesses (Collier, 2006; Malik and Teal, 2006). Public spending aims at
eliminating these deficiencies in order to promote investments, employment and economic
growth.

Furthermore, governments undertake expenditures to pursue a variety of social and political

goals. Public spending aims at tackling poverty and income inequality. For example,
government often uses public spending to target special programmes of food and housing
subsidies. Spending on health and education is crucial to welfare improvements, particularly for
the poor. In this wise, public expenditure can be justified on the grounds of equity, to mitigate
situations whereby private provision of goods and services will lead to a socially unacceptable
distribution of income or large inequities in human development outcomes across
socioeconomic groups (World Bank, 2002). For example, public spending is often directed at
providing and/or regulating the provision of basic economic and social services including
infrastructure, such as roads, airports, seaports, postage, telecommunications, electricity,
waste disposal, and others.

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Budget and Public Expenditure across Nigerian States

Budgets and public spending are powerful tools of economic management and resource
allocation. They also constitute mechanisms for the pursuit of national values. By the pattern of
public spending the government expresses its policy priorities and development orientation.

The redistribution processes of public expenditure affects the population in a number of ways
(Lionel, 2001). Public spending affects the macroeconomic conditions through impact on fiscal
balance, rate of inflation and real incomes. Also, there are expenditure incidence or primary
income effects of public spending. This describes a situation whereby public spending creates
incomes directly, which in turn creates some other incomes through the income-expenditure
multiplier process. Public expenditures generate transfers to the population, in the form of cash
or monetary transfers, such as social assistance or social insurance payments, or in kind. Social
insurance payments include subsidized government services such as health, education, and
infrastructure services. In-kind transfers improve the current well-being of the beneficiaries, and
also enhance their income-earning potential in the longer term.

1.2 Public Expenditure, Economic Governance and Macroeconomic Stability

Like every nation, public expenditure is at the heart of economic governance in Nigeria. The
structure, efficiency and effectiveness of public spending impact upon the ability of government
to create conducive business environment, deliver development goods and achieve national
prosperity. In particular, the adequacy and quality of public goods such as infrastructure, utilities
and related services largely depend on the nature and quality of public spending. On the other
hand, the nature, conduct and levels of public expenditure affect the conditions of fiscal
sustainability and macroeconomic framework of any country. In Nigeria, for example, over many
years, fiscal imprudence and poor public financial management aggravated oil revenue-induced
macroeconomic volatility. Budgets became almost pointless as extra-budgetary expenditures
mounted, coupled with no medium-to-long term plans to which budgets would be linked (NPC,
2004).

12
Budget and Public Expenditure across Nigerian States

Macroeconomic volatility, evidenced by rapid fluctuations in critical macroeconomic indicators,

persisted for many years. Nigeria ranked among the top ten most volatile countries for the period
1961-2000 for all indicators except monetary growth and consumer price inflation (Addison,
2006). Moreover, Nigeria was in the top five countries for the volatility of real government
revenues per capita, terms of trade (TOT) and real exchange rate (RER). Revenue volatility has
remained unchanged, for example, the volatility for revenues over 2000-2005 is two and half
times as much as volatility from 1991-2000 (Addison, 2006).

Theoretical and empirical research underscores the positive impact of macroeconomic stability,
or conversely the adverse impact of macroeconomic volatility. While macroeconomic stability
encourages private investment needed for growth and economic diversification, volatility
induces less investment and reduces productivity. The volatility of macroeconomic aggregates
diminishes price stability, thereby creating uncertainty in the business and investment
environment. Lack of a sound macroeconomic framework is a constraint on development, as it
makes planning difficult and investment more risky. Empirical research shows that private
investment is depressed by extreme levels of risk and uncertainty (Bleaney and Greenway,
2001). In addition, shocks from revenue volatility negatively affect the delivery of public goods
and services, mainly because of the increased uncertainty and erosion of budgetary planning
and implementation. Revenue volatility also complicates monetary and exchange rate policy as
well (Addison, 2006).

The volatility situation can be traced directly to extreme fiscal dependence on oil exports
(exposure to international oil price shocks) coupled with inappropriate fiscal and public spending
policies. While Nigeria has suffered quite considerable external shocks over time, wrong policy
choices have aggravated the level and consequences of macroeconomic volatility. For many
years, pro-cyclical expenditure behaviour amplified Nigeria's macroeconomic volatility. State
and local governments as well as the federal government were actors in this volatility cycle.

Hence, fiscal reforms at all levels of government are imperative to insulate public finances from
external shocks, in order to maintain stable and investment-friendly macroeconomic framework.
In particular, a sound fiscal policy adds to macroeconomic stability by providing economic
agents with expectations of a predictable economic environment. Public expenditure smoothing

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Budget and Public Expenditure across Nigerian States

(for example, through fiscal rules) would stabilize expenditures, diminish macroeconomic
uncertainty and promote longer-term investment decisions and economic growth. Also, fiscal
policy can promote growth and employment via appropriate adjustments of the level and
composition of government taxes and expenditures. Reduced inefficiency and wastages in
public spending can release resources to finance productivity-enhancing physical and human
capital accumulation.

Against this backdrop, Nigeria has since 2004 been implementing budget and fiscal reforms
under the National Economic Empowerment and Development Strategy (NEEDS). The
Government of Nigeria has adopted fiscal strategy and public finance regimes underpinned by
the medium-term expenditure framework (MTEF), deficit ceilings, oil price-based fiscal rule, tax
reforms and public procurement (due process) and banking sector reforms. Government has
embarked on a number of non-oil tax reforms consistent with revenue smoothing. Some key
elements of the tax reforms include measures to broaden the tax base by simplifying the
personal income tax schedule, simplifying the taxation system for small businesses and
introducing taxpayer identification numbers. The reforms are aimed at establishing sound public
finance system that is efficient, sustainable, predictable and effective in generating public goods
and services.

It has also been recognised that strong financial systems can reduce the negative effects of
macroeconomic volatility. The strength of the financial system is often measured in terms of the
volume (share) of domestic credit to the private sector. Following key reforms of the financial
sector, progress has been made on some macroeconomic indicators. For example, the average
rate of consumer price inflation in 2003-2005 was 16% compared to 28% for 1993-2002. Equally
encouraging is that fact that volatility in inflation decreased to 2% for 2003-2005 from 25% for
1993-2002 (Addison, 2006).

Government is also seeking to reduce long-run revenue volatility through promotion of high non-
oil growth, domestic resource mobilization and economic diversification. State governments
could increase their capacity to identify tax jurisdictions, administer tax services, improve
revenue collection and correct distortions in the tax system. Nigeria collects no more than 2% of
GDP from income taxes while other low income countries collect an average of 6% of GDP

14
Budget and Public Expenditure across Nigerian States

(Addison, 2006). Diversification will help stabilize the volatility of the terms of trade and foster
productivity growth. For example, the country recorded real non-oil GDP growth at an average of
7% per annum from 2003-2005, compared to an average of 4% per annum from 1993-2002
(CBN, 2005). Furthermore, the apparent correlation between consolidated expenditures and
revenues has eased over the period 2003-2005 when the fiscal rule has been applied (Addison,
2006). Revenue smoothing will contribute to the sustainability and effectiveness of public
expenditures for critical public services. Overall, the use of an expenditure smoothing fiscal rule
and/or revenue smoothing is necessary for fiscal stabilization and lessened monetary volatility.

2.0 FISCAL FEDERALISM AND PUBLIC FINANCES AT THE STATE LEVEL

2.1 Principle underlying Fiscal Federalism

Fiscal federalism refers to the division of revenue-generating powers and expenditure

responsibilities across the levels of government (political authorities) in a country. In Nigeria,
fiscal federalism is operationalised through the assignment of tax-raising powers, revenue
sharing and developmental functions (expenditure responsibilities) among federal, state and
local governments. Theoretically, fiscal federalism is founded on the need for governments to
provide different kinds of public goods in a socially optimal and economically efficient manner.
Political expediency is also an important consideration underlying the practice of fiscal
federalism.

Fiscal federalism is hinged on several principles including, among others, diversity,

equivalence, centralized stabilization, correction of spillover effects and fiscal equalization
(Ekpo, 2004). Based on the principle of diversity, the fiscal system should provide for variety and
differences to supply national, regional and local public goods. On the other hand, the principle
of equivalence recognizes that the geographical incidence of different public goods and the
allocative efficiency criteria would necessitate the equalization of interjurisdictional locational
advantages, through taxes and public goods provision (Ekpo, 2004). But, it is cautioned that
decentralization may not always give the intended results. This is particularly so, where the
scarcity of public sector administrative, financial and managerial capacity is more acute at the
subnational level (Collier, 2006).

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Budget and Public Expenditure across Nigerian States

In a federal structure, every component part, to the extent allowed by the country's constitution,
is able to exercise autonomy in the conduct of its affairs, free from direction by a higher level of
government. But, depending on the country, the practice of federalism has peculiar political,
economic and developmental features which often reflect responses to unique political and
economic circumstances. In Nigeria, for example, the practice of fiscal federalism has been
significantly impacted by political developments including the creation of additional region in
1963, creation of additional states in 1967, 1976, 1987, 1991 and 1996. Equally significant is the
political distortion brought about by military rule in different periods since Nigeria's
independence in 1960.

2.2 Division of Development Functions (expenditure responsibilities) across

Levels of Government

Nigeria is a federation consisting of a federal government, 36 state governments plus the federal
capital territory (FCT) and 774 local governments. This federal structure is tantamount to eight
hundred and twelve (812) constitutionally created political authorities, and by implication, public
expenditure decision/management centres. These 812 political authorities are connected
through a web of revenue-generation, public spending, intergovernmental transfer and
administrative relations. Since the return to democratic rule in 1999, the fiscal federalism debate
has intensified as issues of resource rights, revenue entitlements and fiscal jurisdiction have
come under greater scrutiny.

Fiscal federalism largely determines Nigeria's political economy, particularly the competition for
fiscal space among the federal, state and local governments. Striking the balance between
expenditure responsibilities (development assignments) and revenue rights/powers across the
three levels of government is both contentious and complicated. The concerns about Nigeria's
fiscal federalism include “excessive” centralization of resources and powers, at the expense of
subnational levels of government. Others are vertical fiscal imbalances (i.e. mismatch of
revenue means and expenditure needs) and horizontal fiscal imbalances (i.e. inconsistency
between revenue-raising ability and revenue needs). Another problem is misallocation and
wastage of resources arising from overlapping and uncoordinated expenditure responsibilities
among different levels of government (Ukwu and others, 2005).

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Budget and Public Expenditure across Nigerian States

The assignment of responsibilities and functions to the tiers of government is stipulated by the
Nigerian Constitution, 1999. The Exclusive List contains the functions reserved for the Federal
Government only. On the Concurrent List, both the Federal and State governments could function,
however, when there is a conflict, the Federal Government shall prevail. The functions reserved
for the states are found in the Residual List which are functions not assigned to Local
Governments and neither contained in the Exclusive and Concurrent Lists. Table 1 presents a
summary of the assigned development (public goods provision) functions and by implication,
expenditure responsibilities, among the tiers of government in Nigeria

Table 1: Distribution of development responsibilities among federal, state and local governments

Level of Government Development functions (expenditure responsibilities)

Federal Only Defence
Foreign affairs
International trade including export marking
Currency, banking, borrowing, exchange control
Use of water resources
Shipping, federal trunk roads
Elections
Aviation, railways, postal service
Police and other security services
Regulation of labour, interstate commerce, telecommunications
immigration
Mines and minerals, nuclear energy, citizenship and naturalization rights
Social Security, insurance, national statistical system (Census births,
death, etc)
Guidelines and basis for minimum education
Business registration
Price control
Federal-State (Shared) Health, Social welfare
Education (post primary/technology)
Culture
Antiquities
Monuments, archives
Statistics, stamp duties
Commerce, industry
Electricity (generation, transmission, distribution)
Research surveys
State only Residual power, i.e. subject neither assigned to federal nor local
government level
Local government Economic planning and development
Health services
Land use
Control and regulation of advertisements, pets, small businesses
Markets, public conveniences
Social welfare, sewage and refuse disposal, registration of births, death,
Marriages
Primary, adult and vocational education
Development of agriculture and natural resources

Source: Nigerian Constitution 1999

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Budget and Public Expenditure across Nigerian States

2.3 Sharing of Revenue among the Tiers of Government

One of the key features of Nigeria's fiscal federalism is the distribution of revenues among the
federal, state and local governments. The significant sequential developments in revenue
allocation formula since the return to democratic governance in 1999 can be outlined as follows
(Jimoh, 2003 and Ekpo, 2004).

³ In 1999, the democratic government inherited the revenue allocation formula that has
been in existence since 1992. The formula gives 48.5% to federal government, 24% to
state governments and 20% to local governments and 7.5% to special funds (which was
distributed as follows: FCT 1%, Ecology 2%, Stabilisation 1.5%, and Natural Resources
3%).

³ Following the return to democratic goverment in 1999, the Revenue Mobilisation,

Allocation and Fiscal Commission (RMAFC) recommended the following formula to the
National Assembly: federal government 41.3%, state governments 31%, local
governments 16% and special funds 11.7% (to be shared as follows FCT 1.2%, Ecology
1%, Natural Resources 1%, Agriculture and Solid Mineral Development 1.5%, Basic
Education 7%).

³ Amidst debate on the RMAFC-recommended formula, there was the Supreme Court
Verdict in April 2002 on the Resources Control Suit which nullified provision of Special
Funds in any given Revenue Allocation Formula.

³ In May 2002, the Federal Government invoked an Executive Order to redistribute the
revenue as follows federal government 56%, states 24% and local governments 20%.

³ Following criticisms, the Federal Government in July 2002, reviewed the Executive Order
as follows federal government 54.68%, states 24.72% and local governments 20.60%.

³ In March 2004, the Federal Government issued a modification which increased states'
share to 26.72% and reduced federal government's share to 52.68%. This formula
remains in force, until the National Assembly legislates on a new revenue allocation
formula.

Table 2 shows the trend in revenue allocation to the tiers of government.

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Budget and Public Expenditure across Nigerian States

Table 2: Vertical allocation of Nigerian government revenues

Period % share going to

Federal State Local Special
Government Government Government Funds
*1981 55 35 10
1989 50 30 15 5
1993 48.5 24 20 7.5
1994 48.5 24 20 7.5
1992-1999 48.5 24 20 7.5
May 2002 56 24 20 -
March 2004 till date **52.68 26.72 20.60 -
Current Bill under consideration 53.69 31.10 15.21 -
at the National Assembly

*Revenue Act of 1981.

** Sequel to Supreme Court verdict in April 2002 on the Resource Control suit, the provision of Special Funds
was nullified in any given Revenue Allocation Formula.

Compared to periods before return to democratic governance in 1999, state and local
governments now control increased share of the federation revenue. During periods of military
rule, revenue sharing was heavily distorted because of non-adherence to the constitutional
imperatives of fiscal federalism. But, currently, state and local governments account for about
50% of consolidated public sector spending (NPC, 2004); and subnational governments have
become increasingly significant in the overall national fiscal profile.

Data on government finances provided by CBN (2006) show that out of the N1621.0 billion
distributed to the three tiers of government in the first half of 2006, the federal government
received N772.6 billion (or 47.66%), state governments N538.0 billion (33.20%) and local
governments N310.4 billion (or 19.14%). Central Bank of Nigeria Statutory revenue allocation to
state governments from the Federation and VAT Pool Accounts in the first half of 2006 was higher
by 10.6% compared to total receipts during the corresponding period of 2005 (CBN, 2006).

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Budget and Public Expenditure across Nigerian States

Increased states' share in consolidated public spending allows greater financial resources for
state governments to promote social and economic development towards the MDGs and
facilitate the growth and development of private enterprise. On the other hand, increased fiscal
profile of the states underscores the challenge of fiscal decentralization and subnational fiscal
autonomy for effective macroeconomic stabilization and coherent public finance management.
The growing fiscal importance of Nigerian states implies that macroeconomic stability cannot be
maintained without fiscal discipline in the states (Kwakwa, 2006). Fiscal choices and public
expenditure efficiency at the state level have become critical for Nigeria's march to development
targets under the MDGs . Since the Nigerian Constitution grants states full fiscal autonomy, it is
difficult to control the intertemporal distribution of states and local governments' expenditure
using monetary and fiscal policies. However, there are prospects of greater intergovernmental
fiscal coordination through the application of the proposed Fiscal Responsibility Law. Such
coordination is imperative for achieving national fiscal policy goals, macroeconomic stability and
the MDGs.

3.0 SPENDING BEHAVIOUR OF STATES

3.1 Overall States' Finances 2001-2005

An overview of states' revenues and expenditures (2001-2005) reveals important features about
the fiscal health and sustainability of state governments. These features are shown in Table 3.

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Budget and Public Expenditure across Nigerian States

Table 3: Summary of state governments' finances 2001 -2005

As % of totals
Average
Fiscal Indicator 2001 2002 2003 2004 2005 (2001-2005)
Federation Account revenue as
% of total revenue 78.29 65.83 70.30 78.41 71.03 72.77
IGR as % of total revenue 10.36 13.38 13.89 12.05 8.65 11.66
Other revenue as % of total
revenue 11.35 20.79 15.81 9.55 20.32 15.57
Recurrent Expenditure as % of
total expenditure 55.61 59.94 62.73 57.42 60.52 59.24
Capital Expenditure as % of total
expenditure 44.39 40.06 37.27 42.58 39.48 40.76
Overall Deficit as % of total
revenue 4.08 8.17 7.74 1.00 4.15 5.03

Source: Derived from data contained in Central Bank of Nigeria Annual Report and Statement of Accounts for the
Year Ended 31st December 2005.

On the average, the thirty six state governments together obtained about 73% of their annual
revenues from the Federation Account, from 2001-2005. Average annual internally generated
revenue was only about 12% of total revenue during 2001-2005. As shown in Table 3 also,
average annual recurrent expenditure was about 59% of total expenditure. All the state
governments put together recorded an average annual deficit of about 5% during the period
2001-2005.

An overview of the finances of local governments (pooled) also reveals instructive features with
implications for development functions of subnational levels of government. Table 4 gives the
summary of local government finances, from 2001-2005.

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Budget and Public Expenditure across Nigerian States

Table 4: Summary of local governments' finances (2001-2005)

As % of totals
Average
Fiscal Indicator 2001 2002 2003 2004 2005 (2001-2005)
Federation account revenue as % of
Gross revenue 86.64 85.75 89.43 90.04 91.10 88.59
IGR as % of Gross revenue 3.51 6.05 5.45 4.78 4.00 4.76
Others as % of Gross revenue 9.85 8.19 5.12 5.18 4.91 6.65
Recurrent expenditure share of total
expenditure 71.61 73.43 58.50 64.13 66.31 66.79
Capital expenditure share of total
expenditure 28.39 26.57 41.50 35.87 33.69 33.21
Overall deficit share of gross revenue 0.09 1.35 2.27 1.55 0.45 1.14

Source: Derived from data contained in Central Bank of Nigeria Annual Report and Statement of Accounts for the
Year Ended 31st December 2005.

Local governments are relatively more heavily dependent on federation account revenues.
Internally generated revenue was only about 5% of average annual revenues from 2001-2005.
Local governments put together devoted about two-thirds of average annual expenditure to
recurrent items, leaving only about one-third for capital spending. Further knowledge is needed
about the extent to which the predominant recurrent expenditure at the local level translates to
better delivery of basic services including education, primary health, sanitation and others.

3.2 Spending Behaviour of Nigerian States

3.2.1 Overall State Governments' Expenditures on Sectors

It is important to have an overall picture of states’ public spending on the different sectors.
Based on the functional classification adopted by the Central Bank of Nigeria, three broad
sectors are identified. They are administration, economic services and social services.
Administration includes general administration, state legislature and judiciary. Economic
services comprise agriculture, livestock, forestry, industry, commerce, finance, transport,
cooperative/supply and rural electrification. Social services include education, health, water
supply, information and culture, social and community development, housing, town and country
planning (CBN, 2005).

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Budget and Public Expenditure across Nigerian States

Table 5 shows the pooled spending behaviour of Nigerian states, from 2001-2005.

Table 5: Classification of state governments' pooled recurrent and capital expenditure into broad sector
categories (2001- 2005)

As % of Totals
Average
Type of Expenditure Sector Category 2001 2002 2003 2004 2005 (2001-2005)
Administration 20.79 24.26 21.31 30.69 30.69 25.55
Economic
Services 18.71 14.29 11.73 14.46 14.46 14.73
Recurrent Expenditure Social Services 55.01 38.28 39.94 37.50 37.50 41.65
Administration 13.70 12.19 11.28 18.18 18.18 14.70
Economic
Services 35.68 33.99 37.71 44.32 44.32 39.21
Capital Expenditure Social Services 33.38 36.63 34.39 34.27 34.27 34.59

Source: Derived from data contained in Central Bank of Nigeria Annual Report and Statement of Accounts for the
Year Ended 31st December 2005.

It is important to observe that, from 2001-2005, average annual share of social services in
recurrent and capital expenditures of the thirty six states (pooled) were about 42% and 35%
respectively. Economic services got the highest single average annual share of capital spending
by all the states, followed by social services in the same period. The bulk of expenditure on
government administration was on recurrent items, incuding personnel, goods and services,
overheads, etc, thereby indicating the nature and extent of fiscal burden posed by the size of
government. Overall, the sectoral structure of public capital spending of the states from 2001-
2005 appeared aligned to progress towards the MDGs. However, further research is needed to
assess the extent to which states' public spending pattern has translated into concrete results
and outcomes.

Deeper analysis of the content of states' public spending on economic and social services
provides greater insights on the priorities of the states. The results of the computations regarding
detailed recurrent expenditure are given in Table 6.

23
Budget and Public Expenditure across Nigerian States

Table 6: Classification of pooled state governments' recurrent expenditure into sector subgroups

As % of total
Average
Sector Subgroups 2001 2002 2003 2004 2005 (2001-2005)
Agriculture, livestock and
forestry 4.54 3.40 3.53 3.34 3.34 3.63
Industry and commerce 5.12 0.70 0.74 0.67 0.67 1.58
Transport and rural
electrification 3.20 1.92 1.69 3.10 3.10 2.60
Finance 3.58 6.54 4.45 3.45 3.45 4.29
Education 6.80 13.12 15.36 14.17 14.17 12.72
Health 2.66 6.20 6.73 8.26 8.26 6.42
Water Supply 0.00 1.30 1.18 3.32 3.32 1.82
Housing 0.00 0.97 0.93 0.99 0.99 0.78
Town and country planning 0.00 0.66 0.91 0.59 0.59 0.55

Source: Derived from data contained in Central Bank of Nigeria Annual Report and Statement of Accounts for the
Year Ended 31st December 2005.

It is observed that education constitutes the largest single share of total recurrent expenditures
of all state governments from 2001-2005, followed by health and then finance. On the other
hand, the results of computations regarding detailed capital expenditure are given in Table 7.

Table 7: Classification of pooled state governments' capital expenditure into sector subgroups

As % of total
Average
Sector Subgroup 2001 2002 2003 2004 2005 (2001-2005)
Agriculture, livestock and
forestry 2.91 2.84 3.57 5.91 5.91 4.23
Industry and commerce 11.67 3.82 1.80 4.08 4.08 5.09
Transport and rural
electrification 18.52 21.98 19.61 23.17 23.17 21.29
Finance 0.45 0.80 3.59 0.82 0.82 1.29
Education 6.71 5.68 5.51 8.69 8.69 7.05
Health 3.13 3.09 4.79 5.13 5.13 4.25
Water Supply 0.00 4.53 4.16 3.95 3.95 3.32
Housing 0.00 3.58 2.67 4.98 4.98 3.24
Tow n and country planning 0.00 4.40 2.62 3.49 3.49 2.80

Source: Derived from data contained in Central Bank of Nigeria Annual Report and Statement of Accounts for the
Year Ended 31st December 2005.

24
Budget and Public Expenditure across Nigerian States

Table 7 shows that transport and rural electrification constitutes the largest single share of total
capital spending by all state governments, from 2001-2005, followed by education and industry
and commerce and then health. The expenditure pattern portrayed by the results is potentially
consistent with the development priorities and policy goals of SEEDS and NEEDS. Caution
should however be exercised in interpreting the results, since the amount of funds spent
represents mere budget inputs and not outcomes or impact. More detailed analysis will be
required to understand the social and economic impact of public spending at the federal, state
and local governments.

3.2.2 Comparative sector expenditure estimates across the states

For the purposes of comparing states on sector expenditure estimates, the sectors are
categorized into three functional areas, namely economic, social including environmental and
government administration. Economic sector includes agriculture, industries, infrastructure,
financial/community and cooperatives. Social (including environmental) sector comprises
education, health, information, social development and community development, as well as
water and sanitation, housing, urban and regional planning and rural development. Government
administration includes the three arms of government - executive, legislature and judiciary.

The distribution of public expenditure on social, economic and government administration

across states is given in Table 8 as follows.

25
Budget and Public Expenditure across Nigerian States

Table 8: Sector shares in public expenditure estimates across states, 2001-2005

States* % of average annual allocation to sectors

Economic Administration Social and Environment
ABIA 26.62 24.67 48.71
ADAMAWA 32.79 30.04 37.17
AKWA IBOM 32.04 32.04 35.92
ANAMBRA 43.82 0.00 56.18
BAUCHI 45.79 12.80 41.41
BENUE 44.24 10.86 44.89
BORNO 26.49 5.37 68.14
DELTA 29.32 30.62 40.06
EBONYI 72.17 12.80 15.03
EDO 30.14 30.14 39.72
EKITI 35.05 35.05 29.90
ENUGU 29.63 30.07 40.30
GOMBE 26.38 35.85 37.77
IMO 27.81 25.62 46.57
JIGAWA 31.86 34.03 34.11
KADUNA 33.05 29.53 37.42
KANO 28.66 34.50 36.85
KASTINA 32.13 19.33 48.54
KEBBI 34.86 30.03 35.11
KWARA 19.78 14.61 65.61
LAGOS 35.17 18.72 46.11
NASSARAWA 26.88 10.81 62.32
NIGER 36.53 18.83 44.65
OGUN 42.77 14.88 42.35
OSUN 24.55 26.39 49.07
OYO 25.28 20.18 54.54
RIVERS 42.57 31.91 25.52
SOKOTO 28.33 23.53 48.14
TARABA 21.89 18.93 59.17
YOBE 32.59 23.68 43.73

Source: Derived from state budgets 2001-2005

* These are the states for which data was available

26
Budget and Public Expenditure across Nigerian States

The allocations can be further illustrated by Figure 1, as follows.

Figure 1: Sector shares in public expenditure estimates across states, 2001-2005

YO BE
TARABA
S O KO TO
RIV ERS
O YO
O S UN
O GUN
NIGER
NAS S ARAW A
L AGO S
KW ARA
KEBBI
KAS TINA
KANO
KADUNA
S o c iaand
Social l/EnEnvironment
vir on m e nt
J IGAW A Ad m inis tr a tion
IM O Ec o nom ic
GO M BE
ENUGU
EKITI
EDO
EBO NYI
DELTA
BO RNO
BENUE
BAUCHI
ANAM BRA
AKW A IBO M
ADAM AW A
ABIA

0.0 0 10 .00 20 .00 30 .00 40 .00 50 .00 60 .00 70 .00 80 .00

27
Budget and Public Expenditure across Nigerian States

Table 9: High and low performing states in average annual sector allocation of public expenditure

State having Social and Economic Administration

Environmental
Highest expenditure Borno Ebonyi Gombe
share
Lowest expenditure Ebonyi Kwara Borno
share

Source: Derived from state budgets 2001-2005

3.2.3 Recurrent and capital expenditure estimates across the states

Recurrent expenditure share of total expenditures is an important indicator of what states are
spending on, which in turn, largely influences the developmental orientation and fiscal health of
the state. Recurrent expenditure covers personnel costs and overheads of government
ministries, departments and agencies (MDAs), legislature and judiciary. On the other hand,
capital expenditures are used to finance development-enhancing public goods and services,
through infrastructure and related projects and programmes in education, health, industry,
agriculture, water and power.

The relative shares of recurrent and capital expenditure estimates in total budget estimates
across the states are given in Figure 2.

28
 Figure 2: Average annual Capital and Recurrent Expenditure across- the states, 2001-2005 (%)
Yobe
Taraba
Sokoto
Rivers
Oyo
Osun
Ogun
Niger
Nassarawa
Lagos
Kwara
Kebbi
Kastina
Kano
Kaduna

29
Jigawa
Imo
Budget and Public Expenditure across Nigerian States

Gombe
Enugu
Ekiti
Edo
Ebonyi
Delta
Bornu
Benue
Bauchi
Anambra
Akwa Ibom
Adamawa
Abia
0 10 20 30 40 50 60 70 80
Average Annual Capital and Recurrent Expenditure (%)
Budget and Public Expenditure across Nigerian States

Figure 2 shows a predominance of recurrent over capital expenditure estimates across the
states during 2001-2005. It is observed that during 2001-2005, Rivers State had the highest
budget share of capital estimates (or lowest budget share of recurrent expenditure estimates).
On the other hand, Imo State had the lowest budget share of capital estimates (or highest budget
share of recurrent expenditure provisions). It is instructive to note that under NEEDS, the ratio of
recurrent to capital expenditure at the state level is targeted at 60:40 in 2007 (NPC, 2004).

3.2.4 Variation between Budgeted and Actual Expenditure

The budget is a tool of financial planning. If underlying assumptions, actual revenue and
expenditure significantly deviate from estimates, the budget loses its value as an economic
forecasting mechanism. The disparity between total budgeted spending and actual expenditure
(budget out-turn) is an indicator of whether the budget is an effective tool for fiscal discipline. If
the actual expenditure (budget out-turn) surpasses the budget, leading to budget deficit, it gives
the impression that the public financial management system is not bringing about effective fiscal
discipline or that the public finance system is unable to respond to changes in the economic and
fiscal environment. On the hand, where the expenditure is significantly lower than the revenue, it
can be interpreted that the budget was based on unrealistic assumptions and that it was never a
reliable basis of public financial management by the state government (NPC, 2005).

The SEEDS benchmarking exercise of 2005 found that in most states, budgets did not provide
reliable guide to actual spending. It was found that there existed huge disparities between
actual and budgeted expenditure, both at ministry level and in aggregate. The international
benchmark used was variations of 5% or less between budgeted and actual expenditure, that is,
budget performance of at least 95%. Evidence across the states indicate high incidence of
budget variations up to 20% and more. Some of the variations reflect unsound revenue
projections by the states, particularly concerning internally generated revenue (IGR). Few states
made convincing projections for internally-generated revenue in their 2005 budgets and less
than half made convincing projections for federal allocations (NPC, 2006). Also, the variations
between budget and actual spending reflect poor application of the budget as the barometer for
public spending.

Analysis of variations between budgeted amounts and actual expenditures in some states is
shown in Table 10.

30
 Table 10: Budget variations in selected states across Nigeria
Budget deviations across Nigerian States 2001-2004 (Nominal million naira)
2001* 2002** 2003 *2004 Average Budget deviation
Budget Actual Budget Deviation Budget Actual Budget Deviation Budget Actual Budget Deviation Budget Actual Budget Deviation Budget Deviation
States Amount % Amount % Amount % Amount % Budget Actual Amount %
Edo 10704.9 3768.12 -6936.8 -184 19305.4 12334.5 -6970.87 -56.52 19176.53 14848.35 -4328.2 -29.15 20142.92 15805.9 -4337.02 -27.44 17,332.43 11,689.22 -5643.2 -74.3

31
Cross River 15994 16,369.13 375.18 2.29 19288.5 12414 -6874.44 -55.38 24,927.53 13,014.49 -11913 -91.54 39,380.22 33,282.38 -6097.84 -18.32 24,897.54 18,770.01 -6127.5 -40.74
Gombe 0 0 23,782.30 15,668.03 -8114.27 -51.79 5,945.58 3,917.01 -2028.6 -61.79
Budget and Public Expenditure across Nigerian States

Katsina 16682.9 8,954.13 -7728.8 -86.3 19,430.74 9054.01 -10376.7 -114.6 19430.74 14188.56 -5242.2 -36.95 22762.22 10,022.12 -12740.1 -127.1 19,576.65 10,554.71 -9022 -91.25
Kebbi 10533.8 7,296.59 -3237.2 -44.4 8,928.95 3,624.93 -5304.02 -146.3 21,653.83 8,833.85 -12820 -145.12 37,924.92 14,738.26 -23186.7 -157.3 19,760.38 8,623.41 -11137 -123.28
Nassarawa 9824.28 7815.36 -2008.9 -25.7 11,088.30 10,515.97 -572.33 -5.44 16,457.79 13,048.54 -3409.3 -26.13 23,069.01 106,490.42 83421.41 78.34 15,109.85 34,467.57 21956.9 5.27
Ondo 1,004.06 1,140.06 1,332.24 483.69 -848.55 -175.43 0 333.06 656.95 -212.14 -175.430
*budget deviation is actual expenditure less estimated expenditure
Source: Computed from States budget documents and Governors' budget speech29
Budget and Public Expenditure across Nigerian States

As shown in Table 10, the average annual variation between budgeted and actual expenditures
from 2001-2004 was very high in Edo, Gombe, Katsina, Kebbi and Ondo; it was comparatively
low in Cross River and Nassarawa. Efforts to minimize disparity between total budgeted
expenditures and actual expenditures would increase the credibility and public confidence in
state governments' budgets as a veritable tool of economic management, resource allocation
and financial planning.

4.0 REVENUE PATTERNS ACROSS STATES

States obtain revenue from many sources, namely the Federation Account, internally generated
revenue (IGR) and loans and grants from internal or external institutions.

4.1 Sources of Revenue

Fiscal health of the state can be measured by the share of internally (locally) generated revenue
in total revenue or expenditure. It is synonymous with a well-known measure of fiscal autonomy
(UNDP, 1993) ratio of locally generated revenues to local expenditures (Jimoh, 2003).

4.1.1 Tax Types and Jurisdictions across the Tiers of Government

Locally generated revenues are determined first and foremost by tax jurisdictions assigned to
the three levels of government. In every society, tax jurisdictions define the source of power to
collect the tax (tax law) and who has the duty to collect the tax (tax administration/collection) and
who has the right to the tax revenue. In principle, revenue collection powers should be shared
between the different tiers of government in a manner that ensures that revenue collection
powers are closely aligned with expenditure functions (Tanzi, 1995). The balance of
centralization/decentralization of revenue jurisdictions is the key distinguishing feature of
federal states. On the one hand, centralized collection of revenues promotes efficiency in the
central government's performance of distribution, stabilization and the provision of national
public goods functions and hence promote substantial economies of scale in tax administration.
On the other hand, decentralized collection ensures efficiency in the provision of public goods,
promotes accountability and responsibility and enhances fiscal autonomy of lower tiers of
government (Tanzi, 1995).

Table 11 gives the picture of the tax space of the three tiers of government in Nigeria as follows.

32
Budget and Public Expenditure across Nigerian States

Table 11: Taxes collectible by the three tiers of government

Level of Taxes and Levies to be Collected
Government
Federal Government Companies income tax
Withholding tax on companies, residents of the Federal Capital Territory, Abuja and non-
resident individuals
Petroleum profits tax
Value added tax
Education tax
Capital gains tax on residents of the Federal Capital Territory, Abuja, bodies corporate and
non-residential individuals
Stamp duties on bodies corporate and residents of the Federal Capital Territory Abuja
Personal income tax in respect of:
(i) members of the Armed Forces of the Federal;
(ii) members of the Nigeria Police Force;
(iii) Residents of the Federal Capital Territory, Abuja; and
(iv) Staff of the Ministry of Foreign Affairs and Non-resident individuals
State Government Personal Income Tax in respect of:
(i) Pay-As-You-Earn (PAYE); and
(ii) Direct taxation (Self Assessment)
Withholding tax (individuals only)
Capital gains tax (individuals only)
Stamp duties on instruments executed by individuals
Pools betting and lotteries, gaming and casino taxes
Road taxes
Business premises registration fee in respect of
(a) urban areas as defined by each State, maximum of
(i) N10,000 for registration, and
(ii) N5,000 per annum for renewal of registration; and
(b) rural areas:
(i) N2,000 for registration, and
(ii) N1,000 per annum for renewal of registration
Development levy (individuals only) not more than N100 per annum on all taxable individuals
Naming of street registration fees in the State Capital
Right of Occupancy fees on lands owned by the State Government in urban areas of the
State
Market taxes and levies where State Finance is involved
Local Government Shops and kiosks rates
Tenement rates
On and Off Liquor Licence fees
Slaughter slab fees
Marriage, birth and death registration fees
Naming of street registration fee, excluding any street in the State Capital
Right of Occupancy fees on lands in rural areas, excluding those collected by the Federal
and State Governments
Market taxes and levies excluding any market where State finance is involved
Motor park levies
Domestic animal licence fees
Bicycle, truck, canoe, wheelbarrow and cart fees, other that a mechanically propelled truck
Cattle tax payable by cattle farmers only
Merriment and road closure levy
Radio and television licence fee (other than radio and television transmitter)
Vehicle radio licence fees (to be imposed by the Local Government of the State in which the
car is registered)
Wrong parking charges
Public convenience, sewage and refuse disposal fees
Customary burial ground permit fees
Religious places establishment permit fees
Signboard and advertisement permit fees

Source: Taxes and Levies (Approved List for Collection) Decree 1998 Decree No. 215.2

33
Budget and Public Expenditure across Nigerian States

4.2 Revenue Trends across the Tiers of Government

It is estimated that about 93.3% of the total Nigerian government revenues are provided by the
federal government. This implies that state and local government areas put together provide
less than 7% of Nigerian government revenues (Jimoh, 2003). This revenue structure is a direct
result of the nature of assigned revenue and tax jurisdictions across the tiers of government. It
has serious implications for the fiscal autonomy of state and local governments. However, state
and local governments have access to federally collected revenue, through the Federation
Account.

From 1960-1999, an average of about 70% of the federally collected revenues was allocated to
the Federal Government. Similarly, from 1980-1999, an average of about 61% of total Nigerian
Government revenues was allocated to the Federal Government (Jimoh, 2003). The Federal
Government retained revenue for the first half of 2006 was N772.6 billion; higher by 8.2% than
the level in corresponding period of 2005 (CBN, 2006).

However, since the return to democratic rule in 1999, states have had increased access to
national revenues. Statutory revenue allocation to state governments from the Federation and
VAT Pool Accounts in the first half of 2006 increased by 10.6% over the total receipts in the
corresponding period of 2005 (CBN, 2006). Annual growth of state governments' receipts from
the federation account increased from 3.91% from 2001-2002 to 45.2% from 2003-2004. In the
same vein, annual growth of state government's expenditures rose from 21.4% in 2001-2002 to
31.4% in 2004-2005 (CBN, 2005). On the other hand, from 2001-2005, revenues received by all
state governments increased by an average annual rate of 25.52%, compared to the average
annual rate of increase of 21.91% recorded by the federal government. During the same period
(2001-2005), state governments' expenditures increased by average annual rate of about 25%
compared to 16.12% recorded by the federal government (CBN, 2005).

Despite increased share of state governments' in federation account, the federal government
still dominates access to national revenues, on account of the prevailing revenue allocation
formula.

34
Budget and Public Expenditure across Nigerian States

4.3 Internally Generated Revenue (IGR) across States

Internally generated revenue share of total revenue is an indicator of fiscal strength of the state.
Results of the analysis of internally generated revenue are given in Table 12.
Table 12: Performance of states on revenue, recurrent expenditure and loans, 2001-2005

Revenue by source, 2001-2005

Average Annual (%) LOAN/IGR Weight*
IGR/Recurrent
State FAR IGR
Recurrent Expenditure Expenditure
Abia 66.67 9.59 56.61 0.17 0.8 5
Adamawa 84.02 6.34 51.42 0.12 0 5
Akwa Ibom 31.26 10.30 37.53 0.27 3.4 4
Anambra 58.45 14.81 56.37 0.26 0.7 3
Bauchi 48.42 8.48 38.35 0.22 1.5 4
Benue 43.17 9.84 38.47 0.26 2.9 3
Bornu 59.12 13.91 53.88 0.26 0.3 3
Delta 58.80 9.10 45.79 0.2 1.4 5
Ebonyi 66.14 2.38 45.18 0.05 1.8 5
Edo 42.38 10.56 53.76 0.2 1.4 5
EkitI 59.13 9.20 62.54 0.15 0 4
Enugu 71.88 17.52 50.78 0.35 0 5
Gombe 45.39 5.96 54.05 0.11 2.1 2
Imo 64.32% 8.08 65.00 0.12 1.8 3
Jigawa 51.01 27.39 53.11 0.52 0.7 3
Kaduna 44.70 12.52 43.22 0.29 2 5
Kano 50.75 18.90 43.67 0.43 0.3 5
Kastina 72.15 9.69 38.24 0.25 0 5
Kebbi 45.26 5.07 34.97 0.14 4.1 5
Kwara 57.74 15.44 56.40 0.27 1.2 5
Lagos 22.57 55.12 64.06 0.86 0 2
Nassarawa 57.75 7.86 46.98 0.17 0.7 5
Niger 81.94 6.76 46.97 0.14 0 4
Ogun 48.23 20.06 53.39 0.38 0.5 5
Osun 55.95 14.39 56.92 0.26 0.5 4
Oyo 54.47 18.92 54.48 0.35 0.6 5
Rivers 30.78 33.34 33.02 1.01 0 4
Sokoto 61.46 10.29 38.34 0.27 0.6 5
Taraba 45.33 2.09 51.90 0.04 5.9 2
Yobe 46.80 2.62 41.10 0.06 5.6 3

* Number of years for which data was available; Source: Computed from state budget estimates

35
Budget and Public Expenditure across Nigerian States

The results can be further illustrated by Figure 3, as follows.

Figure 3: Average annual IGR and FAR across the states, 2001-2005 (%)

Yobe
Taraba
Sokoto
Rivers
Oyo
Osun
Ogun
Niger
Nasarawa
Lagos
Kwara
Kebbi
Kastina
Kano
Kaduna IGR
Jigawa FAR
Imo
Gombe
Enugu
Ekiti
Edo
Ebonyi
Delta
Bornu
Benue
Bauchi
Anambra
Akwa Ibom
Adamawa
Abia
0 10 20 30 40 50 60 70 80 90
IGR and FAR (%)

As shown by Table 12 and Fig 3, the states which recorded IGR less than 5% of total revenue are
Yobe, Taraba and Ebonyi, whereas Lagos and Rivers States have the highest IGR shares of
about 55% and 33% respectively. It is therefore obvious that the states depend heavily on grants
from the federal government, thereby predisposing them to risks from the volatility of the
international oil market.

Another handy measure of the fiscal soundness of the states is the ratio of internally generated
revenue to recurrent expenditure. This indicator mirrors the carrying capacity of the state
finances as shown in Figure 4.

36
Budget and Public Expenditure across Nigerian States

Figure 4: IGR to recurrent expenditure ratio across the states, 2001-2005 (%)

Yobe
Taraba
Sokoto
Rivers
Oyo
Osun
Ogun
Niger
Nassarawa
Lagos
Kwara
Kebbi
Kastina
Kano
Kaduna
Jigawa
Imo
Gombe
Enugu
Ekiti
Edo
Ebonyi
Delta
Bornu
Benue
Bauchi
Anambra
Akwa Ibom
Adamawa
Abia

0 0.2 0.4 0.6 0.8 1 1.2

IGR/Recurrent Expenditure ratio (%)

As shown in Figure 4, states have very low carrying capacity in terms of relative strengths of IGR
and recurrent expenditure. For example, in many states, less than 0.2% of recurrent expenditure
is financed by IGR. Only Lagos and Rivers states financed more than 50% of recurrent
expenditure from IGR. The situation underscores the fiscal vulnerability of the states to shocks
from federally collected revenues.

Moreover, the fiscal burden of the states can be assessed based on the loan to IGR ratio. Many
states have high loan to IGR ratio, signifying poor loan carrying capacity of state fiscal position.
Figure 5 shows the comparative picture of states on loan to IGR ratio.

37
Budget and Public Expenditure across Nigerian States

Figure 5: Loan to IGR ratio across the states, 2001-2005 (%)

Loan-IGR ratio across the states, 2001-2005 (%)

Yobe
Taraba
Sokoto
Rivers
Oyo
Osun
Ogun
Niger
Nassarawa
Lagos
Kwara
Kebbi
Kastina
Kano
Kaduna
LOAN/IGR
Jigawa
Imo
Gombe
Enugu
Ekiti
Edo
Ebonyi
Delta
Bornu
Benue
Bauchi
Anambra
Akwa Ibom
Adamawa
Abia

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
Loan/IGR ratio (%)

It is observed from Figure 5 that states with the highest loan burden relative to IGR are Yobe,
Taraba, Kebbi, Jigawa and Akwa Ibom, while the states with zero loan burden relative to IGR
include Ekiti, Lagos, Adamawa, Katsina, Rivers and Niger.

5.0 BUDGET AND FISCAL MANAGEMENT ACROSS STATES

Underlying the performance of quantitative allocations of budget and public spending by the
states is the quality of budget and fiscal management. The same level of public spending can
produce different outcomes, depending on the efficiency and effectiveness of the spending
institutions. It is therefore crucial to question the budget process and its features including
transparency, openness, predictability, credibility, participation, public scrutiny, discipline,
accountability and coordination. The goal of a public financial management system is to support
the achievement of aggregate fiscal discipline, strategic allocation of funds, value for money and
probity in the use of public funds (NPC, 2005).

38
Budget and Public Expenditure across Nigerian States

5.1 Critical Budget and Pubic Spending Decisions

All governments face a wide range of competing demands on the limited resources available to
them. Therefore, governments at all levels should be able to devise the best spending options for
the maximization of social welfare. Sound analysis of spending options including public
expenditure reviews, benefits incidence analysis, poverty and social impact analysis (PSIA),
entails substantial information and data on programs and services. World Bank (2002) gives
three interrelated tasks in assessing public spending options. They include to:

³ determine the rationale for public interventions;

³ decide on an appropriate instrument or channel to offset market failures or improve

distributive outcomes; and

³ assess expenditure options.

Often, establishing the rationale for public intervention is misconstrued to mean that government
itself can best respond by providing a good or service. Lack of appropriate responses by the
government can lead to government failure, just as there is market failure. Sometimes, it may be
expedient to use a mix of public and private delivery mechanisms, or for regulation, public
financing of subsidies and user charges (World Bank 2002). Where there is established basis for
government to directly provide certain important goods and services, the consequent decision
problem would be the best way to provide them.

5.2 Recent Evidence on Budget and Fiscal Management in the States

Against the need to stimulate best practices in budget and fiscal management at the state level,
the SEEDS benchmarking exercise in 2005 assessed states on a number of critical
requirements for open and orderly public financial system (NPC, 2005). They include:

39
Budget and Public Expenditure across Nigerian States

Against this backdrop, BECANS will assess public spending on education, health and other
public goods. The assessment covers per capita expenditures on health, education and critical
utilities in the various states. The assessment will also elicit independent views about state's
performance in health, education, sanitation, water supply and other critical public utilities
provided by state governments.

Low overall performance of states in budget and fiscal management underscores the need for
capacity building. Capacity building and institutions strengthening are imperative to improve the
budget process for greater transparency, accountability and outcome-based resource planning.
The state legislatures require greater capacity to hold the executive arm of government more
accountable. Civil society organizations in the various states need to be strengthened, through
institutions building and evidence-based systems, to participate more proactively and effectively
in budget formulation, monitoring, feedback and evaluation.

State governments should be supported to adopt and internalize public finance reforms already
applied by the federal government. Such reforms include the adoption of fiscal strategy,
medium-term expenditure framework (MTEF), tax reforms and public procurement (Due
Process). Others are the measures on budget transparency and monitoring, public expenditure
management codes and fiscal responsibility reforms.

6.0 CONCLUSION AND IMPLICATIONS

Most states have unhealthy fiscal conditions. One principal source of the fiscal fragility and
vulnerability is the heavy reliance on Federation Account revenue, which in turn, is hinged upon
volatile oil revenues. Poor economic governance and inappropriate policy choices also
contribute to the volatility problem. For example, domestic resource mobilization (locally
generated revenue) is generally poor due to inadequate and inefficient tax administration,
coupled with acutely low private sector capacity in many states.

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Budget and Public Expenditure across Nigerian States

States' public spending is crucial to Nigeria's overall fiscal sustainability, the creation of
conducive business environment and progress on economic development indicators. States
have expenditure responsibilities for critical public goods and services which affect living
conditions and the environment for investment and business. The overall dominance of
recurrent expenditure over capital expenditure reflects an unhealthy fiscal position in the states
and a low orientation of the budget to promote sustained growth in employment and incomes.
However, the functional distribution of capital budget estimates is generally aligned to economic
and social services. While this trend appears favourable to Nigeria's achievement of the MDGs,
it is not clear how and to what extent public spending leads to concrete effective results in
human, social and economic development. Additional research is needed to find out whether
and how budgets and public spending have translated to public goods and services and the
extent to which they impact upon the investment climate in the states

There is a large scope for capacity strengthening of the budget, financial and procurement
systems of state governments. This requires building capacity of state budget
offices/departments, line ministries, state legislatures and civil society organizations. Also, it is
imperative to establish sustainable framework for fiscal coordination among the three levels of
government. States' budget and fiscal institutions need to be strengthened for the adoption of
best practices in budget and fiscal management.

Examining budget and public expenditure across states is a key agenda of BECANS. This is
because budget and public expenditure can make or mar the environment for business and
investments. In this light, BECANS has a critical role in promoting appropriate budget and public
finance practices and providing comparative evidence to inform stakeholder debates and
advocacy for sound public expenditure and financial accountability at the state level. Regular
performance measurement and dissemination of good budget and fiscal management practices
across states will enhance information sharing, mutual learning and pressurize states to healthy
competition for better budget and fiscal management.

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Budget and Public Expenditure across Nigerian States

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Budget and Public Expenditure across Nigerian States

BECANS Working Paper Series

BECANS Monograph: Assessing and Benchmarking Business Environment across

Nigerian States: The BECANS Framework

BECANS Working Paper 1: The Security Factor in Business Environment across Nigerian
States

BECANS Working Paper 2: Economic Competitiveness across Nigerian States: The

Challenge of Infrastructure and Utilities

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