Public Revenue and Revenue Allocation

A government can only spend what it can raise or borrow, so the first question of public finance is where the money comes from. In Nigeria the answer has two parts. One is the list of sources: oil, taxes, fees, fines, rents, the income of public undertakings, and, outside the narrow definition of revenue, borrowing, grants and the sale of assets.

The other is a harder question: once the money has been collected, how should it be shared between the Federal, State and Local Governments, and among the States themselves?

The sharing of the Federation Account has been a source of dispute from independence, because it involves deciding what is fair: should states that produce the oil receive more, or those with larger populations, or those that are poorer, or those that collect more of their own taxes?

This topic explains the difference between public receipts and public revenue; the sources of revenue, in particular oil and non-oil revenue and independent revenue; revenue allocation as an act of fiscal federalism and the six reasons why it has been so contentious; the commissions and committees that have proposed principles since 1946, and the body charged with the task now; the twelve principles of revenue allocation; and the vertical and horizontal patterns of allocation, with the statutory formula from 1980 to 2002 and worked figures.

The next topic is Public expenditure: growth, classification and principles.

This content has been tested in several diets:

• in May Diet, 2023, Question 7, candidates were asked to distinguish public receipts and public revenue, to state their sources, to distinguish oil and non-oil revenue, and to discuss five problems of revenue allocation (10 marks)
• in May Diet, 2024, Question 5, for five principles of allocation (7½ marks) and five factors that led to the controversies
• in November Diet, 2021, Question 5, for the patterns of revenue sharing in a federation (5 marks) and five principles (10 marks)
• in May Diet, 2022, Question 3, for the functions of the Revenue Mobilisation Allocation and Fiscal Commission (6 marks) and three sources of revenue payable to the Federation Account (6 marks)

Read the rationale, functions and methods of government intervention first.

Sources of public revenue

Government, like any other economic unit, needs funds to finance its activities, and public revenue is the income it generates from its activities and operations. The common and important sources include taxes, fees, fines, borrowings, disposal of assets, income from public undertakings, gifts, donations, licences, royalties, rents, rates, levies and the printing of currency.

Public receipts and public revenue

Following Dalton, a distinction is useful. Public receipts cover receipts from all sources. Public revenue is narrower and does not include borrowings, the printing of currency, grants, gifts and donations, the sale of public assets and reimbursements.

The 1999 Constitution (as amended) is silent on the distinction and refers only to revenue; the 1979 Constitution, however, made it clear that such other monies, including reimbursements, sales of assets and the printing of currency, should not form part of the funds in the distributable account to be shared among the three tiers of government.

Oil, non-oil and independent revenue

The annual budget usually specifies two broad sources of revenue for the Federal Government:

• Oil revenue: proceeds of crude oil sales, earnings of the national petroleum company, royalties, signature fees and similar receipts.
• Non-oil revenue: personal income tax, company income tax, excise duty, import and export taxes, value added tax, stamp duties, capital gains tax and so on.
• Independent revenue: fees, fines, levies, investment income, licences, rent, rates and similar sources.

Oil revenue has remained the principal source of government funding, because it generates most of the country’s foreign exchange. Other activities contribute to gross domestic product, but their contribution to revenue has been minimal because the revenue base has not been diversified.

The course solution puts the oil share of budgetary finance at over 40%, and the chapter on the economy gives a larger figure of over 65% of government revenue for an earlier period. Candidates should quote current budget documents when asked for the present share. Other means of financing government activities besides revenue are public private partnerships, borrowing or public debt, joint venture partnerships and grants, which later topics discuss.

Revenue allocation and its challenges

Revenue allocation is an act of fiscal federalism: the sharing of fiscal responsibilities (tax and expenditure functions) among the tiers of government in a federation. In Nigeria the debate on the appropriate mode of sharing is inconclusive, for these reasons.

Problems and factors behind the controversies

1. Over-dependence on oil revenue. Oil has undermined agriculture, industry, mining and human capital, and become the major source on which the country depends, producing a “leech syndrome” among the States, which depend on hand-outs from the Federation Account. This erodes the autonomy of the federating units, creating a master and servant relationship between the Federal Government and the units, and a formula that encourages States to rely on the federal allocation rather than raise their own revenue.
2. Conflicts over the sharing formula. Sharing has been marked from the start by agitation and rejection, because political rather than economic considerations decide it; several attempts at vertical and horizontal sharing have been made. But no formula has been accepted by all the tiers and units.
3. Agitation for resource control. The principle of derivation has been emphasised at some times and played down at others, a source of conflict between regions and States. Its decline has produced agitation for resource control, which in oil-producing areas has taken violent forms, including kidnapping and vandalism of pipelines.
4. Increasing fiscal units. The number of States rose from 3 to 4, 12, 19, 21, 30 and 36 within three and a half decades, without economic or political guidance, creating States that are not viable financially and that demand a greater share of the “national cake”; many blame their inactivity on a low allocation instead of mobilising more of their own resources.
5. Unstable constitutional framework. The absence of a permanent and generally accepted constitution invites instability: the United States last held a constitutional conference in 1787 and has made only 27 amendments, while Nigeria has held several conferences without general acceptance. States have little statutory power to raise and keep taxes, so the dispute is about how proceeds are shared and not who should raise them. The assignment of expenditure and tax is ambiguous.
6. Lack of will. There is no sincere desire among office holders to settle the problem, shown by the refusal to convene a conference of leaders of the groups and nationalities, and by the fading of will to implement where one has been held.

Commissions and the Revenue Mobilisation Allocation and Fiscal Commission

The National Revenue Mobilisation Allocation and Fiscal Commission, inaugurated on 6 September 1988 under Decree 49 of 1989, deals with revenue sharing among the tiers of government. Section 162(2) of the Constitution lists the principles it must use: derivation, population, land mass, terrain, internal revenue and equality of states.

Principles of revenue allocation

1. Derivation: originally applied to export taxes on agricultural produce; the State from which the bulk of a revenue comes receives an extra share over and above what others receive.
2. Even development: the Federation and each State should grow at an optimum, not necessarily equal, rate, spreading growth so as to reduce serious inequalities, perhaps by accepting lower overall growth.
3. Need: a State’s growth depends on the revenue it can generate and it needs funds to maintain existing facilities and build new capacity; where needs differ, funds may be transferred from one State to another.
4. National interest: used residually by the highest tier to transfer funds to lower tiers or units for various considerations, in the sphere of discretionary grants.
5. Independent revenue: each tier should be able to raise and keep some revenue; most State revenue comes from federally collected funds, and the main sources left to States are personal income taxes, capital gains tax and stamp duties.
6. Continuity of government services: each tier has a minimum responsibility and services should not fall below a standard; a State unable to function for lack of funds should be assisted with federally collected revenue.
7. Equality of States: States are created equal but endowed differently; revenue sharing among States should be on an equal basis.
8. Equality of access to development opportunities: corrects unequal endowments by giving preferential treatment to States that lag behind or fall below a norm.
9. Absorptive capacity: funds should go to those States best able to use them, on grounds of efficiency.
10. Population: because government is about people, States with larger populations should receive an extra share.
11. Tax effort: encourages States to exploit their tax capacity, since realising it widens their development possibilities.
12. Fiscal efficiency: States should minimise the cost of fiscal administration or obtain the maximum revenue from a given cost, which reflects the tax base and the administrative machinery as well as the ability to raise and collect taxes.

Patterns of revenue allocation

Revenue sharing in a federation has two strands. Vertical allocation is sharing among the tiers of government (Federal, State and Local) on a given pattern. Horizontal allocation is sharing among the component States and Local Governments on accepted principles.

The special funds in the 2002 pattern comprise the Federal Capital Territory (1.0), derivation (1.0), mineral producing areas (3.0), ecological problems (2.0) and statutory stabilisation (0.5), which sum to 7.5.

The 2002 pattern is the one the course gives for the last period; later changes, including the share for the derivation principle, which the Constitution fixes for oil-producing States at not less than 13% of the revenue derived, and the court decisions on direct payment to Local Governments, should be checked in current sources.

Worked example (₦bn). The distributable pool of the Federation Account is ₦1,000bn. Under the 2002 pattern: Federal Government 1,000 × 48.5% = 485; State Governments 1,000 × 24% = 240; Local Governments 1,000 × 20% = 200; special funds 1,000 × 7.5% = 75; and 485 + 240 + 200 + 75 = 1,000. Horizontal sharing: a pool of ₦90bn is shared among three States by 40% equality, 40% population and 20% derivation. State A has half of the population and derives 60% of the revenue. Its equality share is 90 × 40% ÷ 3 = 12; its population share is 90 × 40% × 50% = 18; its derivation share is 90 × 20% × 60% = 10.8; so State A receives 12 + 18 + 10.8 = ₦40.8bn.

The ideas in more depth

Why receipts and revenue are separated

Revenue is income that the government earns from its taxes and activities. A loan is money that must be repaid, and the sale of a building is the conversion of an asset.

If both counted as revenue, the government would appear to be richer when it borrowed or sold property, and the pool to be shared among the tiers would include money that does not belong to the permanent income of the nation.

Why derivation is so contentious

The principle of derivation rewards the place that produces the revenue, which is fair to oil-producing communities that bear the damage of production. But a federation also exists so that its richer parts help the poorer ones. Each principle favours a different set of States, and so any formula that gives weight to one is opposed by those who gain from another.

Why independent revenue matters

A tier that depends entirely on a share of money collected elsewhere has little reason to build its own tax system and little accountability to its own taxpayers. Independent revenue gives each tier some funds that it raises and answers for, which strengthens its autonomy and encourages efficiency.

Sources and references

• The 1999 Constitution (as amended), section 162; Dalton on public receipts; the reports of the commissions named above.

These points are stated as at 5 November 2026.

Worked examples

1. Calculate.
   2,000 × 48.5% = ₦970bn.

1. Add.
   1.0 + 1.0 + 3.0 + 2.0 + 0.5 = 7.5%.

1. Calculate.
   90 × 40% × 50% = ₦18bn.

How to answer in the exam

• For sources, classify: oil, non-oil and independent; separate receipts from revenue.
• For problems, give each as a heading with a sentence of cause and effect.
• For principles, name each and explain who gains from it.
• For patterns, distinguish vertical from horizontal and quote the formula.

Common mistakes in the exam

• Treating borrowing as public revenue.
• Confusing vertical and horizontal allocation.
• Listing principles without explaining them.
• Quoting the 1999 Constitution principles but not the full list of twelve when more are asked.
• Forgetting that the formula percentages total 100.
• Using the course’s old formula as if it were current without saying so.

Quick revision

• Receipts against revenue; oil, non-oil, independent.
• Six problems; twelve principles; six constitutional principles.
• Vertical and horizontal; 2002 formula 48.5, 24, 20, 7.5.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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