Study Session One: Nature and Scope of Public Financial

Administration

Introduction
In developing country context, public finance administration derives its
importance from its central role in the implementation of growth and
development policy. Its emphasis is increasingly justified by the demand
for efficient services delivery to address the dire needs of health,
education and basic infrastructure in developing aid flows to developing
countries, and the ever greater proportion of such aid transferred directly
to national treasuries, the need to adhere sound public finance
administration to assure acceptable and transparent levels of fiduciary
risk has become paramount. Public finance administration focuses upon
implementing strategic plans designed to achieve policy objectives using
a carefully prepared budget approved by a legal authority and assuring
its faithful implementation. The goal of economic development and the
lifting of a billion of us out of extreme poverty can only be achieved
through the harnessing of the full potential of sound public finance
administration, systems applied to appropriate policy.

Learning Outcome of Study Session 1:

At the end of this study session, you should be able to
1.1 Define public financial Administration
1.2 Discuss the scope of public finance Administration
1.3 Explain importance of public finance
1.4 Distinctions between private and public finances

1.1 Definition of Public Financial Administration

Public financial administration has been defined in various ways. It can
be defined as the administration of funds use to deliver public services,
depending on the level of government and the specific nation. Ola (2001)
defines Public financial administration as the measures put in place to
control the people’s money or funds. You will note that the word public
means the people while finance connotes funds or money. The
administration of the public funds is known as Public Financial
Administration.
Zhingan (2001) defined public finance as the studies of the income and
expenditure of central, state and local governments for the collective
satisfaction of wants and the principles which governs income and
expenditure.
Ekpung (2001) defined public financial administration as the
management of the flows of money or financial resources through an
organization (Public). Public financial management is a specialized
functional are found under the general classification of public
administration and finance.

1.2 Scope of Public Financial Administration

According to Abianga (2012) public financial administration is a vast field
of endeavours which encompassesthe whole processes of formulating
and implementing decisions made on government services, expenditures
taxes, public debt and other revenue for the federal, state or local
government public financial management is vital in the governance than
other matters; since money is the hub of the wheel of every government
action. Behind the formulation and execution of financial decisions like
many questions of public policy, and the question ranges from what
fiscal measures are to be put in place to ensure high standard of living,
satisfactory income distribution, resources allocation and public
accountability? More questions could be raised as to what changes are
required to make the tax system more equitable and efficient in order to
generate substantial funds to meet the needs of the people?
ITQ
Mention two areas covered by Public Finance Administration
Answer: The areas includes the following
(a) Public Debt
(b) Public Income and Expenditure

1.3 Importance’s of Public Financial Administration

Public financial administration is relevant in the following ways:
1. It helps to ensure accountability and efficiency in the management of
public resources.
2. To assist in the achievement of overall fiscal discipline that will ensure
that public spending is in line with available resources.
3. It helps to allocate resources to priority needs in order to shift
resources from less effective use to more effective ones.
4. It helps to ensure efficient and effective allocation of public services to
make sure that resources are used in such a way that they provide
maximum value for money.
5. It enhances the government ability to deliver macroeconomic stability
vital for sustainable growth. This is because decision makers need to
understand the impact that budgetary decisions have on macro-
economic variables such as growth, inflation money supply, debt and
the balance of payments. They also need to be able to monitor that
revenue and spending during the year are in line with budget
assumptions and adapt plans accordingly is they are not.
6. Reliable procurement processes: Ensuring that public funds,
including fund provided by development partners are used
appropriately, required sound and transparent procurement of goods
and services with public money, the information produced by public
 financial management system on revenue, expenditure and
procurement is also vital for public accountability.
7. Monitoring and Evaluation of public sector policies and projects:
Policy makers need to understand the cost of the policies they adopt
for planning and evaluation purposes. This is not possible without an
effective public financial management system. However, to fully
evaluate the effectiveness of policies and projects requires information
beyond the public financial management system.

ITQ
Mention two importance of Public Financial Administration

Answer: Importance of Public Financial Administration are;

(a) It helps to ensure accountability and efficiency in the management
of public resources
(b) To assist in the achievement of overall fiscal discipline that will
ensure that public spending is in line with available resources

1.4 Distinction Between Private And Public Finances:

By private finance we mean the financial problems and policies of an
individual economic unit (which does not form a part of state organs) as
compared with those of the public authorities. It is necessary to look into
similarities and dissimilarities between the two so as to provide an
analytical foundation for the decision-making aspect of public finances.

1.4.1 Similarities Between Private and Public Finances:

Modern economies are monetized. That is to say, most of their economic
activities have financial counterparts involving creation and use of
financial claims
a. Both private and public sectors are engaged in activities that involve
purchases, sales and other transactions
b. Both private and public sectors engages in production, exchange,
saving, capital accumulation, investment and both uses finances to
run these operations.
c. Both private and public sectors borrow, receive payment, make
payment with the use of funds
d. Both sectors are engaged in satisfying the want of the society by
sharing economic activities. In respect of the above therefore, both the
public and private finances are quite similar to each other
e. Both have limited resources at their disposal and try to make their
best by taking decisions such that the most important wants are
satisfied first.

1.4.2 Dissimilarities Between Private and Public Finances

In contrast to the similarities, the differences between the two are quite
sharp.
1. A private economic unit has to live within its limit or means. Its deficit
budgeting can be only for a limited period and only up to a limit. But
this constraint hardly applied to the state. It can plan to add to its
outstanding debt with every budget, and may also succeed in doing
so. The result is that the public debt in many countries has become a
high proportion of national income.
2. The destination between private and public borrowing does not end
with only amounts of possible borrowings, but extends to their forms,
rates of interest and other terms and conditions. A private firm cannot
raise non-repayable loans but the state may and sometimes does. The
state can borrow both internally and externally. But a private
economic unit (such as a firm) cannot raise an internal loan; all its
loans have to be external.
3. The government or a competent authority on its behalf can create
legal tender currency, that is, money which the creditors cannot
 refuse to accept in discharge of their claims upon their debtors. A
private economic unit cannot do so. Its obligation can never become
legal tender. A private economic unit is always expected to pay back
its obligations. In contrasts, obligations of public authorities via issue
of currency need not be redeemed at all.
4. It is claimed that private finance allows the market principles on the
principle of economic rationality; but the public finance allows the
budget principle. The essence of the budget principle is that the
services in this sphere are determined not by profit expectations and
the willingness of the individuals to spend their money for the
purchase of such services but by decisions reached through political
and administrative procedures and based on common social
objectives.
5. Quite often, in private finance, the view taken is a short term one. In
contrast, the state is expected to take a long term view of the interests
of the economy as a whole and be ready to differ commercial losses for
that purpose, both in the short run and in the long run.
6. It is generally pointed out that while a private economic unit proceeds
by first ascertaining its income and then determining its expenditure
the government first decided about its expenditure and then goes
round to seek revenue for it. But, it is an erroneous idea based upon
the outmoded thinking that the activities of the state would be
confined to the minimum possible and that the state would then find
out the best ways of financing them.

Summary of Study Session One

In this study session you have leant
• Various definitions public financial management
• The scope of public financial management
• Importance of public financial management
• Distinction between private and public finance

Self-Assessment Questions (SAQs) for Study Session 1

Now that you have come to the end of this session, you should test your
knowledge of all the issues discussed in this session. The following
questions will help you to determine this. You may write down the areas
you do not understand and discuss with your course facilitator in your
tutorial class.

Section A: Objective Questions

SAQ 1.1 (Tests Learning Outcome 1.1)
1. _________ defined public financial management as the management of
the flow of money or financial resources through an organization
(public)
(a) Ola and Offiong
(b) Ekpung
(c) Zhingan
(d) Abianga

SAQ 1.2 (Tests Learning Outcome 1.2)

2. Public financial management can be said to be the administration of
funds used to deliver public services, depending on the level of
government and the specific nation
(a) True
(b) False

SAQ 1.3 (Tests Learning Outcome 1.2)

3. Which of the following is not covered by the scope of public financial
management
 (a) Public Debt
(b) Government Expenditure
(c) Implementing decisions on government services
(d) Tenure of financial administrator
SAQ 1.4 (Tests Learning Outcome 1.3)
4. Government could plan to add to its outstanding debt with every
budget prepared in a fiscal year
(a) True
(b) False
(c) Indifference

SAQ 1.5 (Tests Learning Outcome 1.3)

5. Both private and public sectors have limited resources at their
disposal and try to make their best by taking decision such that the
most important wants are satisfied first
(a) True
(b) False

Essay
1. State six dissimilarities between private and public finances
2. Write short notes on the scope of public financial management
3. Highlight six importance of public financial management
References and Suggestion for Further Reading
Bhatia H.C (2008) Public Finance 26th Edition Vikas Publishing House
Put LTD
Ekpung E. (2001) The Essential of Public Finance and Public Financial
Management in Nigeria. University of Calabar: CalabarPress
Ola O.F and Offiong O.J (2008) Public Financial Management in Nigeria,
Lapos Am SITOP Books.

Study Session Two: Public Sector Accounting

Introduction
Public sector accounting is an accounting method applied to non-profit
pursuing entitles in the public sector including federal, state and local
governments and quasi-governmental corporations for which the size of
profits does not provide an effective measurement for evaluating
performance. Public sector accounting has traditionally been different
from business sector accounting (i.e. commercial accounting), because
public sector management traditionally has been different from business
sector management while there is a profitability focus in the latter sector,
the focus of the former sector has been on democratic (political) control
of public money.

Learning Outcomes of Study Session 2

At the end of this study session, you should be able to:
2.1 Define public sector accounting
2.2 Explain purposes of government accounting
2.3 Explain basis of government accounting
2.4 Highlight users of government accounting information
2.5 list and explain concepts of government accounting

2.1 Definition of Public Sector Accounting

Public sector accounting could be defined as a process of recording,
communicating, summarizing, analyzing and interpreting government
financial statement in aggregate and in details, reflecting all levels of
transactions involving the receipt, custody and disbursement of
government funds.
Analysis of the above definition depict that it could be likened to the
universally accepted definition of financial accounting it therefore follows
that government accounting is essentially financial accounting. After all,
accounting is accounting whether in government or a private, public
limited liability companies. The essential fact is to record all historical
cost and income which when process further became useful information
necessary for further decision making.

2.2 Purpose of Government Accounting

The following are the main purpose of government accounting
a. To ascertain the propriety of transactions and their conformity with
established rules. This means that the historical accounting
information should depict the extent of compliance with the various
rules and regulations applicable to the organization, be it government
or organized private sector. It also showed whether the transactions
are proper in relation to the object clause of the organization as any
business outside the object is regarded as ultra-vires
b. To give evidence of financial accountability: Here we need to actually
ascertain how transparent the government/management are in
relation to financial probity. That is, the government has a liability to
reveal, justify and explain what they did with the funds entrusted to
 them. Have they utilized the money in the best interest of the general
public or they have utilized it in the best interest of their pockets
c. To serve as a basis for planning: It is crystal clear that the futures are
loaded with series of uncertainty. Without adequate planning, a
business organization, which can be likened to various ministries and
department may not be able to forge ahead effectively and efficiently,
planning is therefore of utmost importance to every business
organization in order to reduce the uncertainty associated with the
future
d. To serve as a basis for controlling: If various financial activities are not
adequately controlled it could lead to problem in the future, as the
main object of our plans may not be realized. When there are
adequate measures, deviation from expected outcome will be reduced.
e. To serve as a basis for decision making. As all levels of governmental
activities, decision making is very crucial. Failure to take adequate
and informed financial decision at the right time could lead to fraud
and incalculable.
f. The serve as basis for appraisal of the performance of government:
The importance of appraisal cannot be over-emphasised through
appraisal, lapses will be discovered which could warrant urgent
attention of the government
g. To ascertain the economy and efficiency with which the government
carried out its functions and or pursued its objectives
h. To ascertain any major difficulties and problems being encountered
during government operations

ITQ
Mention three purposes of Government Accounting

Answer: The purposes of Government Accounting are;

(a) To serve as basis for appraisal of the performance of government
(b) To serve as a basis for decision making
(c) To serve as basis for planning

2.3 Basis of Government Accounting

There are three basis under which the financial statement of government
could be compiled. They are:
1. The cash basis
2. The accrual basis
3. The commitment basis

2.3.1 The Cash Basis

This basis is very simple to understand, it is the basis of accounting
under which revenue are recorded only when cash is received, and
expenditure recorded only when cash is paid, irrespective of the fact that
the transaction leading to the receipt or payment of cash now may have
occurred in previous accounting period. This is the basis upon which
government financial statement in Nigeria is been prepared. One of the
reasons for the government to choose this basis is its simplicity. For
instance laymen find accounting to be a difficult subject but in
government many laymen such as headmasters and police
superintendents are called upon to perform some accounting duties or at
least to supervise booking work. Such people need a simple method
which can be learnt quickly and perform with confidence.

2.3.1.1 Advantages of Cash Basis

The advantages of this basis can therefore be summarized as follows:
a. It is simple to understand
b. It eliminates debtors and creditors
c. It permits easy identification of those who authorized payment and
receive revenue
d. It is factual
e. It allows for comparism between amount provided in the budget and
those actually spent
f. It saves time
g. It permits delegation of work in certain circumstance
h. It is easy to operate
i. It enables the officers to perform with confidence
j. The cost of fixed assets is written off in the year of purchases, which
result in fewer entries

2.3.1.2 Disadvantages of Cash Basis

It takes unrealistic view of financial transactions.

There are five stages through which a spending transaction passes
i. Government decision to spend money
ii. Issue of order or contract for the supply of goods and services
iii. Supply of goods or services acknowledgement of liability
iv. Settlement of liability
v. Consumption of value

Note:
1. The cash basis of accounting only records stage (10) while the accrual
basis records stages (iii), (iv) and (v) and commitment basis records
stages (ii) to (v)
2. It makes no allowances for depreciation because assets are written off
in the year of purchase
3. It does not reveal an accurate picture of the state of financial affairs at
the end of the period or year
4. It cannot be used for economic or investment decisions as some basis
information are lost
5. It does not obey the matching concept

2.3.2 Accrual Basis

Under this basis revenue are recorded when earned and expenditure are
recorded as the result in liabilities is known or when benefits are
received notwithstanding the fact that the receipt or payment of cash
could take place wholly or partly in another accounting period.
This is the basis commonly sound in private sector and all government
parastatals. The reason for this is that they are profit oriented and it is
therefore necessary to estimate how much profit has been earned in each
period.

2.3.3 Commitment Basis of Government Accounting

Under this basis, financial transaction is records right from the
Boardroom where government takes decision to spend money. Once such
decision is taken money will be set aside, and such fund cannot be
expended for any other purpose.
This is a basis that records an anticipated expenditure evidenced by a
contract or a purchase order as determined by the administration, in
government finance, budgetary and accounting system is closely related
to this basis.

2.4 Users of Government Accounting Information

The users of government accounting information has been grouped into
two categories

2.4.1 Internal Users

The group comprises of:
a. The executive, such as the president, of the country, the governors of
the states and chairmen of the Local Government
b. The advisers to the executive; such as the federal ministers and state
commissioners
c. Top administrators of government department e.g Director Generals,
Executive Directors etc.
d. Sub-ordinates who are delegated with control task eg chair chairman
of DEFRI
e. The civil service union

2.4.2 External Users

This group comprises of:
a. The National Assembly
b. The General Public
c. Government other than the reporting government
d. Foreign friendly and unfriendly countries
e. Foreign financial institutions such as IMF World Bank, ADB etc
f. Foreign and local creditors
g. Researchers and representatives of the media
h. Sectional groups within the population e.g. political parties, trade
unions, pressure groups etc.
i. Foreign Investors

ITQ
Mention the three basis of Government Accounting

Answer: The three basis of government accounting are;

(a) Cash basis
(b) Accrual basis and
(c) Commitment basis
2.5 Concepts of Government Accounting
Concepts have been defined as broad basic assumptions underlying the
preparation of financial statement of an enterprise. Government
accounting is an integral but separate branch of financial accounting,
sharing in common many concepts and principles applicable to the
private sector.
These concepts include:
a. Consistency Concept: Usually there is more than one way in which
an item may be treated in the accounts without violating accounting
principles. The concept of consistency holds that when an
organization selects a method, it should continue (unless conditions
warrant a change) to use that method in subsequent periods so that a
comparison of accounting figures over time is meaningful. The concept
ensures that the accounting treatment of like items is consistent
taking one accounting period with another.
b. Materiality Concept: The principle holds that only items of material
valves are accorded their strict accounting treatment
An items will be considered materials if its omission or mis-statement
could distort the financial statement such that it influences the
economic decision of users taken on the basis of the financial
statement.
c. Periodicity Concept: Although the results of an organization cannot
be determined until its final liquidation, the business community and
users of financial statement require that the business be divided into
accounting periods (usually one year) and that changes in position be
measured over these periods.
d. Historical Cost Concept: The historical cost concept holds that cost
is the appropriate basis for initial accounting recognition of all assets
 acquisition, services rendered/received, expenses uncured, creditors
and owners interest, and it also holds that subsequent to acquisition,
cost values are retained throughout the accounting process.
e. Objectivity Concept: This principle cannot independences of
judgement on the part of the accountant preparing the financial
statements. Objectivity requires support by veritable evidence in
contrast to subjectivity or dependence on the unverifiable opinion of
the accountant preparing the financial statements.
f. Fairness Concept: This is an extension of the objectivity principles. In
view of the fact that there are many users of accounting information,
all having differing needs, the fairness principle requires that
accounting reports should be prepared not to favour any group or
segment of society.

Summary of Study Session 2

In this study session we have examined the concept of public sector
accounting and you have learnt
❖ The definition of public sector accounting
❖ Purposes of government accounting
❖ Basis of government accounting
❖ Users of government accounting information
❖ Also concept peculiar to government accounting

Self-Assessment Questions (SAQs) for Study Session 2

Now that you have come to the end of this session, you should test your
knowledge of all the issues discussed in this session. The following
questions will help you to determine this. You may write down the areas
you do not understand and discuss with your course facilitator in your
tutorial class.

Objective Questions
SAQ 2.1 (Tests Learning Outcome 2.1)
1. _________ concept emphasis that like items should be recorded in like
manner
(a) Periodicity
(b) Consistence
(c) Materiality
(d) Fairness

SAQ 2.2 (Tests Learning Outcome 2 .1)

2. Accounting entries should not be prepared to favour a segment of the
society is a concept advocated by fairness
(a) True
(b) False
(c) Indifference

SAQ 2.3 (Tests Learning Outcome 2 .2)

3. Which of the following is not an external use of government
accounting information
(a) The General Public
(b) National Assembly
(c) Foreign Investors
(d) Executive Arm of Government

SAQ 2.4 (Tests Learning Outcome 2 .2)

4. All of the following are the basis of government accounting except (a)
Cash
 (b) Accrual
(c) Monetary
(d) Commitment

SAQ 2.5 (Tests Learning Outcome 2 .3)

5. Public sector accounting differs from private sector because the earlier
is
(a) For profit making activities
(b) For non-profit making activities
(c) For big organization
(d) For Auditors

Essay
1. List and explain five concept of public sector accounting
2. Highlight five advantages and disadvantages of cash basis of public
sector accounting
3. Explain purposes of government accounting
References and Suggestion for Further Reading
Adams R.A. (2002) Public Sector Accounting and Finance 3rd ed.
Corporate Publishers Ventures Yaba, Lagos State.
Robert O.I. (2004) Financial Accounting made Simple 1st ed. ROI
Publishers, Isolo, Lagos State.

Study Session Three: Fiscal Policy

Introduction
Fiscal policy consists of steps and measures which the government take,
on the revenue and expenditure sides of its budget. The field of fiscal
policy is not very clearly demarcated from those of monetary policy and
debt management because they all deal with overlapping aspects of the
economy. It is quite often maintained that fiscal policy should mean that
policy which concerns itself with aggregate effect of government
expenditure and taxation on income, production and employment.

Learning Outcomes of Study Session 3

When you have studied this session, you should be able to:
3.1 Give various definitions of fiscal policy
3.2 State and explain objectives of fiscal policy
3.3 List and explain instruments of fiscal policy
3.4 Explain fiscal policy lags
3.5 List and explain limitations of fiscal policy

3.1 Definitions of Fiscal Policy

Fiscal policy is one of the tools of government intervention. It could also
be referred to as the regulation of the level of government spending
taxation and public debt. According to Daniel (1973) fiscal policy is the
deliberate action by the government to use its spending or tax rates to
influence gross national product (GNA). Daniel sees the expenditure side
of budget as a “gas pedal” and the revenue side as a “brake” that
government can use to speed up or slow down the economy.
Fiscal policy is designed to influence government taxation, spending and
debt management of an economy. It must be designed to maintain or
achieve the goals of income redistribution, full employment, a reasonable
degree of price level stability, soundness of foreign accounts and an
acceptable rate of economic growth.

3.2 Objectives Of Fiscal Policy

The objective of fiscal policy varies from time to time and may be used to
accomplish the following macro-economic goals among others.
i. Full Employment
ii. Price Stability
iii. Economic growth and Development
iv. Balance of Payment Equilibrium
v. A state exchange rate
vi. Re-distribution of income
1. Full Employment: This is one of the goals of macro-economic policy.
The context of employment must not be limited to the employment of
human resources. It should be extended to cover the employment of
human and non-human resources in the economy. Government at
one point or the other usually aims at the smallest percentage of
unemployment which the nation can reasonably cope with.
The reason being that it is not possible in any economy to achieve zero
unemployment since some amount of frictional, voluntary seasonal
unemployment are inevitable at all times. To achieve full employment,
the fiscalist advocate increase in effective demand via the employment
of fiscal policy.
2. Price Stability: Fiscal policy can be used to stabilize prices in the
economy, so as to avoid fluctuations of prices in the economy. When
the prices of goods and services are not stable, it may lead to inflation
or deflation
During inflation, a contractionary fiscal policy (increasing tax rates
and reducing government expenditure) may be adopted. While to
overcome deflation, an expansionary fiscal policy (reducing tax rates
and expanding government expenditure) is appropriate. This objective
of avoiding inflation and deflation is desirable since rising and falling
prices are both bad and hinders future business plan.
3. Economic Growth and Development: As a macro-economic policy,
fiscal policy can be used to achieve high and sustainable economic
growth. Sustainable or steady growth rate is desirable in order to
achieve high of standard of living. Fiscal policy should be such that
encourage investments and maintain price stability in order to
promote growth and development.
4. Balance of Payment Equilibrium: Fiscal policy is used to avoid and
or to correct balance of payments defects in the nation’s external trade
relations. Balance of payment equilibrium occurs when desired
spontaneous or autonomous trade and capital flows into and out of
the country are equal over a number of years.
5. State Exchange Rate: Fiscal policy is used to achieve stability in the
exchange rate of an economy. This is meant to help avoid wide
fluctuations in the currency exchange rates the value of the country’s
exchange rate is protected from depreciating in relation to other
foreign currency rate.
6. Re-distribution of Income: This can be used to bring about equity in
income distribution and this can be done through progressive taxes so
as to bridge the gap between the rich and the poor
What are the instruments that government could use to achieve the
above objectives?
This will lead us to the next sub-topic

3.3 Instruments of Fiscal Policy

There are four components of fiscal policy which government tries to
manipulate to achieve the desired macro-economic goals. These are:
1. Taxation
2. Government Expenditure
3. Public Debt
4. Subsidy
• Taxation: Taxation is a fiscal policy instrument which can be used to
influence aggregate demand and consumption of people towards
desired direction. During depression or deflation tax rates should be
reduced so as to boost demand and supply of goods and services. On
the other hand, when inflation prevails, tax rates should be increased.
The reduction in the disposable income forces the aggregate demand
downwards. Hence, prices of goods and services will fall and hence
reduction in inflation.
• Government Expenditure: Government expenditure can be used to
control inflation unemployment, depression, balance of payment
disequilibrium among others. In the period of depression and
unemployment, government expenditure causes aggregate demand to
rise and production and supply of goods and services coupled with a
rise in the aggregate demand excrete a downward pressure on
employment and depression.
In the case of inflation and the depreciation in the value of the
currency, it is expenditure must be adopted. A reduction in
government expenditure discourages aggregate demand inflation and
a full in the valve of exchange rates are controlled.
• Public Debt: In recent times, public debt management and servicing
have become an important aspect of fiscal policy. This is so because
borrowing has become a short-term source of revenue for various
levels of government. Debt could be reproductive or dead weight,
depending on the purpose for which the money borrowed was
channelled into.
• Subsidy: At times, the government may decide to pay part of the cost
of producing an item either to stimulate its supply or to reduce the
price paid by the final consumers.
 This is known as subsidy

ITQ
Mention three objectives of Fiscal Policy

Answer: Three objectives of Fiscal Policy are;

(a) To achieve full Employment
(b) To attain Balance of Payment Equilibrium
(c) To achieve Price Stability

3.3 Fiscal Policy Lags

Fiscal policy lags can be defined as the period when action is needed and
when the need is recognized. This type of lag is otherwise known as
inside lag. However, the other type of lag known as outside lag arises as
the time that elapsed between when an action is taken and when the
impact of the policy is felt in the economy.
This fiscal policy lags follows two patterns. These are:

3.3.1 Expansionary Fiscal Policy

An expansionary fiscal policy is required during deflation or depression
in the economy. This is affected by reduction in tax rate and expansion
in government expenditure. This policy measure induces aggregate
demand and recession is overcome. The mechanism for reducing
inflation or recession is shown below:

Fig 3.1 SRASC

Price

Pi
E1
Po Eo

AD1
ADo
In figure 3.1 above, the recessionary gap may be closed by shifting the
aggregate demand from Ado to AD1. This can be achieved by increasing
government spending and tax rates. Given the short-run aggregate from
YotoY1, which is a good indicator of increase in investments, outputs and
employment level. On the other hand, if the deflationary pressure
prevails, a contractionary fiscal policy is adopted as explained below,

3.3.2 Contractionary Fiscal Policy

A contractionary fiscal policy exists when there is a reduction in
government expenditure and when the tax rate is increased. The
consequence of this measure is a reduction in the aggregate demand. An
increase in tax rate and reduction in government expenditure will lead to
a fall in the purchasing power of the people which eventually reduces
aggregate demand in the economy. The mechanism of the contractionary
fiscal policy is shown below:
Fig 3.2 SRASC
Price

Pi

Eo
Po Ei

ADi ADo

O Income
Yi Yo
In the figure above Yo-Y1 is the inflationary gap. The inflationary gap may
be overcome by reducing the purchasing power of the customers. This
can be achieved by shifting aggregate demand upwards as in the figure
above. At the initial stage, aggregate demand was above the full
employment equilibrium at ADo, a contractionary fiscal policy forced
aggregate demand to fall to ADi. This brought about new equilibrium at
E1.

3.4 Limitations of Fiscal Policy

The following are some of the limitation of fiscal policy
a. Conflicting objectives and wrong choice of objective in most of the
less-developed countries, there has always been the problem of wrong
choice of objectives if and when they conflict. For example the control
of inflation and the pursuance of full employment at the same time.
b. Political Instability: Policy cannot work in a country where the
government is not stable because of the inconsistencies that will be
associated with economic priorities of different administrations.
c. Tax Evasion and Avoidance: In most of the developing countries,
people try to avoid paying tax to the government. This makes fiscal
policy difficult to implement
d. Nature of the Economy: Less developed countries are characterized
with underdeveloped financial market and inadequate information of
tax purposes. These will make fiscal policy difficult to be effective.
e. Budget Indiscipline: Poor planning and execution of budget cum
reckless spending on the part of government render fiscal policy
ineffective

Summary of Study Session Three

In this study session, you have learnt:
a. Various definitions of fiscal policy
b. Objectives of fiscal policy
c. Instruments of fiscal policy
d. Fiscal Policy Lags
e. Limitations of fiscal policy such as; political instability, tax evasion
and avoidance nature of the economy, budget indiscipline and
conflicting objectives and wrong choice of objectives.
Self Assessment Questions (SAQs)
Now that you have completed this study session, you can assess how
well you have achieved its learning outcomes by answering the following
questions

Objective Questions
SAQ 3.1 (Tests Learning Outcome 3.1)
1. ________ policy consist of steps and measures which the government
takes, both on the revenue and expenditure sides of its budget
a. Monetary
b. Physical
c. Fiscal
d. Revenue
SAQ 3.2 (Tests Learning Outcome 3.1)
2. All of the following are objectives of fiscal policy except
a. Full Employment
b. Price Instability
c. Balance of Payment Equilibrium
d. Re-distribution of Income

SAQ 3.3 (Tests Learning Outcome 3.2)

3. Fiscal Policy is used to avoid and or to correct balance of payment
deficits in the nation’s external trade relations
a. True
b. False
c. Indifference

SAQ 3.4 (Tests Learning Outcome 3.2)

4. ________ is a fiscal policy instrument which can be used to influence
aggregate demand and consumption of people towards desired
direction
a. Subsidy
b. Public Influence
c. Government Expenditure
d. Taxation

SAQ 3.5 (Tests Learning Outcome 3.2)

5. Which of the following fiscal policy laps is required during deflation or
depression in the economy
a. Expansionary
b. Contractionary
c. Taxation
d. Policy Implementation
Essay
1. Give two definitions of fiscal policy
2. State and explain five objectives of fiscal policy
3. List and explain three instrument of fiscal policy

References/Suggestions for further reading

Ayodele A.O (2006) Monetary and Fiscal Policy: College Press and
Publishers Ltd. Ibadan.
Salawu R.O (2005) Essentials of Public finance: ObefemiAwolowo
University, Press Ltd, Ile-Ife, Nigeria.

Study Session Four: Monetary Policy

Introduction
The government helps in economic development by adopting monetary policies. By adopting
appropriate monetary policies, the state is able to remove social, institutional and economic
bottle necks in underdeveloped countries. Monetary policy plays an important role in
accelerating development by influencing the cost and availability of credit, by controlling
inflation and by maintaining balance of payments equilibrium. The state does all this through the
central bank of the country. The central bank of Nigeria and the federal ministry of finance
controls credits, expands banking facilities by creating financial institutions, floats government
loans and manages the public debt and adopts interest rate in order to encourage saving and
investment.

Learning Outcomes of Study Session Four

When you have studied this session, you should be able to:
4.1 Define Monetary Policy
4.2 Mention and explain objectives of monetary policy
4.3 List and explain instruments of monetary policy
4.4 Explain limitations to monetary policy

4.1 Definitions of Monetary Policy

Monetary policy can be viewed as measures that are designed to regulate and control the volume,
cost and direction of money and credit in the economy to achieve some specified macro-
economic policy objectives, which can change from time to time depending on the economic
fortune of a particular country.
Johnson (2002) defines monetary policy as the policy employed by the central bank to control
the money supply as an instrument for achieving the objectives of economic policy.
4.2 Objectives of Monetary Policy
The aims of monetary policy are basically:
a. Full Employment
b. Economic Growth
c. Balance of Payment Equilibrium
d. Re-distribution of Income

A. Maintenance of Price Stability: This entails a situation where the general price level of
goods and services change very little or not changed at all. An economy that is able to
achieve this is said to be experiencing little or no inflations
B. Full Employment: This is another key macro-economic objective which monetary authority
try to pursue. It should be noted that full employment does not mean that every single person
is employed in an economy. A country for instances, may regard an unemployment rate of 3
percent as depicting a full employment situation. Another country may accept an
unemployment rate of say, 6 percent as reflecting a full employment situation.
C. Economic Growth: Monetary authorities also pursue economic growth as a national
objective. Economic growth refers to the rate of increases in the production of goods and
services. Thus, a country is said to have experienced economic growth when the real output
of goods and services is increasing at a faster rate than the rate of growth of its population.
D. Balance of Payment Equilibrium (BOP): A country may also pursue equilibrium in its
external payment situation as a definite objective. The balance of payment is a record of a
 country’s transactions with the rest of the world over a period of time which is usually a year.
These transactions usually include visible items (such as cocoa, groundnut), invisible items
(banking, insurance services etc) and capital flows.
If the sum of the transactions recorded as minus items (out payments) exceeds the sum of the
transactions recorded as plus items (in payment or receipts) in the BOP, a balance of payment
deficit is said to occur.
E. Exchange Rate Stability: This entails avoiding wide fluctuations in the currency of a nation
viz-a-viz other nations. Monetary policy may be employed to protect and promote foreign
trade. Monetary policy can also be used by the policy makers to influences the value of
currency in terms of other foreign currencies so as to bring stability in the exchange rate.

4.3 Instruments of Monetary Policy

The techniques employed by monetary authorities in executing monetary policy is known as
monetary policy instruments. These instruments are chosen in accordance with their relevance to
policy objectives.
There are two techniques monetary authorized uses to achieve macro-economic objectives
i. Quantitative Instruments
ii. Quantitative Instruments

4.3.1 Quantitative Instruments

They are indirect or market-based control instruments of monetary policy mainly because they
want to be channelled toward the real sector of the economy through money market. They affect
the economy generally without regards to the various units in it. These instruments include
a. Open Market Operation (OMO): This involves the process of buying and selling of
government securities by the monetary authorities to deposit money banks and the general
public in order to influence the volume of liquidating and levels of interest rates, which
ultimately will affect the supply of money
This instrument has not been fully utilized in Nigeria because of the following reasons
Narrowness and underdeveloped nature of financial markets
The paucity in the supply of necessary securities in the economy
b. The Discount Rate: Is the rate of interest the central Bank charges the deposit money banks
on loans extended to them. Other rates of interest move closely with it. If monetary
 authorities intend to increase production, they will reduce the discount rate and borrowing
becomes generally attractive and an increase in the discount rate implies a decrease in the
central bank’s credit to deposit money banks.
Interest rate is a price of capital to the borrower and a return on capital to the saver or lender.
As an instrument of monetary policy it can be used to discourage capital flight as well as to
avoid mis-allocation of resources.
c. Cash or Legal Reserve Ratio: It is usually defined as a percentage of customer’s deposit
that must be held in the form of cash and or non interest earning balances with the central
bank. It is usually fixed by law, tradition or custom. The cash ratio is reduced when money
supply is to be increased, hence more credit can be extended to customers. On the other hand,
if it wants to reduce the money supply, it increases the ratio.
d. Stabilization Securities or Special Deposit: This technique may be employed if the
prevailing economic conditions do not favour the use of other instruments. In this approach,
the central bank may require financial institutions to make special deposits or buy special
securities from it. The main goal of the exercise is to reduce the excess liquidity position of
the deposit money banks
e. Liquidity Ratio: It is a reserve held in form of cash in the bank vault inorder to meet
depositors demand. When the central bank wants to reduce bank lending (or money supply),
it increases this ratio. But if the central bank wants to increase bank lending, it will reduce
this ratio.

4.3.2 Quantitative Instruments

These are instruments that place restrictions on a particular group of institutions (especially
deposit banks) by limiting their freedom to acquire assets and liabilities. They could also be seen
as instruments that minimize the general effects of monetary policy and are often used as an anti-
inflationary technique in preventing the flow of resources to those sectors of the economy that
are regarded as being sensitive to inflationary pressures.
These techniques include the following:
a. It is used to influence the lending policies of commercial banks. It is a gentle appeal to
commercial banks to the kind of lending policy to pursue
b. Loan Ceiling: This refers to the administrative order preventing banks from going beyond a
particular credit expansion limit within a certain period of time
c. Interest Credit Ceiling: It is a form of maintaining a minimum or maximum interest rate
chargeable on loans or payable on deposits by banks, as a means of inducing an increase in
productive capacity.
d. Selective Credit Control: This is where monetary authorities gives directives to banks in
terms of the proportion of aggregate credit that should go to a specific sector of the economy.
This will make commercial banks give loan to more preferred sectors of the economy.
ITQ: As good as monetary policy could be, what are its limitation?

4.5 Limitations of Monetary Policy

The limitations of monetary policy include:
i. Inadequate Information: It is difficult for monetary authorities to have the right
information on economic indicators even with the freedom of information act.
ii. Conflicting Objectives: A policy designedto reduce inflation in an economy while
achieving this objective may create more unemployment within the economy
iii. Political Instability: Change of government (leadership) may result change of policy,
political instability may aid budget indiscipline and this may reduce the effectiveness of
monetary policy.
iv. Time Lag: There is always a long time lag between the time needed for action is realized
and the time the action is taken such that a bad situation might have grown worse
v. Nature of the Economy: It will be difficult for monetary policy to work in a highly
monoculture economy. Nigeria is characterized with rural sector, therefore, it is unlikely
for monetary policy to work in such a sector.
vi. Unrealistic Foreign Exchange Rate: Unrealistic exchange rate problem has often
discouraged foreign investment in Nigeria economy and even discourages domestic
savings.

Summary of Study Session four

In this study session, you have learnt:
• Definitions of Monetary
• Objectives of Monetary Policy
• Instruments of Monetary policy
• Limitations of Monetary Policy

Self-Assessment Question (SAQs) for Study Session Four

Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering these questions.

Objective Questions
SAQ 4.1 (Tests Learning Outcome 4.1)
1. Which of the following objectives of monetary policy entails a situation where the general
price level of goods and services change very little or not changed at all
a. Full Employment
b. Exchange Rate Stability
c. Economic Growth
d. Maintenance of Price Stability

SAQ 4.2 (Tests Learning Outcome 4.1)

2. _________ refers to the rate of increases in the production of goods and services
a. Economic Growth
b. Full Employment
c. Re-distribution of Income
d. Maintenance of Price Stability

SAQ 4.3 (Tests Learning Outcome 4.2)

3. All the following are quantitative instruments of monetary policy except
a. Discount Rate
b. Cash Ratio
c. Loan Ceiling
d. Open Market Operation

SAQ 4.4 (Tests Learning Outcome 4.2)

4. ________ is the percentage of customer’s deposit that must be held in the form of cash and
or non interest earning balances with the central bank
a. Discount Rate
b. Liquidity Ratio
c. Special Deposits
d. Legal Reserve Ratio

SAQ 4.5 (Tests Learning Outcome 4.3)

5. The following are limitations of monetary policy except:
a. Political Instability
b. Non-conflicting Objectives
c. Time Lag
d. Inadequate Information

Essay
1. Give two definitions of monetary policy
2. Mention and explain three quantitative instrument of money policy
3. Highlight four objectives of monetary policy
References/Suggestions for Further Reading
Ayodele A.O (2006) Monetary and Fiscal Policy College Press Ltd, Jericho, Ibadan.
SalawuR.O. (2005) Essential of Public Finance ObafemiAwolowo University Press Ltd, Ile-Ife.

Study Session Five: Sources of Government Revenue

Introduction
Public sector activities whether at the local, state or federal level is based on two important roles.
That is, revenue collection and finance of expenditures. Government needs funds to finance its
activities just like any other economic unit. Such funds are raised from various sources.

Learning Outcomes of Study Session Five

At the end of this study session, you should be able to:
5.1 Explain meaning of government revenue
5.2 Distinguish between public receipts and public revenues
5.3 Explain sources of government revenue in Nigeria
5.4 Discuss problems of revenue generations
5.5 Explain revenue allocation in Nigeria

5.1 Meaning of Government Revenue

Government revenue can be defined as public receipts which the government collects from all
sources except loans and borrowing.
Section 162 (10) of the 1999 constitution as amended of the federal republic of Nigeria defines
revenue as any income or return accruing to or derived by the government from any source and
includes:
▪ Any receipt however described arising from the operation of any law
▪ Any receipt however described from or in respect of any properly held by the government
▪ Any returns by way of interest or loans and dividends inrespect of shares or interest held by
the government in any company or statutory body.
In other words public revenue could be said as the money or resources generated by the
government to finance its activities.
5.2 Distinction Between Public Receipts and Public Revenue
Public receipts include receipts from all sources while public revenue is a narrower concept and
exclude public borrowings and income from the sale of public assets.
According to Musgrave (1959) public receipts may take the form of taxes, charges or borrowing.
Public receipts embrace all sources of funds or income to the government, while public revenue
does not include borrowing or sales of government asset.
Section 149 of 1979 of the constitution of federal republic of Nigeria refers to only revenue,
while section 74 (i) refers to other monies. It clarifies that payment of loans, disposal of assets
and reimbursement cannot be recognized as revenue as they do not form part of federation
account.
ITQ
Distinguish between public receipts and public revenue
Answer: Public receipts include receipts from all sources while public revenue excludes
borrowing and income from the sales of public assets.

5.3 Sources of Government Revenue by Federal Government Of Nigeria

Before the discovery of crude oil in Nigeria, agriculture was the major source of Nigeria revenue
and before the oil boom of early 1970’s, government revenue comprises of various sources of
income of the government.
The main sources of revenue to the government can be divided into two:
1. Oil Revenue
2. Non-Oil Revenue

5.3.1 Oil Revenues Sources Are:

a. Petroleum Profit Tax: This is the tax paid for the meaning or obtaining and transportation of
petroleum in Nigeria by or on behalf of a company excluding refinery. This tax has become
an important source of government revenue since 1970s.
 b. NNPC earnings from direct sales of crude oil
c. Penalty from Gas Flared: This is the amount realized by oil firms that flared gas in
contravention with the Nigeria statutory provision on gas flaring
d. Proceeds from Domestic Market: This could be seen as the revenue generated by NNPC from
the sales of petroleum products to oil firms in the country.
e. Royalties: This is the revenue generated from the use of land for exploration and exploitation
of the mineral resources under oil prospecting license or oil mining lease.

5.3.2 Non-Oil Revenue Sources Are:

a. Taxes: This is a compulsory levy imposed on all taxable persons and corporate bodies. These
include direct and indirect taxes
i. Direct Taxes: These are taxes imposed directly on income of industrial and profit of
corporate bodies examples are:
❖ Pay as You Earn (PAYE): This is tax imposed on individual under federal government
employment. That is those not self-employed.
❖ Company Income Tax (CIT): This is tax imposed on the profit of a company and not its
income.
❖ Capital Gain Tax (CGT): This tax is imposed on individual based on the profit realized
from the sales of land and/or other property
❖ Value Added Tax (VAT): This is tax imposed on sales of goods or services on both
incorporated and unincorporated business
ii. Indirect Taxes: These taxes are imposed on consumable and other goods. Example of
indirect taxes include; custom and excise duty, sales taxes, expenditure taxes, stamp duties
❖ Excise Duties: These are taxes imposed on locally made goods such as Tobacco, alcohol,
etc. these duties are discriminatory in nature and are usually imposed by ad valorem basis
i.e on the value of goods.
❖ Import Duties: This tax is imposed on imported commodity. Import duty is very
important or useful for development strategies as it is used to protect infant industries
against external business competition. Thus, import duty can be used as a means of
generating revenue especially in developing countries.
 ❖ Sales Taxes: These are taxes imposed on goods whose demand are inelastic and are basic
necessities of life.
It is a reliable way of collecting revenue in that it has a wide coverage. It is anti-
inflationary devices in that it reduces the disposable income of the people.
Sales tax can also be imposed at multiple stages and this distinguishes it from purchasing
tax, which is imposed on only one stage. Sales tax can be imposed at production stage,
wholesale stage or retail stage. Normally, sales tax is imposed at the production level, if
the goods are locally produced. If it is from other country or countries, it is imposed at
the point of entry when sales tax is of multiple stages, it has a tendency to encourage
integration for example cartel, monopoly etc.
❖ Stamp Duties: These are taxes imposed on and raised from stamps charged on
instruments, parchments and other legal documents.
❖ Expenditure Tax: By this, we mean a tax on personal income less saving. That is the tax
is levied in essentially the same way as an income tax, but on the basis of spending rather
than income. This tax is imposed to curtail expenditures on luxurious goods. It should be
noted that expenditure tax is not applicable in Nigeria.
ITQ
Mention and explain two examples of direct taxes
Answer: Two examples of direct taxes are:
a. Company Income Tax (CIT): This is tax imposed on the profit of a company
b. Capital Gain Tax: This is tax imposed on individual based on the profit realized from the
sales of land and or other property

5.3.3 Source of State Revenue

The following are the sources of revenue to the state government
a. Taxes: These include PAYE, entertainment tax, capital transfer tax, capital transfer tax,
cattle/ship and goat tax etc.
b. Fins and Fees: These are revenue collected by various ministries such as pools agent,
application fees, contractor registration fees, and submission fees on certificate of occupying
etc.
c. Licenses: These include special marriage licenses, licensing of churches for marriage,
renewal from the federation account
d. Grants and Gifts: These may come from within or outside the state e.g. rich countries.
e. Loans: This may be internal or external loan.

5.4 Problems of Revenue Generation

There are many problems militating against the revenue generation in Nigeria. These problems
are:
a. Lack of Competent and Honest Manpower: Most of the revenue collectors are not faithful
and competent in service. Competence, character and technical knowledge are sacrificed at
the altar of tribalism and political ambition
b. Inadequate Mobility and Infrastructural Facilities: There are no good roads that lead to
the various sources of revenue. Apart from that, good and serviceable vehicles at times are
not available for use. All these reduce the revenue generating capacity of the government
c. Tax Evasion and Tax Avoidance: The self-employed people commonly practice tax
evasion, while tax avoidance is practiced by the educated elites.
d. Political Interference: Political instability will discourage loan, foreign aids and grants from
rich countries and international financial institutions.
e. High Rate of Illiteracy and Low Standard of Living: Many illiterate people see tax
payment as a form of victimization. Low income and economic depression, which have
crippled many financially, would no doubt affect government revenue generation.
f. Problem of Byelaws and Lack of Clear Jurisdiction with respect to tax imposition and
collection
g. Lack of Enlightenment Programmes: The generality of the people in the rural areas are not
well informed as to why they should pay tax or other fees.
ITQ
Mention three problems of revenue generation in Nigeria.
Answer: Three problems of revenue generation are:
i. High rate of illiteracy and low standard of living which impede the culture of revenue
payment
ii. Political Instability which has adverse effect on foreign grants and aids
 iii. Inadequate mobility and infrastructural facilities which reduce revenue generation
capacity of the government

5.5 Revenue Allocation in Nigeria

Revenue allocation relates to the division of resources among the various tiers of government or
sharing of the proceeds of the federation account among the various levels of government.
According to Adesola (1989), revenue allocation is the constitutional arrangement subsisting for
revenue sharing among the tiers of government.

5.5.1 Constitutional Provision for revenue Allocation

Section 162 (1), (2), (3) (5), (6), (7) and (8) of 1999 constitutional of federal republic of Nigeria
deals with the sharing of revenue between the tiers of Government. For instances, section 162 (2)
states as follows.
“The president, upon the receipt of advice from the revenue mobilization allocation and fiscal
commission, shall table before the National Assembly Proposals for revenue allocation from the
federation account, and in determining the formula, the national Assembly shall take into
account, the allocation principles especially those of population, equality of state, internal
revenue generation, land mass, terrain as well as population density;
Provided that the principle of derivation shall be constantly reflected in any approved formula as
being not less than thirteen percent of the revenue accruing to the federation account directly
from any natural resources?
Also as provided by section 162 (3) of 1999 constitution of federal republic of Nigeria is to the
effect that:
“Any amount standing to the credit of the federation account shall be distributed among the
federal and state government and local government councils in each state on such terms and in
such manner as may be prescribed by the National Assembly”.

Furthermore, sub-section of the same section provides that:

“Each state shall maintain a special account to be called “State joint Local Government Account”
into which shall be paid all allocations to the local Government councils of the state from the
federation account and from the government of the states”.
The constitution provides in part III section 313 for system of revenue allocation in the absence
of statutory provisions as follows:
“Pending on an act of the National Assembly for the provision of a system of revenue allocation
between the federation and the states, among the states, between the states and Local government
Councils in the states, the system of Revenue allocation in existence for the financial year
beginning from 1st January, 1998 and ending on 31st December, 1998 shall, subject to the
provisions of this constitution and as from the date when this section comes into force continue
to apply.

Provided that where functions have been transferred under this constitution from the Government
of the federation to the states and from the states to Local Government Councils, the
appropriation in respect of such function shall be transferred to the states and the local
Government Councils, as the case may require.
The second schedule, Part II, section I states
“Subject to the provisions of this constitution, the National Assembly may by an Act make
provision for;
a. The division of public revenue
b. Between the federation and the states
c. Among the states of the federation
d. Between the states and the Local Government Councils
e. Among the Local Government Councils in the states.
Furthermore, item in the third schedule, section 31 and 32 deals with the revenue mobilization,
Allocation and fiscal commission. Section 32 (b) provides as follows’
“The commission shall have power to review from time to time, the revenue allocation formula
and principles in operation to ensure conformity with changing realities.
Provided that any revenue formula which has been accepted by an Act of the National Assembly
shall remain in force for a period of not less than five years from the date of commencement of
the Act!!.

5.5.2.1 The National Revenue Mobilization Allocation and Fiscal Commission 1989.
This commission was established in 1989 as a permanent revenue allocation body and it was
headed by Lt. Gen. T.Y. Danjuma (Rtd). The commission recommended that revenue should be
shared on the following basis. Federal – 48.5%, State- 24%, Local- 20% and Special Fund-7.5%,
The 7.5% of the special fund should be applied as follows. Ecology problem – 3.0% Emergency
Problem- 2.5% and mineral producing areas – 2%.
However, Gen. Ibrahim Babangida announced a new form of revenue allocation approved by the
Armed Forces Ruling Council (AFRC) as follows: Federal-50%, State- 30%, Local – 15%, and
Special Fund- 5%.
The revenue allocation formula proposed by the National Revenue Mobilization Allocation and
fiscal commission (RMAFC) undergone a lot of criticism but continued to be in use until April
2002, when the mineral (oil) producing states went to the supreme court for a proper revenue
allocation formula to increase the 3% being allocated to them.
The RMAFC in its post supreme court resource control ruling in April 2002 recommended a new
revenue allocation formula of federal government-47.5% State Government 32.7% and Local
Government 20%.

A seven-man Ad-hoc committee was set up by RMAFC in April 2002 because of the
dissatisfaction of the populace with the post supreme court resources control ruling formula. That
formula had allocated 43.3% to the federal government, 31% to the states, 16% to the Local
Government and 11.7% to the special funds.
As at 2003, revenue from the federation account was shared based on an executive order issued
by President Obasanjo in July 2002. This gives the Federal Government 54.68%, the States
24.72% and the Local Government 20.60%.

5.5.3 Principles of Revenue Allocation

The basic principles of revenue allocation as provided by section 162 (2) of 1999 constitution of
federal Republic of Nigeria are as follows:
a. Derivation: The principle states that the state from which bulk of the revenue is obtained
should have extra share over and above what other states receive. Also not less than thirteen
(13) percent must be given to state from federation account revenue accrued directly from
any natural resources.
b. Principle of Population: The state with large population should receive larger share above
others with smaller population
c. Principle of Equality of States: The principle states that the revenue sharing among the
states should be on equal proportion since states are created equally with different
endowment of economic, financial and potential powers.
d. Need: This principle is based on the perceived need of each state. When the need of a state is
put against the needs of others, it may require the transfer of financial resources from one
state to another in the interest of efficiency.
e. Principle of Independent or Internally Generated Revenue: This principle is of the view
that each level of government should be able to generate and keep some revenue for its use.
The principle suggests that states should exploit their revenue potentials.
f. Equal Access to Development Opportunities: This was introduced to correct unequal
endowment of the states. The principle is to the effect that preferential treatment should be
given to those states which by some measure of development lag behind.

Summary of Study Session Five

In this study session, you have learnt
i. Meaning of sources of Government Revenue
ii. Distinction between public receipts and public revenue
iii. Sources of federal government revenue which are from oil revenue and Non-oil revenue
iv. Sources of state government revenue which includes: Taxes, fines and fees, Licenses,
statutory allocation, grants and gifts, loan etc.
v. Revenue Allocation in Nigeria, constitutional provision for revenue allocation and the
establishment of the National Revenue, mobilization, allocation and fiscal commission
1989.
vi. Principles of Revenue Allocation which include derivation, principle of population,
principle of equality of states, need, principle of independent or internally generated
revenue.

Self-Assessment Questions (SAQs) for Study Session 5

Now that you have come to the end of this session, how do you test your ability and knowledge
of what you have learnt? There is a way to do this. Kindly attempt the questions listed for this
session and see how far you can go. Do you want to try? You may later discuss with your
facilitator areas that are not very clear to you.

Objective Questions
SAQ 5.1 (Tests Learning Outcome 5.1)
1. Government needs fund to finance its activities just like any other economic unit
a. True
b. False
c. Indifference

SAQ 5.2 (Tests Learning Outcome 5.1)

2. Government revenue is receipt of the Government from all sources except
a. Penalty
b. Fines
c. Loan
d. Court Charges

SAQ 5.3 (Tests Learning Outcome 5.1)

3. Public receipts differ from public revenue because the earlier include receipt from all sources
a. True
b. False
c. Indifference

SAQ 5.4 (Tests Learning Outcome 5.2)

4. All the following are sources of federal government revenue except
a. Penalty from Gas Flared
b. Petroleum Profit Tax
c. Company Income Tax
d. PAYE of Company

SAQ 5.5 (Tests Learning Outcome 5.2)

5. Tax imposed on locally made good is ___________ duty
a. Excise
b. Sales
c. Tariff
d. Value Added Tax

SAQ 5.6 (Tests Learning Outcome 5.3)

6. The present VAT rate in Nigeria is _________ percent
a. 2
b. 4
c. 5
d. 6

SAQ 5.7 (Tests Learning Outcome 5.3)

7. The National Revenue, mobilization, Allocation an Fiscal Commission was established in
_________
a. 1988
b. 1989
c. 1990
d. 1987

SAQ 5.8 (Tests Learning Outcome 5.4)

8. In the absence of National Legislation on Revenue allocation, which methods shall be
adopted
a. The revenue allocation formula as at 1 st January to 3rd December 1989
b. The revenue allocation formula as it 1 st January to 31st December 1998
c. The formula at the discretion of the president
d. The one announced by revenue mobilization and allocation commission

SAQ 5.9 (Tests Learning Outcome 5.4)

9. ______ schedule of the 1999 provides the enabling power to the revenue mobilization and
allocation commission
 a. Third
b. Fourth
c. Second
d. Fifth

Essay
List and explain principles of revenue allocation as being provided under section 162 (2) of the
1999 constitution as amended

References and Suggestions for Further Readings

Adesola S.M. (2001). Public Sector financial management and accounting, Lagos: Comfort Press
and Publishing Company Ltd.1999 Constitution of the Federal Republic of Nigeria as Amended.
Adesola S.M (1989) “ Tax Policy in the Quest for Social Cohesion and Development in
Nigeria”, in Sanda A.N (ed.) Public Administration in Periods of Uncertainty, (Ibadan and
Lagos: Fact Finders International).
Ihimodu I.I (1995) Resources Mobilization under the Current Reform Programme in Nigeria” In
M.I Obadan and G.O Ogiogio, eds, Planning and Budgeting in Nigeria, Ibadan. NCEMA
Salaru R.O (2005) Essential of Public Finance.ObafemiAwolowo University Press Ltd.

Study Session Six: Taxation

Introduction
Government plays an important role in most modern economics. In Nigeria, the role of
government extends from providing for national defence to providing social and essential
amenities. In order to provide for these programme and services, the governments need revenues.
One of the sources of these revenues is to.
Learning Outcomes for Study Session 6
At the end of this study session, you should be able to:
6.1 Explain meaning of tax
6.2 List and explain types of taxes
6.3 Explain Canons of Tax
6.4 Explain tax Incidence
6.5 Explain Objectives of Tax

6.1 Meaning Of Taxation

A tax is a compulsory levy payable by an economic unit to the government without any
corresponding, entitlement to receive from the government. In other word, it is not a price paid
by the tax-payees for any definite service rendered or a commodity supplied by the government.
The benefits received by tax payers from the government are not related to or based upon their
being tax payers.

6.1.1 Parts of a Tax

There two parts of a tax. These are:
a. Tax Base: This is the measure or value upon which a tax is levied. The base can be measured
as such as income, sales, purchases, home value, corporate profits etc. It could also be seen
as the legal description of the object with reference to which the tax is payable.
b. Tax Rate: This is the percentage of the tax base that must be paid in taxes. For example if
you pay 35% of your income in taxes, then your income is the tax base and 35% is the tax
rate.

6.2 Types of Taxes

The most popular classification of taxes in economic literature is on the basis of method of
payment or in terms of the incidence of taxation. In this case, taxes are classified as Direct and
Indirect.

Direct Taxes: These are taxes levied directly on the income of individuals and business firms
that is, the incidence of tax rests upon the person who bears its impact. The proportion of income
which is to be paid as tax could be classified as either
Progressive Taxes:-A tax is progressive if the percentage of income paid in tax varies directly
with the level of income. This means the higher the income, the greater the percentage of tax
paid.

Regressive Taxes: For a regressive tax, the percentage of income paid in tax varies inversely
with the level of income. That is the higher the level of income, the lower the percentage of
income paid in tax. Such taxes have the potentials of widen the gap between the rich and the
poor.

Proportional Taxes: These are taxes in which all tax payers pay the same percentage of their
incomes in tax. An example of proportional tax in Nigeria is company income tax.
 Tax Rate
Progressive Tax

Proportional Tax
r

Regressive Tax

Income

The progressive tax curve is positively slope, the regressive tax curve is negatively slope,
showing on universe relationship while the preoperational tax curve is in horizontal nature
irrespective of the level of income.
Indirect Taxes: These are taxes levied on goods that are either imported from other countries or
produced locally. The burden of this tax is transferred to the final consumer.
Indirect taxes may be specific or ad valorem. Specific tax is a fixed sum imposed per unit or per
item irrespective of the valve of the commodity. While ad valorem tax is a tax imposed as a
given percentage of the valve of the item being tax examples of indirect taxes include
a. Import Duties: These are taxes levied on goods which are imported from other countries
b. Export Duties: These are taxes levied on goods which exported to other countries. In
Nigeria export duties are paid mostly on agricultural product such as cocoa, cotton and
cashew.
c. Excise Duties: These are taxes levied on goods which are manufactured within the country.
In Nigeria excise duties are paid on commodities such as soft drinks, cement, textiles, beer,
cigarettes, plastic products etc.
d. Valve Added Tax: VAT system is a consumption tax levied on business at every stage of
inputs. The tax is borne by the final consumer of goods and services because it is included in
 the price paid. VAT system was introduced in Nigeria in January 1994 as a replacement for
the existing sales tax which has been in operation under federal government. Decree No 7
1986. The tax is a flat rate of five percent (5%)

6.3 Canon of Taxes

The following canons of taxation was prescribed by Adam Smith
1. Canon of Equality: This canon tries to observe the objective of economic justice. It dictates
that in absolute terms the richer should pay more taxes because without the protection of the
state they could not have earned and enjoyed that extra income. It follows that the tax should
impose equal marginal disutility upon every tax-payer
2. Canon of Certainty: This canon is meant to protect the tax-payers from unnecessary
harassment by the tax official. It emphasis that the tax which individual is bound to pay
ought to be certain and not arbitrary.
3. Canon of Convenience: The mode and timing at tax payment should be, so far as possible
convenient to the tax-payer. This canon recommends that unnecessary trouble to the tax-
payer should be avoided.
4. Canon of Economy: This canon recommends that cost of collection of taxes should be the
minimum possible. It is useless to impose taxes which are too widespread and difficult to
administer
5. Canon of Productivity: It is also called the canon of fiscal adequacy. According to this
principle, the tax system should be able to yield enough revenue for the treasury and the
government should have no need to resort to deficit financing.
6. Canon of Buoyancy: The tax revenue should have an inherent tendency to increase along
with an increase in national income, even if the rates and coverage of taxes are not revised
7. Canon of Flexibility: It should be possible for the authorities, without undue delay, to revise
the tax structure, both with respect to its coverage and rates, to suit the changing
requirements of the economy
8. Canon of Simplicity: The tax system should not be too complicated. That makes it difficult
to understand and administer and breeds problems of interpretation and legal disputes.

6.4 Tax Incidence

It is a patent fact that the economic unit upon which the authorities impose tax may not be the
ultimate payer of that tax. Incidence of a tax therefore, is defined as its final resting place. It is to
be seen and judged in terms of the money burden of the tax. To put it differently, the incidence
of a tax is upon those economic units which finally bear the money burden of it and which are
not able to pass it on to others. Incidence lies upon that final source from which tax money
comes.
6.4.1 Theories on Tax Incidence
The following will serve as proper guide on where the burden of tax finally rested.
a. The Diffusion Theory: Dalton asserts that in some cases the effects taxes are widely
diffused but with proper analytical approach it should be possible to estimate where the
incidence lies. The assertion that the taxes get diffused in the economy is obviously based
upon the impact assumption that the market is sufficiently competitive and that the factors of
production can move from one employment to the other quickly, easily and without approach
cost.
b. Demand and Supply Theory: This is the most acceptable approach in explaining the
incidence of a tax. The incidence can be shifted only through sale/purchase transactions and
only through a revision of the prices. A price revision is possible and is determined by the
relative values of demand and supply elasticity.
6.4.1bi Incidence of Tax when demand is perfectly inelastic

D
P S

P2 S

P0
S

S
O
Go Q
In this case the burden of the tax lies on the buyer of the commodity because irrespective of the
price and supply, the quantities demanded remains constant.
6.4.1bii Incidence of tax when demand is perfectly elastic

P S

P D

S
If the demand for the commodity is perfectly elastic, the incidence of the tax will be entirely on
S
the seller, since the consumers are only willing to buy at a fixed market price and at any price
O
slightly higher sales will drop to zero. Q

6.4.1biii Incidence of Tax under a Relatively Elastic Demand.

The above two are extreme cases of tax incidence. If demand is relatively elastic the quantity
demanded will fall due to increase in price. To keep sales up, the price may be reduced. In this
case, buyer and seller pay part of the tax which implies that incidence of tax is partly on the
buyer and the seller as shown below:

9
P

Si

Pi

So
Si
Po

So D
O
Qo Qi
As a result of increase in supply from SoSo to SiSi the equilibrium price rises and this result to
decrease in demand (sales) as a result the seller must reduce price to boost sales.
From the forgone discussions and graphical illustration, it stands to reason that the commodity
most suitable for taxation will be those or which demand is perfectly inelastic.

6.5 Reasons for Tax Imposition

The following are some of the purpose for tax imposition
1. To discourage the consumption of certain commodity.
2. To generate revenue in order to meet social, economic and political obligations
3. To correct balance of payment difficult
4. To serve as a dependable fiscal tool to plan and direct the economy, by shaping the growth
and development of the country
5. To reduce inequality among income earners in the economy
6. To control inflationary trend in the economy
7. To service national debt and to provide retirement benefit etc.
8. To provide subsidies in favour of preferred sectors of the economy e.g Agro-allied industries

6.6 Tax Evasion and Avoidance

Tax evasion is the illegal practice of not paying taxes, by not reporting income, reporting
expenses not legally allowed or by not paying taxes owed. This is direct violation of the law and
it involves a fraudulent or deceitful effort by the tax payer to escape legally stated obligation.
Tax avoidance is where the individual takes advantage of the loopholes in tax regulation and
manipulate his/her economic situation in order not to pay the exact amount of tax. It occurs when
a tax payer takes a perfectly legal course to lower the amount he has to pay in taxes like the
taking a life assurance policy, deductible from the total amount subjected to tax or claiming the
existence of an aged mother or father where there are not which statutorily attract deduction from
the taxed sum and declaring that he has children where as he/she has none.
Summary of Study Session Six
• In this study session you have learnt the definition of tax as a compulsory levy imposed on
goods and services by the government and paid to the government. That there are two parts
of taxes which are tax rate and tax based.
• That tax could be direct or indirect. The direct tax is imposed on income which could be
progressive, regressive or proportional in nature. Examples of direct taxes are company
income tax, personal income tax, capital gain tax, petroleum profit tax etc.
The indirect tax is tax imposed on goods and services. Examples are import duties excise
duties, VAT etc.
We have also been able to examine tax incidence and its theories such as diffusion and
demand and supply theories. Also examined are the purposes of tax imposition and tax
evasion and avoidance.

Self Assessment Questions (SAQs) for Study Session 6

You have come to the end of this session. Do you want to test your ability in the new areas you
have studied? The following questions will help you to achieve the objective. So try and attempt
the question and see how good you are.

Objective Questions
SAQ 6.1 (Tests Learning Outcome 6.1)
1. A compulsory levy imposed on goods and service by the government is _____________
(a) Levy
(b) Rate
(c) Tax
(d) Income

SAQ 6.2 (Tests Learning Outcome 6.1)

2. Tax is paid by the tax payer in order to get a desire service in return (a) True
(b) False
(c) Indifference
SAQ 6.3 (Tests Learning Outcome 6.2)
3. The percentage amount paid as tax is called tax _________
 (a) Rate
(b) Base
(c) Item
(d) Percentage

Use the following to answer questions 4 and 5

Mr John earns N10,000 and pays N1,000 and Mr Femi earn N20,000 and pays N1,200

SAQ 6.4 (Tests Learning Outcome 6.2)

4. The tax system is _________
(a) Progressive
(b) Regressive
(c) Proportional
(d) None of the above

SAQ 6.5 (Tests Learning Outcome 6.3)

5. Mr Femi tax rate is _______ percent’s
(a) 5
(b) 10
(c) 6
(d) 12

Essay
1. List and explain reasons for tax imposition
2. Write short notes on the following
a. Direct Tax
b. Indirect Tax
c. Tax Rate
d. Tax Base
 e. Tax Evasion and Avoidance
3. Highlight six cannons of taxes
4. Explain the theory of demand and supple on tax incidence

A tax is a compulsory levy payable by an economic unit to the government without any
corresponding, entitlement to receive from the government. In other word, it is not a price paid
by the tax-payees for any definite service rendered or a commodity supplied by the government.
The benefits received by tax payers from the government are not related to or based upon their
being tax payers.

References and suggestion for further reading

Bahtia H L (2008) Public Finance, Vikas Publishing House Pvt LtdTax Law in Nigeria 2013.
Ekpe D.A (2008) Personal Income Tax in Nigeria Panaf Publishing, Inc.

Study Section 7: Public Expenditure Introduction

Introduction
In the previous study sessions, we have been able to discuss in details meaning, nature and scope
of public financial management, public sector accounting, fiscal and monetary policy and
sources of government revenue.
In this session we shall examine public or government expenditures which renders to the
expenses which a government incurs for its own maintenance, the society, economy and helping
other counties.

Learning Outcomes of Study Session 7

At the end of this study session, you should be able to:
7.1 Define public expenditure
7.2 Explain components of public expenditure
7.3 List and explain purposes of government expenditure
7.4 Explain control of public expenditure
7.5 classification of government expenditure
7.6 discuss effects of public expenditure on the economy
7.7 Explain theories of public expenditure

7.1 Definition of Public Expenditure

Public expenditure is spending made by the government of a country on collective needs and
wants such as pension, provision of basic amenities and other infrastructural facilities.
It could also be referred to as the expense, which the government incurs for its own maintenance
and for the society and the economy as a whole. Public expenditure is an important mechanism
which can have significant effects on people’s live in terms of standard of living and better
opportunities.

7.2 Components of Public Expenditure

Government expenditure in ministries and extra-ministerial departments are mainly as follows:
1. Re-current expenditure; and
2. Capital expenditure

7.2.1 Re-current Expenditures:

These are expenses on goods and services carried out by the government on the day-to-day
activities of the government. It could also be referred to as general spending of the government
in maintain the existing facilities in the economy.
They mainly related to the votes for wages and salaries, allowances, maintenance of social
services, interest on public debt etc. Re-current expenditure are generally, consumables year by
year.

7.2.2 Capital Expenditures:

These are expenses on goods and services whose services are rendered over a long period of
time. It could also be seen as the costs of capital works and projects for example kanji Dam,
office building construction of hospitals, bridges, houses etc. undertaken by government.
The benefits of capital expenditure are more durable and long lasting for years than those of the
recurrent expenditures. They are mainly financed from borrowing, budget surplus and from
grants and aids.

ITQ
Give three examples of recurrent expenditure

Answer: Examples are re-current expenditures are:

i. Payment of wages and salaries to public servants
ii. Purchases of drugs for general hospitals
iii. Payment of interest on public debts

7.3 Purposes of Government Expenditure

In developing countries, private enterprise is reluctant to invest in risky channels and where
returns on capital are not quick. In achieving rapid economic development public expenditure is
imperative to create enabling environments. This therefore leads us to the purpose of public
expenditures which are as follows:
i. To Achieve Economic Development: Public expenditure helps in increasing the growth
rate of the economy through provision of more employment opportunities raising income
and standard of living, reducing inequalities of income and wealth and to bring about
regional balance in the economy.
ii. Democratic Needs: The country’s political structure has undergone many changes
overtime since independence. A lot of money is spent in maintaining political parties,
legislatures and the Electoral commission.
iii. Grants and Aids: At times, the federal government do assist the state and local
governments by giving grants and aids and equally helps maintain order and peace in
neighbouring countries e.g. ECOMONG
 iv. General Administration: In Nigeria a lot of money is spent by government at various
levels for the day to day running of the governmental activities. Such expenses include
salaries and wages, purchases of stationery, maintenance of vehicle, building etc.
v. Servicing of Loans: To repay public debt and other government loan borrowed internally
and externally, a huge sum of money is spent from Government purse or coffee.
vi. Miscellaneous Expenditures: These include payment of pensions and gratuities, training
of manpower, scholarship etc.
vii. Provision of social amenities: Government always spend a huge amount of fund for the
provision of social amenities for people and industries.

7.4 Control of Public Expenditure

The control of government finance in civilian administration is exercised by both national
Assembly and through the executive arms of government (civil service hand book, 1997).

The main feature of such control is that no money should be spent except approved by the
national Assembly’s while the public Account Committee (PAC) is responsible for querying
malpractices in the expenditure of the budget approved by the National Assembly.

The chief Accountant –General officer of Government the counter-part in a state Government is
called Account-General. He is responsible for all the receipts and payments of non-self-
accounting departments. In accordance with the financial regulations, he is responsible for the
general supervision of the Accounts of all ministries and Extra-ministerial Departments within
the Federation and for the compilation of the Annual financial statements of Accounts as may be
required by the National Assembly or by the minister of finance.

Constitutionally, the federal Auditor-General is responsible for the audit of accounts of all
ministries and Extra-ministerial departments within the Federation.

All civil servants are made to be cost-conscious when spending public funds on behalf of
government. Unnecessary Extravagance spending may be checked in the following ways:
a. Every officer or employee should justify his employment by giving efficient services in
return for his earning.
b. Every expenditure should be duly authorized by an appropriate authority as required by
regulation.
c. Every expenditure should be in accordance with the financial regulations.
d. Staff recruitment should be dictated by real needs so that under-employment and over-
establishment are avoided.
e. Economy should be exercised in the purchase of office furniture, equipment and stationery.
f. No officer should condone wasteful spending of public funds by other civil servant.

ITQ
Mention three ways of checking extravagance spending in public service
Answer: Three ways of checking unnecessary spending in public service are:
1. Every expenditure should be duly authorized by an appropriate authority as required by
regulation
2. Every expenditure should be in accordance with the financial regulations
3. No officer should condone wasteful spending of public funds by other civil servant.

7.5 Classification of Government (Public)

Coming by the nature of expenses of the Federal Republic of Nigeria, the recurrent and capital
expenditures are classified as follows:
a. Administration
b. Economics Services
c. Social and community services
d. Transfers

A. Administration: this expenditure is undertaken in order to ensure effective organization of

the whole society. Expenditures on administration comprise general administration, wages
and salaries, provision of necessary logistic for armed forces for defence, maintenance of law
and order through internal security.

B. Economic Services: Government incurs expenses on economic services like agriculture,

construction, transportation and communication, mining, manufacturing and others.
The purpose of this expenditure is to achieve growth and development in the country
C. Social and Community Services: At times, Government spends money on the provision of
social amenities, which reduce the cost of production in the other sectors of the economy.
This comprises expenditure on education, health housing etc.

D. Transfers: these are expenditures that are made not on direct productive activities, but
money spent on debt repayment, both the principal and the interest. It should be emphasized
here that while the classification into heading and sub-heading are the same so far for both
recurrent and capital expenditure, they differ in terms of components of transfer.

While the transfer under recurrent expenditure consists of public debt charged, pensions and
gratuities, contingencies and extra budgetary expenditure, the transfer under capital expenditure
includes financial obligations capital repayment and loan to parastatals, outstanding abilities and
others.

7.6 Effects of Public Expenditure

Public expenditure has effect on economic stabilization, production, distribution and economic
growth in the following areas:
1. Public Expenditure and Economic Stabilization: It is a well-known fact that market
forces by themselves leave much to be desired in the field of economic results. The more
advanced and free the market mechanism, the more prone that economy is to fluctuations in
income, employment and prices. It is for this reason that with the development of
capitalism, from enterprise economies came to experience ever stronger trade cycle.
Keynesians advocated a continuous injection of additional purchasing power in the market
through simulation of investment and consumption activities and through direct public
investment. This direct investment was a part of the public expenditure. Such a public
expenditure was meant to directly add to the effective demand in the market and generate a
high value multiplier by distributing income to those sections of the population which had a
high marginal propensity consume.
 On the other hand, during a boom, the government reduces public spending in order to
curb-extra demand. It should be added here that, the demand flows should be regulated to
match the supply flows, otherwise, the stimulating effect will result in inflationary pressure.
2. Public Expenditure and Production: Low investment is one of the features of less-
development countries. This feature can be eradicated through increase in government
spending on production projects. Government can enhance productivity or investment
through direct public saving and investment, education and training of human resources,
provision of social amenities etc. The monetarists believe that increased government
expenditure will gear up private investment entirely.
3. Public Expenditure and Distribution: In developing countries, there is a wide gap
between the poor and the rich in terms of income and wealth. A shift toward equality may
be achieved through various expenditure measures especially such measures that tend to
help the poor to bridge the gap. This bridge of gap may be achieved through the
government expenditure in a number of welfare measures like free education, health, water
and other facilities can be given top priority, which the poor and low income groups could
not have afforded with their meager income.
4. Public Expenditure and Economic Growth: Every developing country desires to achieve
economic growth and development. Public expenditure has an active role to play in
achieving this objective through creation of infrastructure of economic growth expenditures
in manpower development that increases skills and efficiency of labour and tend to increase
the level of economic growth.
5. Public Expenditure and Employment: Government expenditure in establishment of
industries and public enterprises has created a lot of employment opportunities. Keynes
recommended policy of deficit expenditure by government, because, it was expected to
create new jobs and new income to re-activate aggregate demand for goods and to draw
idle capital goods back into use

ITQ
Mention relationship between public expenditure and four economic variables
Answer: Relationship between public expenditure and economic variables are:
i. Public expenditure and economic growth
ii. Public expenditure and employment
iii. Public expenditure and distribution of wealth
iv. Public expenditure and production

7.7 Theories of Public Expenditure

There has been different literature on taxes and their effects, without serious attention to the
expenditure aspect of the economy. Most economists and other financial experts have
concentrated their efforts on the theory of taxation, in order to correct this imbalance, a few
economists attempted to focus attention on the side of the public budget by providing theory of
public expenditure growth. These theories can be grouped into two, namely.
1. Macro-model theory and
2. Development model theory

7.7.1 Macro-Model theory

This theory is made up of two theories
a. Wagner’s law and
b. Peacock – wiseman theory

7.7.1a Wagner’s Law of increasing

State Activities
This theory was developed by a German Economist named Adoph Wagner (1835-1917). The
law states that government expenditure must increase as the Gross National Product increases
and the government expenditure must be of necessity grow at a faster rate. He argued that there
was a functional relationship between the growth of an economy and the growth of the
government expenditure, such that as both increase, there is a tendency for the former to grow at
a faster rate.
The categories Government expenditure into three:
i. Administration and protective functions of government
ii. Expenditure on cultural and welfare functions e.g. Education, defence, health and income
distribution
iii. Provision of series by the government.
As the economy grew, he argued that there would be need for industrialization and economic
development. Growth in urbanization will eventually lead to inevitable centralization of
economic factors and increase complexities of modem life. However, other researchers have
criticized him on the ground that there are periods when government expenditure in relation to
Gross National Product will decline when the elasticity of income to government expenditure is
less than one but greater than zero, that is inelastic

7.7.1b Peacock-Wiseman’sTheory:
Allan Peacock and Jack Wiseman, two English economists argue that the growth of public
expenditure follows political economic path. The main argument of the authors is that public
expenditure does not increase in a smooth and continuous manner, but in jerks or step like
fashion. The Public expenditure increase could make inadequacy of the present revenue is clear
to everyone.
The upward review of expenditure and taxes could be referred to as “displacement effect”. This
displacement creates a public acceptance of tax levels that previously implemented programmes
that would otherwise not have been possible prior to the displacement.
However, after crisis tax, tax situation never revert back to the pre-crisis level just creating a new
government expenditure level until the next crisis.

Furthermore, they argue that each tax crisis often led to what they refer to as concentration
effects.

7.7.2 Development Model Theory

This is otherwise known as Musgrave Theory: Theory Musgrave argued that at low level of
capital income, the demand for public services tends to be generally high. This is because at the
early stages of economic development the income level is very low and government is forced to
provide the basic amenities or infrastructural facilities for economic take-off.

Summary of Study Session 7

In this session you have learnt the following
❖ Definition of public expenditure
❖ The components of public expenditure which include; recurrent expenditure and capital
expenditure
❖ Purposes of government (public) expenditure which are; for economic growth and
development, democratic need, grants and aids, general administrations, servicing of loans,
provision of social amenities and miscellaneous expenditure.
❖ Control of public expenditure
❖ Classification of government (public) expenditure which includes: administration, economic
services, social and community services and transfers
❖ Effects of public expenditure on the economy.
❖ Lastly, the theories of public expenditure which are macro-model theory and development
model theory.

Self Assessment Questions (SAQs) for Study Session 7

You have come to the end of this session. Do you want to test your ability of these great new
ideas? If you are ready, the following questions will help you to achieve the objective. So try and
attempt the questions and see how good you are.

Objective Questions
SAQ 7.1 (Tests Learning Outcome 7.1)
1. __________ is spending made by the government of a country on collective needs and wants
(a) Pubic responsibility
(b) Public ability
(c) Public expenditure
(d) Public saving

SAQ 7.2 (Tests Learning Outcome 7.1)

2. Which of the following is not a recurrent expenditure
(a) Repairs of building
(b) Purchases of drugs
(c) Sinking bole holes
(d) Allowances paid
SAQ 7.3 (Tests Learning Outcome 7.1)
3. The miscellaneous expenditures of government includes the following except
(a) Pension
(b) General administration
(c) Gratuities
(d) Training of manpower

SAQ 7.4 (Tests Learning Outcome 7.2)

4. Grants and aids also constitute public expenditure
(a) True
(b) False
(c) Indifference

SAQ 7.5 (Tests Learning Outcome 7.2)

5. The expenditure undertaken by government in order to ensure effective organization of the
whole society is ________
(a) Administration
(b) Economic services
(c) Transfer
(d) Social series

Essay
1. Explain Wagner’s law of increasing state activities
2. Explain the relationship between the following
a. Public expenditure and production
b. Public expenditure and distribution
c. Public expenditure and employment
References and Suggestion for Further Reading
Eneanya A.N (2014. Theory and Practice of Public Administration, University of Ibadan Printer.
Ibadan.
Rhafia H.L (2008) Public Finance 28th ed. Vikas Publishing House PUT LTD
Salawu R.N (2005) Essential of Public Finance. OAU Press Ltd. Ile – Ife.
Musgrave R.A (1959): The Theory of Public Finance – A Study in Public Economy – Hill
Books 6: P3
Musgrave R.A & Musgrave P.B (1989) Public Finance in Theory and Practice. New York:
McGraw-Hill Book Company.

Study Session 8: Government Budgetary System

Introduction
Each government wants to undertaken several economic and non-economic activities and pursue
certain policies which have their financial counter parts in the form of revenues, borrowings and
expenditures. This link us to the term budget. The word budget has been derived from the
French word “bougette” which means a small bag. It symbolizes a bag containing the financial
proposals.

In Nigeria, the idea of budgeting was part of our national inheritance from Britain, our colonial
master. Usually, about six month to the close of each financial or fiscal year, the government
starts to budget for its capital and recurred expenditures and revenues for the following year.
Specifically, budget is often divided between the three tiers of government, federal state and
local government

Learning Outcomes of Study Session 9

At the end of this study session, you should be able to:
8.1 Explain meaning of budget
8.2 Highlight characteristics of a good budget
8.3 Explain budgetary process
8.4 State and objectives of government budget
8.5 Explain kinds of budget as to nature

8.1 Meaning of Budget

A budget is a financial plan expressed or prepared in quantitative and monetary terms and
approved prior to the defined period of time, usually a year.
Dimok (1937 cited by Eneanya, 2014) defines a budget as a financial plan summarizing the
financial experience of the past, stating a current plan and projecting it over a specified period of
time in future. In other words, a budget is a financial estimate of revenue receipts and proposed
expenditures, covering a specified period of time.

8.2 Characteristics of a Good Budget

A good budget must possess the following attributes
1. It is a statement of expected revenue and proposed expenditure
2. It requires some authorities to sanction it.
3. It is for a limited period, generally, it is annual
4. It sets for the procedure and manner in which the collection of revenue and how the
administration of expenditure is executed.
5. It must reflect the over-all policy and purpose of the government
6. The present position of the treasury must be known
7. It must be comprehensive and clear, so that a correct judgement can be formed as to the way
in which the budget is expected to function in the coming year.
8. It must be accompanied by the fiscal and monetary control measure to be introduced by the
government
ITQ
1. Give a brief definition of budget
Answer: It is a financial of proposed income and expenditure of the government in a fiscal or
financial year
ITQ
2. Mention two characteristics of a good budget
Answer:
i. It must reflect the over-all policy and purpose of the government
ii. It is a statement of expected revenue and expenditure.

8.3 Budgetary Process

Eneanya (2014) identifies six distinct stages in the budgetary process, namely:
i. Budget conception
ii. Budget preparation
iii. Budget approval of enactment
iv. Budget of implementation extension
v. Budget monitoring and evaluation
vi. Budget Audit and Control

1. Budget Conception: the starting point in the budget process is the mid-term review
which takes place by July of each year. The mid-term of the budget is normally carried
out by a committee made up of the relevant economic ministries and agencies under the
chairmanship of ministry of finance – Based on the findings of the mid-term review
committee, recommendations are made about the directions to be followed or policies or
priorities to be adopted in the forthcoming year’s budget.
2. Budget Preparation: Budget preparation is the responsibility of the executive arm of
government. The federal ministry of finance, particularly the budget office is charged
with the responsibility of co-ordinating overall budget preparation at the federal level. At
the ministry level, the budget department/division coordinates and obtains input for all
other department in the ministry. A call circular is normally issued from the ministry of
finance in the first week of August, _________ all ministries, extra – ministerial
departments and other agencies of government to submit to the budget office of the
ministry, their revenue and expenditure proposals for the forthcoming year.
3. Budget Approval or Enactment Stage: the final draft of budget prepared is presented
to the National Assembly as the draft appropriation bill. Policy changes or modifications
may be introduced at any point during the budget approval stage. This is because
budget is a financial or economic document as well as political document.
An appropriation or money bill like a budget under presidential system of government might be
presented to both the House of Representative and the senate simultaneously by the executive or
might emanate from either House. The bill had to go through the following stages before it is
passed into law.
a. First reading: this is the period when the bill is first introduced into the House or the senate
and a general debate would take place regarding the subject matter
b. Second reading: At this stage, the bill might be considered clause by clause. The
discussion at this stage frequently necessitated modifications and compromises.
c. Committee stage: a specialized committee in both Houses of the legislature would
considered the bill in detail. In the presidential system the specialized committees were very
important. They might call in expert testimony, commission studies or hear public officials or
interested members of the public.
d. Third reading: At the third reading stage, debate or discussion that might change any of the
clauses might not be entertained. Members of the House or the senate might move a motion
to vote on the bill with a view to passing it into law.
In a bi-cameral system, a bill first considered by one Hose might be sent to the second House
where the stages mentioned above might be repeated. In some cases, a joint committee or
joint session of both Houses might be required.
e. Budget implementation/extension: After approval, the budget book is printed, warrant
certificates are issued and ministries and agencies are them free to withdraw their budget
allocations from the ministry of finance/central bank and implement programmes in
accordance with the approved budget. Withdrawal of funds always follows government
guidelines and financial instruction from ministry of finance. The office of the Accountant –
General is important in this case.
f. Budget monitoring and evaluation: the object of this exercise is to ensure that money
released are used for the purpose intended or as approved by government and that the work
done is commensurate with the amount disbursed for the purpose and that approved
monetary, fiscal policies are being implemented as intended.
To ensure transparency in the budget process, a budget office and budget monetary and
implementation unit (BMIU) were established.
g. Budget Audit and control: the budget process revolves around efficiency and effectiveness
of resources use in the economy as a whole efficiency of resource use in budgeting requires
that the budget must strive towards maintaining equilibrium between the social benefits of
public expenditure and the social cost of withdrawal of resource. This means that the
available revenue should be utilized to meet the expected targets.

8.4 Objectives of Government Budget

The objectives of a typical budget include the following:
(a) Allocation of Resources: If budget is applied efficiently and wisely, it can lead to efficient
allocation of resources in the economy.
(b) To check inflation: If the Government spends less than it realized, the purchasing power of
the consumers will consequently be reduced and this may eventually curb an inflationary
trend. A budget surplus could be a potent instrument of controlling inflation.
(c) To reduce cost of living: A budget surplus could be used to reduce the cost of living since a
reduction of the rate of inflation means reducing the cost of living.
(d) To redistribute income and wealth: Budgetary policy may be used to bridge the gap
between the rich and the poor
(e) To increase output in the economy: A budget deficit could directly lead to an increase in
the level of production, provided the extra spending of the government is on productive
investments.
(f) To protect infant industries: A budget, through its provisions may be used to protect local
industries.
ITQ
Mention the stages money bill will go through before it is passed into law
Answer: The stages are
(a) First reading
(b) Second reading
(c) Committee stage and
(d) Third reading
ITQ
List the distinct stages in budgetary process
Answer: There are six distinct stages in budgetary process; these are
1. Budget conception
2. Budget preparation
3. Budget approval or enactment
4. Budget implementation/extension
5. Budget monitoring and evaluation
6. Budget Audit and Control

8.5 Kind of Budget as to Nature

Government budget may be classified as to nature and basis as follows:
i. Annual budget: this is a budget which covers a period of one year. It is the basis of an
annual appropriation.
ii. Supplementary budget: This is a kind of budget which purports to supplement or adjust
a previous budget, which is deemed inadequate for the purpose to which it is intended. It
is the basis of supplementary appropriation.
iii. Deficiency budget: this is a budget prepared in order to cover any deficit or overdraft
incurred over and above those originally budgeted. It is a basis of deficiency
appropriations passed by the legislative arm of government.
iv. Special budgets: there are those budgets, which are of special nature and generally
submitted in special forms on account of the fact that itemizations are not adequately
provided in the appropriation act or the amount are not at all included in the appropriation
act. These types of budget are used generally for special funds not ordinarily subject to
formal budgetary control like true funds.

Summary of Study Session

In this study session, you have been able to learn:
• Meaning of budget
• Characteristics of a good budget
• Budgetary process
• Objectives of government budget and
• Kinds of budget as to nature
Self-Assessment Questions (SAQs) for Study Session 8
You have come to the end of this session. Do you want to test your ability and see how good you
are? Yes! This can be done only through one way, by attempting the questions below. Do you
want to try? Do not forget to write down in your notebook any area of this study session that you
do not understand or that needs further clarification. Discuss this with your facilitator in the next
tutorial class.

Objective Questions
SAQ 8.1 (Tests Learning Outcome 8.1)
1. The word budget is derived from the French word
a) Bouget
b) Budgetee
c) Bougette
d) Budget

SAQ 8.2 (Tests Learning Outcome 8.1)

2. The idea of budgeting in Nigeria could be linked to
a) French
b) Germany
c) Britain
d) Western world

SAQ 8.3 (Tests Learning Outcome 8.2)

3. Which of the following is not budgetary process
a) Budget conception
b) Budget preparation
c) Budget audit and control
d) Budget estimates

SAQ 8.4 (Tests Learning Outcome 8.2)

4. Which of the following is the most important stage of budget enactment
a) First reading
 b) Second Reading
c) Third reading
d) All of the above

SAQ 8.5 (Tests Learning Outcome 8.2)

5. Which of the following stage of budget approval requires the input of expert and public
hearing
a) First reading
b) Committee stage
c) Second reading
d) Third reading

SAQ 8.6 (Tests Learning Outcome 8.3)

6. A budget that supports previous budget could be best described as _________ budget
a) Annual
b) Supplementary
c) Support
d) Appropriation

Essay
1. List and explain four kinds of budget as to nature
2. Highlight four objectives of government budget

Reference/Suggestion for further reading

Dimock, M.E (1937): Modern Politics and Administration. New York. American Book
Company.
Eneanya A.N (2014: Theory and Practice of Pubic Administration. Ibadan University Press.
Ibadan
 Study Session 9: Budgeting System II

Introduction
In the previous study session, you have learnt the definition of budget characteristics of a good
budget, budgetary process, objective of government budget and kinds of budget as to nature.
This session will expose other aspects that will deepen your knowledge on the budgetary system.

Learning Outcomes of Study Session 9

At the end of this study session, you should be able to:
9.1 Mention and explain benefits of budgeting by the government
9.2 Explain budgetary techniques, their merits and demerits
9.3 List and explain the techniques of budget evaluation
9.4 Constraints that shape the government budget
9.5 Explain financial appropriation in the local government
9.6 Distinguish between budget and development plan

9.1 Benefits of Budgeting by the Government

The following are some of the importance of government budget
a. Ensures programmes or activities are related to expected or available resources and
economic conditions
b. Wastages is prevented: because budgeting analyses the reasons for proposed
expenditures in advance, waste is prevented
c. Operations are controlled: control of expenditures and operations is provided in
systematic budgeting
d. Co-ordinated efforts are attained: As you are awared that in budgeting, co-ordination of
all ministries, Departments or divisions is necessary for without it, concerted actions
cannot be attained
e. Policies are established: Policies are declared in the budget in that, emphasis is laid on
the essentials of projects to be undertaken.
f. Weakness in the ministries/developments are revealed where plans are developed and
responsibilities for any, in the departments will be revealed
9.2 Budgeting Techniques
Budgeting techniques are the management processes, which provide the framework for the
acquisition, allocation and utilization of resources by presenting decision rules and other
operational criteria, which govern the entire allocation procedure.

The five widely known budgeting techniques are described below:

1. Line-item budgeting
2. Planning programming budgeting
3. Zero-based budgeting
4. Performance budgeting
5. Functional/programme budgeting

9.2.1 Line-Item budgeting

The line-item budgeting is the traditional approach of government allocation. The technique is
related to the expenditure account in each ministry and department of government. In this
approach, each line of item is either considered for an increment or remains adjusted in the case.
Usually, increments are calculated as uniform percentage adjustment for every line or group of
lines.

9.2.1.1 Advantages of line-item budgeting

(a) It accommodates inflation which increase the cost of running the government.
(b) Sub-head allocations are expressed in terms of different types of expenses
(c) It does not curate many difficulties to government
(d) It is flexible, adaptable and reduces inter-ministerial rivalries

9.2.1.2 Disadvantages of Line-item Budget.

(a) it is based on organizational structure rather than programmes
(b) The system or technique emphasizes fund allocation rather than sectional performance
(c) Limited attention to efficiency of on-going activities and disregard for emergent need.
(d) The relationship between recurrent and capital expenditure is blurred
(e) It fails to take into consideration the inter-dependent nature of ministries and parastatals
9.2.2 Planning Programme Budgeting
This system embraces and emphasizes the three concepts of planning, programming and
budgeting. The planning aspect involves long-term determination of goals and specifying the
best programmes to attain them.
The programming aspect involves structuring the budget in terms of goals (programmes). The
budgeting function is the allocation of resources in money terms to achieve the specified goals,
programmes and projects.
Planning, programming budgeting has three important stages of management (Bankole 2002
cited be Eneanya 2014), Namely.
• Policy management
• Resources management and
• The implementation, monitoring and evaluation of programmes

9.2.2.1 Advantages of Planning Programme Budgeting

(a) it provides a framework of accountability
(b) it provides clearer definition of objective and strategies
(c) It promotes an optimization of resources
(d) It is useful for capital budgeting
(e) Enhancement of the flow of information and about inputs and expected outputs

9.2.2.2 Disadvantages of planning, Programme Budgeting

(a) it is a costly programme
(b) it is not designed to improve administrative control over expenditure of fund
(c) it focuses on what will be done and not how to do it
(d) It is difficult to adequately define programmes
(e) It does not provide an operating tool for line officer who implements the policy and
programme decisions.

9.2.3 Zero-Based Budgeting

Zero based budgeting was first introduced in 1969 in United States and made popular by Ex-
president Jimmy Carter between 1976 and 1980. According to him, a decision package is the
foundation of zero based budgeting, what it means is that, we must evaluate all activities to see if
they should be eliminated, funded at reduced level, funded at a similar level or increased.

Zero – based budgeting is a budgeting technique that emphasized comprehensive annual reviews
and scrubbing in the allocation of funds to organization and activities. It requires that the present
budget be an entirely new activity not based on old estimate and activity.
It is an assumption that the entire budget is built up based on current goals, reasoning,
operations, reviews and target accomplishments.
Zero-based budget requires that funds needed for financing every programme put forward to be
included in the budget be justified from a zero base. Allocation of funds under the method
follows the ranking of programme based on cost benefit analyses.

9.2.3.1 Advantages of Zero-Based – budget

(a) It leads to annual reappraisal of the whole system
(b) It ensures that available resources are nationally utilized
(c) it assures the matching of objectives with strategies
(d) The process involved in zero-based budget frequently leads to more efficient and more
useful alternatives
(e) It minimizes resources wastages by avoiding the carryover of errors over years, while
maintaining relative flexibility
(f) It is most suitable for use during periods of outing economy in a country because it ensures
that scarce resources are devoted to only viable programme based on their cost – benefit
analyses.

9.2.3.2 Disadvantages of Zero-based budgeting.

(a) It is time and paper work consuming
(b) It emphasizes short-term benefits to the detriment of long term benefits
(c) IT requires substantial skilled manpower and information which developing countries
may find difficult to afford
(d) It under-estimates the importance of political and technological constraints
(e) It is disruptive if previous projects have to be abandoned presently.
9.2.4 Performance budgeting
Performance budgeting is a budgeting technique for presenting public expenditure in terms of
functions, programmes, project etc and correlating the physical and financial aspects of the
individual items comprising the budget. It provides the means for measuring accomplishment or
results either by the use of unit of work measurement or by suing expenditure or inputs ratio. It
relates cost to be volume of work required to achieve defined objectives and targets.
Performance budgeting is an improvement over line-item and incremental budgeting. The major
components of performance budgeting are:
• Activity classification
• Performance measurement and
• Performance reports
In this approach, costs are linked to various activities as budget expectations, which the actual
performance is measured against budget expectation.

9.2.4.1 Advantages of Performance Budgeting

(a) it helps to improve planning
(b) it provides more effective control
(c) It sharpens decision-making at all executive levels and particularly by the legislature.
(d) It provides means of evaluation the efficiency of the government
(e) It helps to improve public relations by providing clearer information on each programme
(f) It helps to decentralize decision making and thus encourages placing authority at level of
real responsibility

9.2.4.2 Disadvantages of Performance Budgeting System

There is difficulty of determining the performance criteria
(a) It is extremely difficult to attribute a particular outcome or performance to any single
department or organizational unit, since move than one unit frequently contributes to effort
(b) It lacks political appeal because legislators often take greater personal interest in defending
their state or establishments rather than support activity criteria as a basis of allocation of
fund.

9.2.5 Functional/Programme Budgeting

Functional budgeting is a budgeting technique which delineates a government office according to
its logical functions programmes and activities for the purpose of establishing a budget structure
or framework to achieve the follow objectives.
(a) To establish collection centres of the budget estimates during the budget preparation phase.
(b) To establish control centres for the actual expenditures during the budget executive phase
(c) To establish reference point during the budgets review phase for budget examiners,
accountants and auditors

9.3 Budget Evaluation Techniques

The following techniques can be used to control the estimates for the various ministries or
departments.
a. Open-ended Budgets: This refers to a technique of budget formulation under which the
ministries can include whatever they like in their budgets irrespective of amount and
relevance to the achievements of goals and objectives.
b. Increase-decrease Analysis: This is a technique of budget formulation, which assumes that
the level of expenditure approved in the last budget is acceptable for the current budget and
only takes a critical look at a request to increase or to cut back a previous expenditure
c. Fixed Ceiling: This is a technique of budget formulation under which the ministry of finance
imposes ceilings for each budget head that the ministries cannot exceed in their budget
proposals.
d. Priority Listing: Here, the ministry of finance that prepares budget specifies the priorities in
the budget. The intention is to prevent the ministries form including irrelevant items in their
proposals.
e. Item by item Control: In this technique every item in the budget is individually reviewed
irrespective of whether the proposal is above or below the level of expenditure approved in
the last budget.

9.4 Constraints that shape the Budget: there are a number of problems that shape the
budget:
a. Knowledgeable Officers: Budget officers should be sufficiently knowledgeable in the
technique involved in the budget process. This applies not only to those in a budget office of
the ministry of budget and planning, but also to those in the budget units of all government
 Ministries/Departments and Agencies – presently, there are very few officers of the Federal
Government who are sufficiently knowledgeable in the techniques of the modern budgeting
system. The only way to get adequate manpower to operate the system is to train officers
who have the right aptitude for the job and re-train those who are used only to the old line-
item budgeting system.
b. Politics: Budgeting is a scientific exercise but it is at the same time a highly political issue.
Changes are always made by executive or legislature in order to accommodate different
interests and win acceptance or support for a project or programme.
Budgeting process is made by adjustment compromises, bargaining, consensus building and
agreement between diverse and conflicting interests.
c. Accounting Problems: another area of concern in budgeting is the “accounting system”. At
present, the system of accounting in the Federal Public service of Nigeria is “Financial
Accounting”, which is limited to ensuring that receipts and payments are made and recorded
in accordance with the existing rules and regulations. Although, efforts are being made to
persuade the existing generation of Government accountants to re-orient their practice and
embrace management accounting. An improved budgeting system calls for an accounting
system which emphasizes cost minimization and proper asset maintenance and replacement
provisions.
d. Lack of Accurate Information: A good budgeting system thrives on accurate reliable and
up-to-date information and data since these are the most essential inputs in analyzing and/or
forecasting economic and social trends. Without accurate and reliable date, it would be very
difficult or even impossible to make realistic projection and determine targets to be achieved
with a given financial provision. Unfortunately, Nigeria, Nigeria fares very poorly when it
comes to maintenance of accurate, reliable and up-to-date and essential information.
e. Continuity of Policy or Programme: A large chunk of budget allocations go to inherited
policies and programmes, debt obligations, contracts and commitments by previous
administration, there is tendency for continuation rather than termination and overhaul.

9.5 Financial Appropriation in Local Government

The finance and general purpose committee serves as the cabinet of the local government. The
committee is made up of the following
a. Chairman of the local government as chairman
b. The vice-chairman of the local government as vice-chairman
c. All supervisors appointed by the chairman
d. Not more than two councillors to be appointed by the chairman of the local government as
members

9.5.1 Functions of Finance and General Purpose Committee

i. To regulate and control the finance of the local government
ii. consider and award contract
iii. Consider and moderate budget preparation actualization and implementation
iv. Regulate expenditure and relate commitments to the liquidity of the councils through cash
flow statements prepared by the councils Treasurer.
v. To ensure that all sources of revenue are explored in order to finance the various projects
undertaken by the council public department
vi. To ensure financial accountability and assurance that all revenue collected are properly
accounted for and that effort are geared towards the collection of all revenue due.
vii. To ensure that all the procedural control in existence with respect to revenue are being
followed
viii. Ensure prompt collection of all revenue due to the council
ITQ
1. Mention and explain two budget evaluation techniques
2. Highlight three constraints that shapes budgets
Answer
1. Two budget evaluation techniques are:
a. Open-ended budgets: this refers to a techniques of budget formulation under which
the ministries can include whatever they like in their budgets.
b. Fixed ceiling: this is a technique of budget formulation under which the ministry of
finance imposes ceilings for each budget head that the ministries cannot exceed in
their budget proposals
2. Constraints that shapes budgets are :
a. The quality of knowledge of officers
 b. The level of politics in the preparation of budget
c. The problem of accounting system adopted

9.6 Distinction Between Budget and Development

Budget and development plan can be distinguished by the following elements:
i. Definition: A budget can be defined as a document containing statements of intended
expenditure and expected revenue of the government during a particular period, usually a
year.
A development plan is an official document of government listing among other things,
economic aims, objectives, goals and targets to be attained within some countries or more in
some other countries.
ii. Duration: A budget is a short-term plan while development plan is a long-term
programme designed to achieve some structural changes in an economy.
iii. Coverage: Budget may not cover the whole economy but development plan always covers
the whole economy
v. Source of Finance: The source of finance for budget is internal while it is mainly external
for a developed plan

Summary of Study Session 9

In this study session, you have learnt:
• Benefits of budgeting by the government
• Budgeting techniques which include line-items, planning programming, zero-based,
performance and functional/ programme budgeting. Also the advantages and disadvantages
of each of them.
• Budget evaluation techniques which are: open-ended, increase-decrease analysis, fixed
ceiling, priority listing and item by item control
• Constraint that shape the budget which include; knowledgeable officers, politics, Accounting
system problems, lack of accurate information and continuity of policy or programme.
• Financial appropriation in local government and functions of finance and general purpose
committee.
• Finally distinction between budget and development plan
Self-Assessment Questions (SAQs) for Study Session 9
Now that you have completed this study session, you can now assess how well you have
achieved the learning outcomes by answering the following questions. Write your answers in
your study diary and discuss areas that are not very clear to you with your facilitator.

Objective Questions
SAQ 9.1 (Tests Learning Outcome 9.1)
1. One of the objectives of budgeting in government is to ensure programmes or activities are
related to expected or available resources and economic conditions.
a) True
b) False
c) Indifference

SAQ 9.2 (Tests Learning Outcome 9.1)

2. ________ budgeting is the traditional approach of government allocation.
a) Planning programming
b) Performance
c) Line-item
d) Zero-based.

SAQ 9.3 (Tests Learning Outcome 9.2)

3. The budgeting techniques which delineates a government office according to its logical
functions in budget
a) Performance
b) Planning programming
c) Functional/programme
d) Zero-based

SAQ 9.4 (Tests Learning Outcome 9.2)

4. All the following are constraints that shape budget except
a) Politics
 b) Knowledgeable officers
c) Accounting system
d) System of government

SAQ 9.5 (Tests Learning Outcome 9.2)

5. The finance and general purpose committee of the local governments is headed by
a) Chairman of the local government
b) Speaker of the House of Assembly
c) Chairman local Government Commission
d) Commissioner of local Government Commission

Essay
1. Highlight three distinction between budget and development plan
2. Mention five benefits of budgeting by the government

References /Suggestions for Further Reading

Adams R.A (2002): Public Sector Accounting and Finance. 3 rd Edition. Corporate Publishers
Ventures Yaba-Lagos.
Eneanya A. N (2014): Theory and Practice of Public Administration. Ibadan University Printers,
Ibadan.
Salawu R.O (2005): Essentials of Public Finance. OAU Press Ltd. Ile-Ife

Study Session 10: National Debts and Debt Management

Introduction
Public indebtedness of a central government expressed in money terms, often referred to as
national debt. The debt is computed differently by nearly every nation, some authorities exclude
all government obligations other than those incurred by public borrowing from individuals.
There has been consistent controversy over debt management in Nigeria. The controversy
includes primary objections to and justification for borrowing. Most of the objections focus on
the interest cost that is created, the inflationary pressures that are associated with large scale
borrowing, debt illusion, crowding out effect and generational inequality of debt burden.

Learning Outcomes of Study Session 10

10.1 Meaning of National Debts
10.2 Classifications of Public Debt
10.3 Reasons for public debt
10.4 Sources of public debt
10.5 Limits of raising public debt
10.6 Public Debt Management

10.1 Meaning of National Debts.

Normally the government of a country has a large variety of debt obligations. Therefore, public
debt may be defined in several different watts covering their alternative combinations and to suit
the purpose of the definition.

Thus at one extreme, it may be defined as how much a country owes to lenders outside of itself.
These can include individuals, businesses and even other governments. It may include all
financial inabilities of a government including its currency. It may include only a few of them.
The term “public debt” is often used interchangeable with the term National debt, but some
countries include the debt owed by states in a federation.

10.2 Classification of Public Debt.

Public debts are classified along the purpose for which the debt was incurred as follows:
a. Internal Debt: This also called Domestic debt. It is the amount of money owed to citizens or
raised within the economy. Repayment is by local currency by tax revenue transfer to the
creditors.
b. External Debt: External loans are raise from foreign countries or international institutions.
These loans are repayable in foreign currencies. External loans help to take up various
developmental programmers in developing countries. These loans are usually voluntary.
c. Voluntary Debt: These loans are provided by the members of the public on voluntary basis,
most of the loans obtained by the government are voluntary in nature. The voluntary debt
may be obtained in the form of market loans, bonds etc. The government makes an
announcement in the media to obtain such loans.
d. Compulsory Debt: A compulsory debt is a rare phenomenon in modern public furnace
unless there are some special circumstances like war or crisis.
e. Trade Debt: This debt arises when a country trade with other countries and is unable to pay
for the goods and services supplied
f. Product Debt: This could also be called project tied loans. It is raised for productive purpose
and is used to add to the productive capacity of the economy.
As Dalton puts, productive debt are those which are fully covered by assets of equal or
greater value. Productive loans are self liquidatory. Generally, such loans should be repaid
within the lifetime of property. Thus such loans does not cause any net burden on the country
g. Unproductive Debt: Unproductive debts are those which do not add to the productive
capacity of the economy. They are not necessarily self liquidatory. The interest and principal
amount may have to be paid from other sources of revenue, generally from taxation, and
therefore, such debts are a burden on the economy.
h. Funded Debt: This debt is repayable after a long period of time. The period may be thirty
years or more. Funded debt has an obligation to pay fixed sum of interest subject to an option
to the government to repay the principal. The government usually establishes a separate fund
to repay this debt. Money is credited by the government unto this fund and debt is repaid on
or before maturity out of this fund.
i. Unfunded Debt: These debts are incurred to meet temporary needs of the government. These
debts duration is comparatively short say a year. The interest rate on unfunded debt is very
low.

10.3 Reasons for Public Debts.

Let us now see some of the reasons on account of which a government might raise public debt.
a. There May be a Sudden Spurt in Government Expenditure: This may be as a result of
ways or natural calamities in wish case the government would be forced to incur much larger
expenditure and may run into a debt.
b. The Fear to Change Businesses as Usual: Politicians are masters at playing the game,
because Nigerians waking up to the financial crisis we are in today, policy makers in both
executive and legislature use any administrative “back doors” to increase the debt ceiling
without looking like they did.
c. Unpaid Interest on Debt: when the interest on public debt remained unpaid and subsequent
interest rate is calculated on compound interest, this will result to increase in public debt.
d. Smoothing: This is to ensure a more efficient manner for conducting counter cyclical
policies or meeting emergency spending needs. The government instead of decreasing taxes
during recessionary periods as an expansionary fiscal policy during periods of recession
resorts to borrowing from external sources to boost economic activity in order to avoid
efficiency losses and economic uncertainty.
e. Stability: Excessive reliance on printing money could lead to high and volatile inflation,
which obscures the information content of relative prices and hurts investment. Economic
theory has it that when there is a continuous and rapid increase in supply of money (Curtion
of new currency) without a corresponding growth in the output of goods and services can
result in hyperinflation which may seriously affect foreign investment and business planning.
In order that nation does not want to suffer from hyperinflation, the government does not
print new money to fund capital projects but rather borrow.
f. Political Budget Cycles: The stage of the election cycle affects fiscal policy. The incumbent
government thus to hold on to power by spending on identifiable and observable
consumption expenditures rather than on investments. Election years are often characterized
by increased government expenditure and budget deficits which are always financial by
public debt.

10.4 Sources of Public Debts.

The sources of public debts could be classified into two:

10.4.1 Internal Sources of Public Debt

It should be noted that it is the central Bank of Nigeria (CBN) responsibility to administrator
internal debt. The instruments of internal public debt are:
1. Three-month treasury bills which are issued either to replace those maturing or to raise extra
money for government
2. A one to two-year treasury certificates
3. Long-term development stock which are issued periodically as a means of channelling
savings into productive uses through the government.
4. CBN overdraft to government.

10.4.2 The Major Sources of External Debt. The Major External sources of debt include
the following:
a. The Paris club of creditor
b. The London club of creditor
c. The multinational creditors like;
i. The international monetary fund (IMF)
ii. African Development Bank (ADB)
iii. European investment Bank (ETB)
iv. International fund for Agricultural Development.

10.4.3 The composition of Nigeria’s External Debt Stock.

Nigeria’s external debt stock is composed of the following
❖ Federal Government Debt
❖ Private companies Debt
❖ State Government Debt
❖ Government parastatals Debt inabilities.

10.5 Limits of Raising Public Debt

We find that in most countries public debt has registered a continuous upward trend during the
last few decades. But still a question arises as to whether there are any definite limits beyond
which a government cannot raise loans and add to its outstanding debts obligation. To answer
this question, we shall discuss answer this question, we shall discuss the will and capacity of the
government to raise loans both in the short run and long-run as follows:
a. It must be noted at the outset that a modern government is not expected to borrow for the
sake of it. It is not expected to borrow for indulging in wasteful expenditure of any kind or to
suit the personal whims of individuals running the government. It is expected that the
government would abide by a self-imposed limitation that all borrowings must be for public
purpose.
b. In some cases, there may also be specific legal restrictions on public borrowings.
c. Given total loan able funds, government borrowings add to their demand and cause an
upward pressure on interest rates. Thus, higher interest cost can act as a deterrent against the
borrowing programmers’ of the authorities.
d. In the long run, however, total volume of public debt can increase gradually and in line with
the growth in national income and credit structure. Therefore, no definite limit may be stated
to exist for the volume of public debt in the long-run (unless the law sets such a limit). The
philosophy that the government should be guided by overall governments of the economy
without worrying about the actual budgetary surpluses or deficits has also freed the
government from inhibitions about the absolute size of the public debt
e. It has been claimed that the physical growth of an economy cannot be sustained without a
healthy and strong financial sector. And this in turn necessitates the growth of the public debt
since it provides a foundation for the superstructure of credit in the economy. This line of
reasoning has always been advocated and emphasized for sustained economic growth.

10.6 Public Debt Management

There has been consistent controversy over debt management in Nigeria. The controversy
includes primary objections to justifications for borrowing. Most of the objections focus on the
interest cost that is created, the inflationary pressure that are associated with large-scale
borrowing debt illusion, crowding out effect and generational inequality of the debt burden. In
Nigeria the central Bank of Nigeria is statutorily responsible for debt management in conjunction
with the federal ministry of finance and other agencies. Recent development has witnessed the
establishment of Debt management office in the vice president’s office to oversee the work of all
the named agencies on public Debt management. Debt management is the technical, operational
and institutional arrangement enjoyed in managing a country’s inabilities so that the debt stock
and the debt service burden are curtailed to a tolerable and sustainable level.
 10.6.1Debt management office: organizational structure

Supervision
Board

Director
General

Internal Executive
Audit Unit

Debt recording Debt recording Debt recording Debt recording Organizational

and settlement and settlement and settlement and settlement Resources
Department Department Department Department Department

16.6.2 Departments and Operational Responsibilities

The Debt management office is structured in a front, middle and a back office configuration in
line with international best practice in debt management. It consists of four core department.
a. Portfolio Management Department (Front Office): It negotiates loans and is responsible
for the issuance of sovereign bonds.
b. Strategic Programme Department (Front Office): It is responsible for facilitating the
development of debt management Developments (DMDs) in the 36 states of the federation,
nationwide public. Debt education, the establishment of the Debt management institute, and
the management of associated issues and externalities affecting public debt.
c. Market Development Department (Front Office): This department is responsible for the
development of the federal Government of Nigeria debt securities market.
d. Policy Strategy and Risk Management Department (Middle Office): This department is
responsible for, among others, the formulation of policies and strategies, performing debt
sustainability analysis and risk evaluation on the portfolio.
e. Debt Recording and Settlement Department (Back Office): This department is
responsible for the recording of public debt data and the serving of debt.
f. Organizational Resourcing Department(Support-Office): Responsible for human
resources and administrative issues, Its accounts, outreach and communication

Summary of study Session Ten

In this study session, you have learnt.
1. Meaning of National Debts
2. Classifications of Public Debts Which are internal, external, voluntary, compulsory, trade,
product, unproductive fund, and unfunded public debts.
3. Reason for Public Debts are: sudden spirit in government expenditure, Fear of change in
businesses pattern, smoothing, stability, political budget cycles and unpaid interest on debt.
4. Internal and external sources of public debts
5. The composition of Nigeria’s external debt stock.
6. Limits of raising public debt and debt management

Self Assessment Question (SAQs)

Now that you have completed this study session, you can assess how well you have achieved its
learning out comes by answering these questions.

Objective Questions
SAQ 10.1 (Tests Learning Outcome 10.1)
1. The type of debt that arises when a country trade with other countries and is unable to pay
for the goods and services supplied is______________
(a) Product
(b)Compulsory
(c)Trade
 (d)Voluntary

SAQ 10.2 (Tests Learning Outcome 10.1)

2. All of the following are classifications of public debt except (a)Produce debt
(b)Unproductive debt
(c)Funded debt
(d)Government debt

SAQ 10.3 (Tests Learning Outcome 10.1)

3. Smoothing is a reason for public debt
(a)True
(b)False

SAQ 10.4 (Tests Learning Outcome 10.2)

4. ______________is directly above the Director General in debt management office
(a)Minister
(b)Supervisory Board
(c)Board of Governors
(d)Auditor General.

SAQ 10.5 (Tests Learning Outcome 10.2)

5. ______________department is responsible for the development of the federal government
of Nigeria debt securities market. (a)Market
(b)Portfolio
(c)Strategic
(d)Debt recording

Essay
1. List and explain classification of public debt.
2. Write short notes on reasons for public debts.
3. What do you understand by the term-National debts.

References and Suggestion for further ready

Edosa E. &Osaze (2003) Public Finance: AStudy Guide, Ethiopia, Benin City: Publishing
Corporation.
Nwulw A.O (2003), Budgeting and Public Finance (Page752) Lagos National Open University
of Nigeria.
Oriakhi D.E (2004) Introduction to Public Finance 2ndEdition. Benin-City, Nigeria Mundex
Publishing.

Study Session 11: Public Sector Audit

Introduction
Auditing is as essential in the public sector as it is in the private sector. By the provision of
Section 85 of the 1999 constitution of federal republic of Nigeria as amended states that there
shall be an Auditor-General for the federation. The role of the auditor-general is to ensure that
there is accountability by the legislative arm, the proper administration of the activities,
functions, operations and programmes of the government and its various agencies.

Learning Outcomes for Study Session 11

At the end of this study session you should be able to:
11.1 Define the Term Audit
11.2 Explain the Appointment and Functions of the Auditor-General of the Federation of
Nigeria
11.3 List and Explain Categories of Government Auditing programmes
11.4 Highlight Objectives of Auditing Government Parastatals
11.5 Explain the Public Sector Audit Procedures
11.1 Definition of Audit
Audit is an official inspection of an organization’s account typically by an independent body. It
could also be said as a systematic and independent examination of data, statements, records,
operations and performance (financial or otherwise) of an enterprise for a stated purpose.

11.2 Appointment of Auditor-General

The auditor-general for the federation shall be appointed by the president on the recommendation
of the federal civil service commission, subject to confirmation by the senate as being
providedunder section 86 of the 1999 constitution as amended “The Auditor-General for a state
shall be appointed by the Governor of the state on the recommendation of the state civil service
commission subject to confirmation by the House of Assembly of the state.
Section 126 (3) provided “Except with the sanction of a resolution of the House of Assembly of
a state, no person shall act in the office of the Auditor-General for a state for a period exceeding
six months. This is also being provided for under section 86 (3) of the 1999 constitution for the
federation.

11.2.1 Functions of Auditor-General for the Federation

The Audit act 1958 provides that the Auditor-General for the federation shall audit the accounts
of all accounting officers and of all persons entrusted with the collection receipt, custody, issue
or payment of federal republic monies or with the receipt, custody, issue, sale, transfer or
delivery of any stamps, securities, stores or other property of the government of the federation.

The functions of the Auditor-General for the federation include the following:
a. Auditing and reporting in respect of treasury accounts, accounts of ministerial extra-
ministerial departments and accounts of parastatals.
b. Detection and prevention of fraud
c. Control of loss of funds by ensuring that effective internal control systems are in place.
d. Serving as chairman of the Audit Alarm committee and chairman of the loss committee, and
e. Being in attendance during public accounts committee sessions as an adviser.
ITQ
Who appoints the Auditor-General of the federation? Support your answer with appropriate
statutory provision
Answer: The president of federal republic of Nigeria is responsible for the appointment of the
Auditor-General of the federation on recommendation of public service commission and subject
to the confirmation of the National Assembly. Section 86 (1) of 1999 Constitution of Federal
Republic of Nigeria as amended.

11.3 Categories of Government Auditing Programmes

Government auditing can be divided into three major categories, namely;
11.3.1 Audit of the Treasury accounts, as prepaid by the Accountant-General of the federation,
11.3.2 Audit of Ministries/Department and Agency Accounts, and
11.3.3 Audit of Accounts of Parastatals
11.3.1 Audit of the Treasury Accounts

The treasury department is headed by the Account-General of the federation, who is regarded as
the Chief Accounting officer of the federation. He is also the treasurer and the financial adviser
to the federal government (finance control and management Act, 1958)
Functions of the Treasury Department
a. It Is the custodian of the consolidated revenue fund, development funds, contingency fund
and other public funds of the federation.
b. It manages the federation accounts and their disbursements to the three tiers of government
c. It supervises the accounts of all ministries and extra-ministerial Departments and issues
circulars to them on government accounting and financial control matters.
d. It is responsible for staff training and development of accountants, accounting and auditing
personnel from the three tiers of government
e. It is responsible for revenue monitoring and accounting in ministries and extra-ministerial
departments to ensure that the necessary internal controls are in place.
f. It initiates and formulates financial and accounting policies for the federal government

The main objectives of auditing of treasury accounts are to ascertain whether:

 a. The financial statements have been prepared in accordance with generally accepted
government accounting principles and
b. The information contained in the financial statements are properly classified, reliable,
accurate and complete

11.3.2 Audit of Ministries/Departments and Agency Accounts

The minister or commissioner (at the state level) is the Chief Executive of each ministry while
the permanent secretary is the accounting officer who is empowered to deputize for the Chief
Executive whenever the former is away from office.

In the extra-ministerial departments and agencies, the head of department is the accounting
officer each ministry or extra-ministerial department also has a finance and supplies department
(now finance and accounts from October 2001, headed by a director) and sub-divided into two
divisions (accounts divisions and supply division). One of the functions of the accounts division
is the submission of financial statements to the treasury in the form required and reconciliation of
the ministry’s below. The line accounts, that is, non-budgetary accounts balances with treasury
corresponding balances. Each ministry or extra-ministerial department is regarded as an
accounting unit for the purpose of processing accounts in the public sector. Accounting units are
classified into the following three groups
a. Self-Accounting Units
b. Non-self Accounting Units and
c. Sub-Accounting Units

a. Self-Accounting Units
These are ministries or extra-ministerial departments where the accounting functions are
delegated to the accounting officer and are therefore, required to:
i. Be approved by the ministry of finance to be a self-accounting unit
ii. Write an accounting manual or code which must be approved by the accountant-general and
auditor-general
iii. Establish an internal audit department
iv. Operate a central pay office and
v. Operate two current bank accounts with the central bank of Nigeria, one for revenue account
and the other for capital expenditure

Examples of self-accounting units are all federal and state ministries

b. Non-Self Accounting Units:
These are ministries or extra-ministerial departments which are required to maintain complete
records of “below-the-line” payments and receipts (salary advance accounts) but incomplete
records of the “above-the-line (Budgetary Account) payments and receipts. Consequently all the
financial transactions of this type of unit are conducted through the federal Sub-Treasury or
federal pay office in the state; to which payment vouchers are presented for checking and
payment. Revenue received by this type of unit is paid into the account of the sub-treasury or
federal pay officer and it is the latter who renders his accounting return to the accountant-general
of the federation.
Examples of non-self accounting units are the federal ministries located in any state of the
federation.

c. Sub-Accounting Units
These are Ministries and extra-ministerial departments where the accounting functions are
delegated to the accounting officer but the officer is required to render monthly accounts to the
accountant-general not in details but in sub-head aggregate form, accompanied by the original
vouchers.

Examples of sub-accounting units are federal pay offices, custom area offices, and police pay
offices.
Monthly transcripts should be audited by the auditor-general’s staff before being sent to the
treasury.

There are appropriate divisions in the office of the auditor-general for the federation to handle
the audit of various types of ministries/departments and agencies.

These include the following:

1. Revenue audit division to handle the audit of all revenue earning ministries/departments for
example, federal ministry of petroleum resources, custom and excise, federal inland revenue
service
2. Self-Accounting Ministerial Department Division of the Auditor-General’s office. This
division is responsible for the audit of the transactions and accounts of self-accounting
ministries/departments. Examples are ministry of education and ministry of communication.
3. Defense and security division responsible for the audit of the transactions and accounts
relating to the ministry of defense, the armed forces of the federation, police and other
security agencies of government.

11.3.2.1 Duties and Responsibilities of Government Internal Audit Units.

The general responsibilities of the internal audit units at the various levels of government as
contained in the existing financial regulations are to:
a. Carryout continuous examination of all accounting books and records maintained by the
Ministry/Department
b. Determine the adequacy of the internal control system
c. Ensure that an adequate system of securities exists in the ministry/Department
d. Check all payment vouchers originating from any section of the Ministry/Department before
payments are made
e. Check the reliability of the accounting and reporting systems.
f. Carryout any special review or assignment which may be required by management
g. Co-operate with and assist the office, of the auditor-general for the federation in making
available necessary documents for the final audit of the establishment.
ITQ
Mention and explain two divisions in the office of the auditor-general for the federation that
handle audit of Ministries/Department and Agencies
Answer: Two divisions that handle audit of ministries department and agencies in the office of
the auditor-general are:
a. Revenue Audit Division: This division handles the audit of all revenue earning
ministries/Department. For example, federal ministry of petroleum resources, custom and
excise, federal Inland Revenue service.
b. Defence and Security Division: This division is responsible for the audit of the transactions
and accounts relating to the ministry of defence and other security agencies of Government.

11.3.3 Audit of Federal Government Parastatals federal parastatals or public sector enterprises
originated from public authorities, which are government units, created to perform a single
function or a restricted group of related activities. Some of them are set up to accomplish some
purposes which ministries/extra-ministerial departments and agencies are not adequately
equipped to accomplish. Examples of this type are water, sewage, electricity, and gas utilities,
seaports, hospitals, schools, transportation systems, Public housing, etc.
Section 85 (3) of the 1999 constitution as amended provides that the auditor-general for the
federation shall not audit the accounts of or appoint auditor for government statutory
corporations, commissions authorities, agencies, including all persons and bodies established by
any Act of the National Assembly but the Auditor-General as authorized to:

a. Provide such bodies with

i. A list of auditors qualified to be appointed by them as external auditors and from which
the bodies shall appoint their external auditors and
ii. Guidelines on the level of fees to be paid to external auditors and
b. Comment on their annual accounts and auditor’s report thereon.
The auditor-general however, shall have power to conduct periodic checks at all these
government parastatals section 85 (4) of 1999 constitution. It is clear therefore, that the audits
of the parastatals are carried out by the firms of professional accountants in accordance with
the provision of the 1999 constitution. Such audited accounts signed by the Board of the
parastatals along with the auditor’s domestic reports on them are forwarded to the auditor-
general for the federation for vetting.

11.4 Objectives of Auditing Government Parastatals

The objectives of auditing the accounts of government parastatals are to ascertain whether:
a. Proper accounting records are being kept
b. All revenue items are duly collected and properly accounted for
c. Adequate controls exist to ensure the safety and proper use of the organization’s funds and
assets
d. The organization’s management comply reasonably with the general level of probity and
public accountability
e. The organization’s chief executive and other top management carry out only those functions
and operations for which the corporations is established
f. Proper accounts are being prepared in accordance with the financial and accounting clauses
as provided for in the respective legal instruments setting up that corporation
g. The audited financial statements reflects a true and fair picture of the activities of the Board
of corporation for a particular period
ITQ
Mention two objectives of auditing government parastatals
Answer: Two objectives of auditing government parastatals are:
1. To ascertain whether proper accounting records are being kept
2. To determine whether all revenue items are duly collected and properly accounted for

11.5 Public Sector Audit Procedures

The peculiarities of public sector accounting make the procedures required for the audit to be
peculiar to some extent. There are certain procedures of auditing in the public sector which are
similar to those in the private sector, such as the verification of assets and store audit. However,
some procedures are peculiar to the public section accounts.
Examples of these peculiar procedures are in respect of the following
a. Revenue
b. Vote book
c. Contract
d. Cash book and
e. Control of security document

a. Revenue: The following steps should be taken to audit the revenue collected on behalf of
Government.
1. Conduct a cash survey on the revenue collector who is an officer entrusted with official
receipt or license book for the regular collection of a particular form of revenue from the
public and is required to keep a cash book
2. Obtain and ascertain all receipts issued to the revenue collector after the last audit
3. Trace all the triple copies of receipts into the revenue cash book maintained by the revenue
collector.
4. Cast the cash book to ensure that no mistake has been made.
5. Verify the total collection as recorded in the revenue cash book with the TR 6 posted on the
cash book for evidence of payment to the main cashier
6. Examine the bank tellers and confirm at the central pay office (CPO) that all cheques
received have been correctly and completely recorded
7. For rates, obtain copies of the latest assessment notice and list of outstanding from the
previous year
8. Evaluate the system of internal control for the handling of all receipts of revenue

b. Vote Book
The audit procedures for departmental vote allocation book (vote books) in the public sector are
stated below:
i. Obtain the approved estimates for various heads and sub-heads
ii. Obtain copies of the financial warrant/authority to incur expenditure (AIE) issued to the
ministry/Department
iii. Post the warrants to the Vote Book to ensure that there is authority for the entries made
iv. Ascertain the officers who are authorized to control and spend the votes
v. Ensure that all vouchers, including the liabilities are posted to the Vote Book
vi. Ensure that no unauthorized liability or expenditure is incurred and that over-expenditure
is avoided
vii. Ensure that each entry is initiated by the authorizing officer
viii. Check all the various instruments of vehement
ix. Ensure that where there is a mistake, the entry is reversed in red or black ink as
applicable
x. Ensure that all outstanding liabilities at the end of the financial year are cleared as
indicated in financial regulation 521

c. Contract
The procedures for the audit of contract account are as follows:
i. Check contract agreements with the minutes of the Tenders Boards Meetings
 ii. Open the contract register and update it for control purposes
iii. Ensure that interim payments are in accordance with the contract agreement
iv. Examine the completion certificates to ensure that payments are made on the appropriate
certificates given
v. Conduct physical inspection of work done to ensure compliance with terms of contract
and completion of work certificates given
vi. Ensure that the correct retention fee is retained
vii. Ensure that all necessary deductions are made before payments are made on each
occasion that they are authorized

d. Cash Book
The following procedures shall apply when auditing the cash book of the pay office, central pay
office or cashier in the treasury of a Local Government
i. Conduct a cash survey to verify if the cash book (cash column) agrees with the physical cash
produced for survey
ii. Trace the receipt vouchers to the each book and ensure that all of them have been correctly
posted
iii. Verify revenue collected and paid to bank by reference to the bank tellers
iv. Ensure that the cash book contains individual treasury receipt numbers
v. Trace the payment vouchers to the cash book serially and ascertain that all postings are
accurate and complete
vi. Ensure that all the cheque numbers (where applicable) are correctly indicated in the cash
book
vii. Cast the cash book, ensuring that every brought-forward and carry-forward balances from
one folio of the cash book to the other are correctly transferred and cover the entire audit
period.

e. Control of Security Documents

The following steps should be taken to audit the security book register in order to ensured control
of the various types of security documents used by government:
1. Check if orders for new supplies of cheques or printing of receipts are authorized by the
designated officer in the finance department
2. Ensure that all deliveries of new supplies are recorded in the appropriate register, for
example, cheque stock register or security book register
3. Check that all issues from stock are recorded in the appropriate security book register and
signed by authorized recipients
4. Request to see all cancelled cheques for audit inspection
5. Ensure that all the security documents whether currently in use or not are kept in a safe under
lock and key
6. Ensure that there is prior written approval consent of the account-general of the federation for
the transfer of receipt books between any sub- accounting officers.

Summary of the Study Session 11

In this study session, you have been able to learn the definition of audit, appointment and
functions of auditor-general of the federation categories of government auditing programmes,
objectives of auditing of government parastatals and public sector audit procedures.

Self-Assessment Questions (SAQs) for the Study Session 11

Now that you have come to the end of this study session do you know how well you have fared?
Would you like to test your understanding of the session? Then, see if you can answer the
following assessment questions. Do not hesitate to write down in your notebook the topic you do
not understand or that needs further clarification. Discuss this with your lecturer in the next
tutorial you will have.

SAQ 11.1 (Tests Learning Outcome 11.1)

1. The responsibility for auditing the accounts of the Nigeria police force lies on
a) The accountant-general of the federation
b) The auditor-general for the federation
c) The inspector-general of police
d) The Honourable Minister of Finance
SAQ 11.2 (Tests Learning Outcome 11.1)
2. The functions of the Auditor-General for the federation do not include
a) Detection and prevention of fraud
b) Auditing and reporting in respect of treasury accounts
c) Serving as chairman of the audit alarm committee
d) Being in attendance during public accounts committee session as a chairman

SAQ 11.3 (Tests Learning Outcome 11.2)

3. The following are the classification units of accounting in the public sector except
a) Self-Accounting Units
b) Non-Self Accounting Units
c) Sub-Accounting Units
d) Sub-Balancing Units

SAQ 11.4 (Tests Learning Outcome 11.2)

4. The following is one of the types of units used to describe a ministry or extra-ministerial
department
a) Self-Balancing
b) Non Self Balancing Unit
c) Self-Accounting Unit
d) Non Sub Accounting Unit
SAQ 11.5 (Tests Learning Outcome 11.3)
5. The auditing procedure which ensures the examination of the completion certificates to
ensure that payments are made on the appropriate certificates given is __________ procedure
a) Cash Book
b) Contract
c) Security Control
d) Material Control

SAQ 11.6 (Tests Learning Outcome 11.3)

6. Section ________ of the 1999 constitution of federal republic of Nigeria provides for the
existence of auditor-general for the federation
 a) 85
b) 86
c) 126
d) 125

SAQ 11.7 (Tests Learning Outcome 11.4)

7. _______ is an official inspection of an organization’s account, typically by an independent
body
a) Investigation
b) Audit
c) Accounting
d) Auditor

Essay
1. Highlight two of public sector audit procedures
2. Write short notes on the following
a. Self-Accounting Units
b. Sub-Accounting Units
c. Non-Self Accounting Units

References and Suggestions for Further Readings

ICAN (1999) Rules of Professional Conducts of Members “In Members” Hand Book.
Johnson I.E.C (1999) “Public Sector Accounting and Financial Control” Lagos: Financial
Training Nigeria.
Millichamp A.H (2000) Auditing London, Letts Educational, 7th edition
OvemadeTunde (1988) “Auditing and Investigation” Lagos: West African Book Publishers.

Study Session 12: Due Process in Public Sector

Introduction
In study session 12, we were able to discuss at length the definition of audit, functions and
appointment of auditor, general for the federation, procedures for auditing public sector and
objectives of auditing of public sector. This study session will expose us to different ways of
achieving financial efficiency in public sector without deviating from rules and stationary
provisions by those involved in Public Administration.

Learning Outcomes of Study Session12

At the end of this study session, you should be able to:
12.1 Explain the term “Due Process” in public sector
12.2 Highlight main objectives of due process
12.3 Discuss Due Process Review
12.4 List impact of Due Process Review
12.5 Explain Public sector investigations

12.1 Due Process in Public Sector

It is a process that is designed to enforce and ensure compliance in budgeting, procurement and
spending is not only based on authentic, reasonable and fair costing, but are also appropriately
geared to be realization of set priorities and forgets that were generated from medium range
strategic plan.

The Obasanjo Administration that committed itself to using the budget to generate sustainable
growth, reasonable investment and significantly reduce poverty adopted the Due process
compliance (DPC instrument to ensure due compliance in disbursement of government funds and
other financial activities of the government.
Due process simply means the appropriate way or proper method or expected approach or
normal way of doing something.
12.2 Objectives of the Due Process
The following are the main Objectives of Due process
a. To harmonize and update all federal Government policies and practices on public
procurement and by extension or implication, those of the state and local governments
b. To ensure that project conceptualization and packaging match the defined priorities and
targets as set in Annual Appropriate.
c. To strictly enforce the Due process principle of transparency, competition and efficiency
and value for money in the procurement of public goods, works and services
d. To ensure efficient and integrity-based monitoring of the implementation of all federal
Government projects and by extension those of the state and Local government in line
with Due process principles
e. To prevent extra budgetary spending by ministries, departments and agencies by ensuring
that only projects with due Appropriation by the National Assembly and by extension, the
state House of Assembly and the Local Government Councils are certified and thus
funded for execution
f. To prevent contract inflation by ensuring cost reasonableness, accuracy and
comparability of all public contracts with national, regional and global costs.

Question
Mention three objectives of the Due process
Answer: Three Objectives of Due process are:
1. To prevent contract inflation by ensuring cost reasonableness and accuracy.
2. To harmonize and update all federal Government, State and Local Government Policies and
practices on public procurement.
3. To ensure that project conceptualization and packaging match the defined priorities and
targets as set in Annual Appropriations

12.3 Due Process Review.

On a continuous basis and in both the private and public sectors, efforts are usually made, to seek
improvement on the way activities are carried out, if there is to be progress in the results being
sought to be achieved. More importantly, in the public sector, those at the helm of affairs should
make deliberate put in place in all the three tiers of government. If they must remain relevant in
the global village which the world is turning into.

The concept of control as applicable to the Public sectors has been undergoing various changes
from one country to the other and in the recent past. Those involved in the administration of
Nigeria have formulated policies aimed at improving resource utilization at the budgeting
implementation stage from the year 2001. Considerable efforts have been made to find new
techniques of control and to introduce institutional changes and improvements to the types of
control applied.

There has been a constant effort at applying a new approach to financial management in the
public sector. This involves a new managerial outlook to controls, which in turn according to
Nwankwo (2004) includes:
(a) Specifications of standards and measures of performance
(b) Emphasis on output controls
(c) Greater competition in the public sector
(d) More focus on discipline and economy in resource use

12.3.1 Establishment of the Budget Monitoring and Price Intelligence Unit (BMPIU).
It has always been a recurrent observation of those reviewing the budgetary performance of
government in Nigeria that experienced during implementation may as well have originated in
formulation.
Therefore, the axiom “prevention is better than cure” could be appropriate here. It is on the basis
of the view that evaluation of completed programmes and projects was initiated as an ex-post
control but with an impact that goes beyond the budget implementation phase. The evaluation
consist of an assessment of progress and its impact, so that areas of success and failure in
implementation can be identified. It is a process aimed at the following:
(a) Examining the programme rationale
(b) Achievement of Objectives
(c) Costs of achievement
(d) Exploitation of alternatives.
Evaluation in the content of the above explanation services mainly to link formulation and
implementation of budgets and is used by the executive.

The BMPIU has become synonymous with due process. Infact, it has come to be known as the
Due process unit because of the emphasis on the different tiers due process in all the different
tiers of Government and in all the Parastatals.
12.3.2 Objectives of BMPIU
The objectives of BMPIU are to
(a) Harmonize existing policies/practices and update same on public procurement
(b) Determine whether or not Due process has been observed in the procurement of services
and contracts
(c) Introduce more honesty, accountability and transparency into the procurement process
(d) Establish and update pricing standards and bench marks for all supplies to government
(e) Monitor the implementation of projects during execution with a view to providing
information on performance, output and Compliance with specifications and targets
(f) Ensure that only projects which have been budgeted for are admitted for execution.
ITQs
1. What do you understand by the term “Due process”
2. Mention two objectives of BMPIU
Answer:
1. Du
2. \e process simply means the appropriate way of doing something.
3. Two Objectives of BMPIU are
a. To ensure that only projects which have been budgeted for are admitted for execution.
b. To introduce more honestly, accountability and transparency into the procurement
process.

12.3.3 Functions of BMPIU.

The BMPIU operates under four main areas as follows:
(a) Regulatory functions
(b) Certification functions
(c) Monitoring functions and
(d) Training and Advisory Functions

a. The Regulatory functions consist of the following

 i. Regulating and setting standards, including the enforcement of harmonized budding
and tender documents
ii. Formulating of the general policies and guidelines related to public sector
procurement
iii. Developing, updating and maintaining a related system, wide data base and
technology
iv. Undertaking procurement research and survey in order to determine information
needs and project costing
v. Enforcing professional ethics and sanctioning erring officers and professionals

b. The Certification Functions include:

i. Certifying all federal Government procurements under the following guidelines:
ii. Resident Due process Team Certification for projects below N50million and
iii. Full Due process certification for projects above N50million at various stages such as
“contract award certificate” and “payment certificate”.

c. The Monitoring Functions Comprise:

I. The supervision of the implementation of established procurement policies.
II. Monitoring of the prices of tendered items
III. Performing procurements audits
IV. Undertaking the monitoring of capital projects that have exceeded 50% of contract
sum before release of further funds and
V. Documentation of all projects at award and completion styles, and publishing same in
designing journals.

d. The Training and Advisory functions include the following?

i. Co-ordination of relevant training programmes so as build institutional capacity.
ii. Embarking on regular public enlightment programmes aimed at sensitizing various
stakeholders involved in procurement
 iii. Interacting with Government and parastatals officials, National Assembly member,
consultants and relevant professional bodies in order to educate them on all aspects of
the work of BMPIU.

12.4 Impact of Due process Review.

The impact of the Due process Review has been reportedly felt at all levels of government
(Federal state and Local) and even in the parastatals. Some of the salutary effects are:
a. Recognition of only competent contractors who go through the due process
b. Elimination of “middlemen” such as consultants in contract awards
c. Re-instatement of rightful contract winners who had been formerly denied contracts
d. Restoration of confidence to many local and foreign companies that could not carry on in the
former corruption ridden culture that had characterized the award of government contracts
e. Massive savings through the reduction in contract sum of the contracts reviewed by the unit.
For example, as much as N125billion in the first two and half years of operation and
f. Improvement in revenue collecting units of Government. For example the federal inland
Revenue service (FIRS), Nigerian customs and Excise and other parastatals that have
resorted to following the laid down rules and procedures of carrying out their operations

ITQ
Mention the four main functions of BMPIU and highlight one of them.
Answer: The four main functions of BMPIU are
i. Regulatory Functions
ii. Certification Functions
iii. Monitoring Functions
iv. Training and Advisory Function.
ii. Certification Functions include:
a. Certifying all Federal Government procurement under the following guidelines.
(1) Resident Due process Team certification for projects below N50 million and
b. Full Due process certification for projects above N50million at various stapes such as
“contract award and certificate and payment certificate”
12.5 Public Sector Investigations
When it comes to losses of Government Fund or Suspected fraud, there are laid down procedures
for conducting the required investigation. The main reason for this could be attributed to the
bureaucratic structure in the Public sector.

12.5.1 Power to conduct Investigation in the public Sector

Section 88 of the 1999 constitution as amended provides that each House of the national
assembly shall have power, by resolution published either in its journal or in the federal
Government official Gazette, to direct into:
a. Any matter or thing with respect to which it has power to make laws: and
b. The conduct of affairs of any person, authority, ministry or government department charged,
or intended to be charge, with the duty of or responsibility for:
i. Executing or administering laws enacted by the National assembly and
ii. Disbursing or administering monies appropriated or to be appropriated by the
national Assembly.
The purpose for directing such an investigation is to enable National Assembly to
a. Make laws with respect to any matter within its legislative competence and correct any
detects in existing laws; and
b. Expose corruption, inefficiency or waste in the execution or administration of laws within
its legislative competence of funds appropriated by it.

Section 128 of the 1999 constitution as amended provides each state House of Assembly with
similar powers to conduct investigation for purposes similar to those for which National
Assembly can Conduct Investigation

In addition to the power of the legislative arm of Government to conduct investigation, the
executive arm of government can also conduct investigation through its public service structure.
This can be done by both the auditor-General for the federation and Accountant. general of the
federation.

12.5.2. Procedure for Carrying out Public Sector Investigations.

The procedure for conducting investigations in the public sector varies according to the type of
investigation being conducted. The variation is purely in terms of the extent to power bestowed
on the body set up for conducting the investigation. Some of the procedures are discussed below:
As regards the investigations that could be conducted by the National Assembly, section 89 of
the constitution state the power as to matters of evidence (which brings out clearly the procedure
to be followed) as follows;
a. The senate or the House of Representative or a Committee appointed to conduct investigation
shall have power to:
i. Procure all such evidence, written or oral, direct or circumstantial, as it may think
necessary or desirable and examine all persons as witnessed whose evidence may be
material or relevant to the subject matter
ii. Require such evidence to be given on oath
iii. Summon any person in Nigeria to give evidence or produce any document in his
possession or under his control and
iv. Issue a warrant to compel the attendance of any person who refuses to attend after
being summoned and order such a person to pay all costs associated with have to
compel his attendance.
b. Such a warrant or summons issued in this case may be served or executed by any member of
the Nigeria Police Force or any person authorized in tat behalf by the president of the senate
or the speaker of the House of Representatives, as the case may be.

Section 129 of the 1999 constitution contains similar provisions for power as to matter of
evidence bestowed on each state House of Assembly or its committee as regard the conduct of
investigation
At the completion of the investigation in either case, a report will be written and submitted to the
House.
In the case of the treasury inspectorate Department of the federal Treasury, whenever a case is to
be investigated, at least two investigators are appointed in order to allow the report of one
investigator to corroborate the report of the other. The investigation will involve:
a. Examination of records
b. Making extracts from relevant documents
c. Making visits to various places that are connected with the case
d. Interrogating persons that are connected with the case
e. Writing and submission of the investigation report.
The investigation report should be comprehensive enough and include recommendations as to
whether the case should be referred to the board of survey and inquiry, or where such referral is
not necessary, the sanctions to be meted out to the erring officers and possible improvement in
the internal control system to prevent a recurrence of similar cases.

12.5.3 Uses of Probe Panel in investigating

Fraud and corruption
The code of conducts is being provided for in the fifth schedule of the 1999 Constitution. The
meaning of misconducts as implied in the code of conduct Tribunal are also indicated
misconduct is stated in the code of conduct means:
“Breach of the oath of Allegiance or Oath of office of a member or breach of the provisions of
the constitution or a misconduct of such mature as amounts to bribery or corruption or false
declaration of assets and liabilities”
In the past, it was usual for the executive arm of Government to set a panel of enquiry (popularly
Government to set a panel) of enquiry (popularly referred to as Probe panel) for the purpose of
inquiring into a matter with a view to ascertaining the extent of fraud.
Ascertaining the extent of fraud and/or corruption perpetuated and those responsible for it. This
is different from the code of conduct Tribunal. Such a probe is usually handled by a panel
consisting of professional experts, usually involving a judge, as a chairman and other members
including an accountant.
The major characteristics of the use of a probe panel include:
a. Appointment of panel members, specifying the chairman and the secretary
b. Letter appointment in which the terms of references are clearly stated.
c. Introduction of the scope of the probe assignment and the time frame for carrying out the
assignment should be clearly stated.
d. Preliminary settings to set out how to carry out the assignment
e. Call for memoranda from the public, indicating he format, decline for submission of same
and addresses to which they should be sent
f. Requesting the persons suspected of Fraud and/or corruption to appear before the panel with
written submissions of their involvement with the case.
g. Public Hearings (at places and on dates clearly stated and communicate to the members of
the public) during which oral presentations could be taken.
h. Invitations of persons, officials, experts and auditors considered relevant to the case being
probed to give evidence to the panel on date and at places clearly communicated to them.
i. Examining the evidence obtained and searching deeply into the requiring additional attention.
j. Writing of the Report for submission to the person that appointed the panel.
The report of the probe should include the following:
I. Reference to the letter of appointment and the terms of reference
II. The of operations of or the method used by the panel to conduct the investigation or
probe
III. The extent of evidence gathered and any limitations encountered
IV. The funding especially the fraud or extent of corruption that has been discovered
V. He identify of those found guilty of the fraud or corrupt practices
VI. The internal control weakness that facilitated the fraud and how the weakness can be
eliminated from the system concerned.
VII. The effects of fraud and/or corruption on the operations of the organization concerned
and the periods affected and
VIII. The plea made by those found guilty and amends that they have promised to make or
have made.
Summary of Study Session 12
In this study session, you have learnt:
• The definition of Due process in public sector
• Objectives of the Due Process
• Due process Review
• Establishment of the Budget monitoring and Price intelligence unit (BMPIU)
• Objectives of BMPIU
• Functions of BMPIU
• Impact of Due process Review
• Public sector investigations.
Self-Assessment Questions (SAQs) for Study Session 12
Now that you have come to the end of this study session do you know how well you have fared?
Would you like to test your understanding of the session? Then, see if you can answer the
following assessment questions. Do not hesitate to write down in your notebook the topic you do
not understand or that needs further clarification. Discuss this with your lecturer in the next
tutorial you will have.

SAQ 12.1 (Tests Learning Outcome 12.1)

1. The following is one of the four main functions of the Budget monitoring and price
intelligence unit
a) Certification functions
b) Research functions
c) Stationary function
d) Classification function

SAQ 12.2 (Tests Learning Outcome 12.2)

2. Each house of the National Assembly is empowered by the 1999 Constitution to direct or
cause to be directed and investigation into:
a) The conduct of affairs of any person charged or intended to be charged with the duty of
disbursing monies appropriated or to be appropriated by the National Assembly
b) The conduct of affairs of any ministry charged with the responsibility of recruiting staff.
c) The conduct of any government department that is about to be set up.
d) The conduct of affairs of any agency of government that is operating as a non-self
accounting unit

SAQ 12.3 (Tests Learning Outcome 12.3)

3. The major characteristics of the use of a probe panel investigating fraud and corruption
include the following
a) Election into the senatorial District’s Panel
 b) Engagement of consultants for the panel
c) Discussion with the Due process office
d) Appointment of panel members, specifying the chairman and the secretary.

SAQ 12.4 (Tests Learning Outcome 12.4)

4. ___________ simply means the appropriate way or proper method or expected approach or
normal way of doing something.
a) Orderliness process
b) Stationary process
c) Due Process
d) Systematic process

SAQ 12.5 (Tests Learning Outcome 12.6.1)

5. The ___________ functions of the BMPIU consist of formulating of the general policies and
guidelines related to public sector procurement.
a) Classification
b) Regulatory
c) Management
d) System

Essay
1. Using appropriate constitutional provisions, explain power of the national Assembly to
conduct investigation in the public sector.
2. State five objectives of Due process.
References/Suggestions for Further Reading
Aderibigbe P. (2001) “Pedagogy of the Probe Panel and Auditing” The Nigerian Accountant
July-September. Pp. 33-36.
Johnson I. E (1999) “Public Sector Accounting and Financial Control” Lagos: Financial Training
Nigeria.
Oremade T. (1988) Auditing and Investigation Lagos West African Publisher.
1999 Constitution of the Federal Republic of Nigeria.

Study Session 13: Local Government Financial

Introduction
The expediency for the creation of Local Government anywhere in the world seems from the
need to facilitate development at the grassroots. The importance of local government is a
function of its ability to generate sense of belongingness, safety and satisfaction among its
populace.

Central to the creation of Local Government, however is its ability to facilitate an avenue
through which government and the people intermise, relate and more quickly than any other
means resolve or dissolve issues that may have heated the system

Learning Outcomes for Study Session 13

At the end of the study session you should be able to:
13.1 Define Local Government
13.2 Highlight Functions of the Local Government

13.1 Definition of Local Government

According to the 1976 National Guidelines for Local Government reform, Local Government
can be defined as “Government of the local level exercised through represented councils
established by law to exercise specific powers within defined administration in Nigeria. The
Local Government as a third tier of Government in Nigeria has the following powers, restricted
areas or jurisdiction in the locality.
1. Power to raise fund for performance of their duties
2. Power to maintain law and order
3. Power to construct libraries in urban centres
4. Power to provide health centres and recreational facilities e.g. clinics and amusement park
5. Power to make byelaw
6. Power to run primary and post-primary institutions
For the purpose of carrying on the activities of the Local Government, revenue from various
sources must be generated.

13.2 Functions of Local Government

The main functions of a Local Government council are as follows
a. The consideration and the making of recommendations or any similar body on
i. The economics development of the state, particularly in so far as the areas of authority
of the council and of the state are affected and
ii. Proposals made by the said commission or body
b. Collection of rates, radio and television licenses
c. Establishment and maintenance of cemeteries, burial grounds and homes for the destitute or
infirm
d. Licensing of bicycles, truck (other than mechanically propelled trucks) canoes, wheel
barrows and cards
e. Establishment, maintenance and regulations of slaughter houses, slaughter labs, markets,
motor parks and public conveniences
f. Construction and maintenance of roads streets, street lighting, drain and other public
highways, parks, gardens, open spaces or such public facilities as may be prescribed from
time to time by the house of assembly of a state
g. Naming of roads and streets and numbering of houses
h. Provision and maintenance of public conveniences, sewage and refuse disposal
i. Registration of all births, deaths and marriage
j. Assessment of privately owned houses or tenements for the purpose of levying such rates as
may be prescribed by the House of Assembly of a state and
k. Control and Regulation of
i. Out-door advertising and hoarding
ii. Movement and keeping of pets of all description
iii. Shops and Kiosks
iv. Restaurants bakeries and other places for sale of food to the public
v. Laundries and
vi. Licensing of the sale of liquor.
You have observed from the above factors that enable Government to generate revenue. This
will lead us to the next.
ITQ
Mention three revenue generation functions of Local Government Councils
Answer: Three revenue generation functions of Local Government Councils are:
1. Collection of rates, radio and television licenses
2. Licensing of bicycles, canoes, wheel barrows and carts
3. Licensing of sales of liquor, restaurant and other places for sale of food to the public

13.3 Sources of Revenue to Local Government Councils

The performance of any Local Government is subject to the availability of sufficient funds,
which it can use to finance its ever-increasing responsibilities.
According to Orewa (1983) “one of the main reasons why a local council exists is to collect
various forms of revenue from its citizens and use these to provide social services in an efficient
manner possible. Generally, there are two sources of revenue for the Local Government system
in Nigeria like many other countries of the world.
a. Internal Sources of Funds
b. External Sources of Funds

a. Internal Sources of Funds

Generally, these refers to those revenue source that Local Governments are empowered by law to
administer and collect within their area of jurisdiction. In times of dividing resources, it has
become vital for each Local Government to look inwards and see how to increase internally
generated revenue (IGR) to meet their political promise to their respective constituencies. The
internal sources of revenue are as follows:
a. Proceeds from sales of unserviceable asset: The Local Government authority can dispose off
unserviceable assets and revenue will be generated.
b. Commercial undertakings: At times local government generates revenues from undertakings
that are profit oriented to boost the revenue base of the Local Government e.g. shops and
shopping centres development, sale of consumer goods, transportation venture, investment in
securities etc.
c. Tax: As detailed by the joint tax publication of 1999, these include:
i. Market taxes and levies excluding any market where state finance is involved
ii. Rating tax on properties or development rates.
d. Rates and levies include
i. Tenement rates paid by landlords and companies
ii. Shops and kiosks rates
iii. Motor park levies
iv. Merriment and road closure levies
e. Local license fees and fine includes:
i. On and Off liquor license fees
ii. Slaughter slab fees
iii. Marriage birth and death registration fees
iv. Right of occupying fees of land in rural area excluding those collectible by the federal
and state government
v. Domestic animal license fees
vi. Bicycle, wheel barrow and cart fees
vii. Public convenience, sewage and refuse disposal fees
viii. Customary burial ground permit fees
ix. Signboard and advertisement permit fees
x. Market/trading license fees
xi. Revenue from investment
b. External Sources of Funds
The major external sources of revenue for Local Government include:
a. Federal statutory allocation: This represents the amount which the Local Government is
constitutionally entitled to from the federation account. This amount is meant to cover both
recurrent and capital expenditure of the Local Government.
b. Grants: Grants are made both by the federal and state governments for specific management.
They come as:
i. Equalization blocks, general or deficiency grant which are meant to supplement Local
Government resources in general or its revenue from a particular source
ii. Specific grant to meet cost of particular services like education, health etc.
c. Loan: Loan forms the part of externally obtainable finance for Local Government and could
be used for development programmes or projects. Loans for such programmes could be
obtained from finance and commercial banks through the state government
d. Miscellaneous Income: This income could accrue from excess crude revenue allocation and
donations from some international organization to support the developmental activities of a
Local Government
e. State Allocation: by virtue section 7(66) of the1999 constitution of federal Republic of
Nigeria, the House of Assembly of a state shall make provisions for statutory allocation of
Public revenue to Local Government councils within the state.
ITQ
Mention two internal and three external sources of Local Government revenue
Answer: Two internal sources of Local Government are:
a. Tenement rates paid by landlords and companies
b. Shops and Kiosk rates
Three external sources of Local Government Revenue are:
a. State statutory allocation
b. Grants
c. Federal Government statutory allocation

13.4 Problems of Revenue Generation of Local Government

There are several problems associated with revenue generation in our Local Government system.
Some of these problems include:
a. Failure of most states in the federation in remitting to Local Governments, the 10% of the
internally generated revenue
b. The present revenue sharing formula does not appear to be favourable to the Local
Government in view of the enormous functions and responsibilities constitutionally and
conventionally assigned to it
c. Political instability, economic recession and heavy dependency on oil revenue which
accounts for over 80% of the country’s earnings, are major constraints in obtaining maximum
contributions to Local Government revenue from external sources.
d. Low capacity for embarking on credible and authentic feasibility studies, design
programmes/projects and right technical financial proposals also contribute immensely in the
inability of Local Governments to attract external assistance.
e. Leadership failure and bad government at all levels of government inhibit attracting external
development assistance. This is coupled with high level of corruption and managerial
incompetence, which discourage interested persons, governmental and non-governmental
organizations to participate in Local Government activities.
f. Poor revenue administration, which consist of
• Lack of revenue
• Corruption/Sharp practices on the part of revenue collectors
• Inadequate working tools
• Poor Database
• Inadequate incentive/motivation
g. Citizen distrust, cynism and reluctance/refusal to pay rates, tax, charges etc due to poor
record of performance of local government in Nigeria (OfofeItimi 1998:3 cited by Ann and
etal 2009)

13.5 Functions of Local Government Treasurer

As the chief accounts officer, head of finance department and chief financial adviser to the local
government, the treasurer is saddled with the more responsibilities in the daily financial
management within the local government.
The functions of the local government council treasurer, as contained in the civil service and
local government reform of 1988, include:
 a. Rendering financial advice to the council
b. Serving as the secretary to the budget committee
c. Receiving and disbursing money for the authorized ends
d. Keeping proper accounting records of all accounting records
e. Verifying the accuracy and integrity of all accounting records
f. Ensuring compliance with all financial instructions or laws for safe custody of the
council’s money
g. Ensuring that vouchers are correctly made out and that funds are available in the
appropriate votes or accounts to detray the expenditures
h. Rendering necessary contemplated statutory returns to the state and federal governments
i. Ensuring that all revenue belonging to the council are collected as and when due and
officially acknowledged
j. Ensuring that fiscal policies are executed and expenditures incurred with due diligence
and regard for value-for-money
k. Maintaining effectively run and staffed financial operations
l. Keeping up-to-date statistical information in such a form as will enhance the submission
of prompt and accurate reports
m. Submitting recommendations to the council in his capacity as the financial adviser
n. Serving as a signatory to the councils bank accounts and other disbursements
o. Offering expert opinions on short medium and long term bases

ITQ
Mention three problems associated to revenue generation of Local Government

Answer: Three problems of Local Government Revenue Generation are:

i. Failure of most states in the federation in remitting to local governments, the 10% of
the internally generated revenue
ii. Leadership failure and bad government at all levels to attract foreign financial
resistance
iii. Poor revenue administration, which consist of inadequate working tools, poor
database, inadequate incentive motivation etc.
13.6 Improvement of Revenue Base of Local Government
In order to improve the financial base of the local government, certain measures have to be
taken. Some of these measure will include:
1. Financial institutions should be encouraged to provide loan facilities to local government at
conditions that can be met by them. Such loans should be used for welfare oriented projects
for the general well-being of the rural people
2. Dishonest revenue collectors should be adequately disciplined. They should also be closely
monitored and supervised to avoid financial leakages through their perfected fraudulent
activities
3. Grants from federal and state governments to local government should be increased to boost
the financial base of local governments. These grants should be released in time and
targeted towards specific projects.It must also have to be monitored to avoid misapplication
or misuse.
4. Local governments have to embark on money yielding projects especially now that most of
them receive increased revenue from the federal allocation such projects include building
residential estates, floating community bank engaging in production and trading activities,
transportation corporations and other money yielding ventures.
5. Local governments can raise additional revenue through a variety of means such as
increasing their user fees and charges, raising local taxes, introducing new taxes and charges
6. Local governments can reduce the scope of their activities by greater use of private
participation in the provision of urban services under self-help activity system and through
mobilization of non-governmental resources
7. There must be good, comprehensive and up to date information in respect of revenue
sources
8. There is the need to computerize the finance/revenue section of the local government.
Billing and tax records, property valuation methods cost analysis and accounting system pay
roll etc. need to be computerized to meet the contemporary accounting standards and
facilitate inspection when the need arises
9. Leasing of landed properties to investors and mega companies to establish businesses.

Summary of the Study Session 13

In this study session, you have learnt:
❖ Definition of local government
❖ Functions of local government
❖ Sources of local government revenue
❖ Problems of revenue generation of local government
❖ Functions of local government treasurer
❖ Ways of improving the finances of local government

Self-Assessment Questions (SAQs) for the Study Session 13

Now that you have come to the end of this study session do you know how well you have fared?
Would you like to test your understanding of the session? Then, see if you could answer the
following assessment questions. Do not hesitate to write down in your notebook the topic you do
not understand or that needs further clarification. Discuss this with your lecturer in the next
tutorial you will have.

SAQ 13.1 (Tests Learning Outcome 13.1)

1. The closest government to the people is _________ government
a) State
b) Federal
c) Local
d) Council

SAQ 13.2 (Tests Learning Outcome 13.2)

2. Kiosk rate is a source of local government revenue
a) True
b) False
c) Indifference

SAQ 13.3 (Tests Learning Outcome 12.3)

3. Naming of roads and streets and numbering of houses is the function of _______ government
 a) Military
b) Local
c) State
d) Federal

SAQ 13.4 (Tests Learning Outcome 13.4)

4. Which of the following is an internal source of local government revenue
a) Grant
b) Loan
c) Statutory allocation
d) Proceed from sales of assets

SAQ 13.5 (Tests Learning Outcome 13.5)

5. The chief accounts officer and head of finance department of a local government is _______
a) Treasurer
b) Executive chairman
c) Chairman
d) HOD

Essay
1. Highlight six problems associated to revenue generation on local government
2. Mention four ways of improving revenue generation of local government
References/Suggestions for further reading
Akinde S.T &etal (2002) Fiscal Federalism and Local Government Finance in Nigeria, Internet
Paper.
Ani S. &etal Advanced Local Government Finance. Springtime Press Enugu.
Fahegan S.B (1985), Redesigning Nigerian’s Financial System, Ibadan, University Press
Limited.
Salami R.O (2005) Essential of Public Finance. OAU Press Ltd. Ile – Ife
The constitution for the Federal Republic of Nigeria 1999, Federal Government Press, Lagos.

Study Session 14: Dynamic Environment of Public Enterprises

Introduction
Change as you may have realized is ever occurring in all aspect of life. This is the same with the
public enterprises. There are current national and global changes unfolding in the public
enterprises, transformation in information and communication technology (ICT) has improved
the awareness of citizens and non- citizens with respect to the best or expected standard of public
enterprise performance. There is also the increased awareness of the changing environment of
the public enterprise, particularly in the areas of staff downsizing, good governance,
decentralization, privatization, commercialization and private-public-partnership among others.
The necessity of change in the public enterprise is obvious from the fact that any organization
that refuses to change with the changing environment will be left behind when compared with
those that can cope with the changing time. To cope with the changing times, public
organizations must identify the factors that influence these changes.

Learning Outcomes for Study Session 14

At the end of this study session, you should be able to:
14.1 Define public enterprises environment (SAQ 14.1)
14.2 Conceptualize public enterprise dynamism (SAQ 14.1)
14.2 List and explain changes in the public enterprises (SAQ 14.2)
14.3 Mention and explain the importance of change in public enterprise(SAQ 14.3)
14.4 Enumerate factors that influence change in public enterprises(SAQ 14.4)

14.1 Concept of Public Enterprise Environment

The dynamics of public enterprise environment reflects the changes in both the internal and
external factors affecting the operational activities of the public enterprises. You may have heard
of the saying “the only thing which is constant in life is change”. Our social, economic, religious
and more importantly, the political environments are always changing. If this is so, we cannot
discuss the current trend in public enterprises without discussing the areas of change in the
public enterprises. These changes influence and affect the ownership, method of operation,
financing and service delivery of the public enterprises.

You will agree that the first place to commence this study is by demystifying the term
‘Dynamics’. Dynamics is a force that stimulates change or progress within a system or process.
It could also refer to any alteration of the status quo including innovation in the public enterprise.
Dynamics is the process of alteration or transformation which individuals, groups and
organizations undergo in response to internal and external environmental influences.

In a similar vein, the term ‘environment’ refers to the forces and general conditions that exist
within and outside the organization including public enterprises that have the potential of
significantly impacting on its services, ownership and control.
Public enterprises are dynamic due to the following factors (Mohiddin,2001):
a. The environment of public enterprises is changing constantly so, they must change
commensurately.
b. Public Enterprises need to change to be able to adapt to changing environments.
c. Public enterprises that do not adapt to change are not likely to survive or meet their expected
demand in a changing environment.
d. The environment of public enterprises is constantly changing as a result of political,
technological and social changes in expectations.
e. The resources required for the effective functioning of the public enterprises are scarce and
define the organizational process.
f. Public enterprises need to identify current developments and to react swiftly.

14.2. Dynamic Areas of Change in the Public Enterprises

The operating environment is changing everywhere one looks at, not just in Nigeria, but in the
world at large. Public enterprises are faced with increased pressure for efficiency and cost
reduction, whilst requirements on quality standards remain unchanged. The technical, legal and
regulatory environment of public enterprises is changing everywhere in the world including
Nigeria.
In the past, many people thought that the public enterprises were insulated from change,
considering their monopolistic culture. It is doubtful whether many people would argue that such
is the case today. The major areas of change are in right-sizing and rationalizing the public
enterprise operations; adoption of information communication technology, electronic
government, good governance and democracy decentralization, development of mega policy,
public/private partnership, special public committee on public enterprises and eradication of
protectionist policy by government.
Now that you understand what we mean by dynamics and the environment we should discuss
these elements in further detail.
a. Rightsizing
Nigeria public enterprises are right-sizing with the aim of performing in the catalytic role
through better policy formulation. Rightsizing implies not only reduction in the number of
public/civil servants, but also in the involvement of government in social and economic
activities. Based on this concept, government machinery and structures have been reviewed
and restructured with a view to doing away with unnecessary organs and avoiding
overlapping of functions.

b. Adoption of Information Age Government

Information and Communication Technology (ICT) is the pivot of modern government. You
would have seen and heard, over the past years, of the increasing usage of computer technology
in organizations. This is a major component of the information age. Computer networks have
been used to enhance the operational activities of the public enterprises in order to meet service
delivery to the citizens. The adoption of the ‘information technology has’ led to convenient and
efficient ways for citizens and businesses to communicate with government and to receive
services. It also reduced the amount of paper used in running government businesses; thus
leading to what is often termed as “paperless” government. Paperless government refers to the
use of computers to disseminate information both within and outside the organizations without
using paper.

c. Good Governance And Democracy

Governance is the art and skill of utilizing political or collective power for the management of
society. It is a process that enables people to utilize collective power to manage the affairs of a
nation in accordance with the needs, aspirations, cultures and relationship among the people
(Mohiddin 2001, cited by Fagbemi 2006).
Good governance could be achieved through the process of governing the people within the
framework of:
i. National Constitution
ii. The Rule of Law
iii. Ethical Codes of conduct and traditions of the people
iv. Response to the traditions of the people
v. Response to the basic needs, wishes and aspirations of the people
vi. Popular participation
vii. Human rights

You have heard the word ‘Democracy’ many times. It is a system of governance in which people
effectively participate in the decision-making processes that affect their lives and livelihood. It
entails laws, rules, regulations and conditions that allow people to freely choose their leaders or
representatives who will eventually form a government and if need be, remove or change that
government. It entails the creation of an environment of freedom, peace, security, liberty,
tolerance and trust. Democracy as you can observe is a subset of good governance.

Democracy and good governance improve the efficiency of the public enterprise in service
delivery through the power of the people to refuse to vote for a government that cannot achieve
optimal performance of the public enterprises. Where true democracy is practiced, the
government does its best to deliver high quality services to retain the votes of the citizens.

d. Decentralization
Decentralization is the transfer of resources from the center to the periphery (local areas).
Ordinarily, the establishment of public enterprises represents an attempt to decentralize
government and deliver essential services to the people. In practice, governments in developing
countries like Nigeria only pay lip service to decentralization as governments and public
enterprises are still highly centralized. For example, the headquarters of the Nigeria National
Petroleum Corporation is at the Federal Capital Territory Abuja, whereas the resources being
managed by it are produced mainly in the Niger Delta region.
It must be admitted, however, that public enterprises, local authorities and cities do not even
cherish independence because they enjoy their relationship with the central government
(Mackintosh 1994 cited by Johnson, 2012). In Nigeria, government parastatals never fail to let
the public know the ministry they belong to in their letter-headed papers, signboards, and formal
and informal relations. They often mention the name of their parent ministry as if that will help
them deliver services to the people. It is all about eye service and ego tripping.

e. Development of a Mega Policy

Performance (public or managerial) may be enhanced by developing a mega policy for public
enterprises. A mega policy is the mother policy, for example health policy, security policy and
education policy. Mega policy of public enterprises will provide guidelines on their formation,
purpose or objective, funding, management, and performance benchmark for assessment,
monitoring and evaluation.

Many policy approaches have been adopted for planning and implementation of economic
liberalization in Africa including a variety of institutional models. However, such programmes
have largely been characterized by inadequate design and preparation. We now examine the
variants of public enterprise privatization policies as it concerns public-private partnership and
protectionist policies.

f. Public-Private Partnership
Providers of social goods may need to cooperate and compete. In other words the water tight
compartmentalization of public and private sectors may not be in the interest of citizens. For
example, at a conference held at The Hague in 2003 on the problems of water privatization, the
point was made that there was a big role for public-private partnership in water provisioning. It
was observed that many people were excluded from access to water when it was controlled by
public utility companies and that the private sectors had a role to play in extending access to
water. They therefore, saw a role for private capital and markets in water provisioning.

But given the weakness of both sectors especially in Third World countries and since neither the
public nor the private sectors can on its own efficiently provide these public utilities, it is
important that both sectors be jointly engaged for the delivery of such services. It should be
admitted, however, that the Public – Private Partnership is a moral idea which will take time to
grow in Nigeria.

g. Reduction of the Protectionist Policy

Another trend witnessed in the dynamic change in public enterprise management is the abolition
of protectionist policies on welfare services, agricultural products and manufactured products.
This may also imply making greater use of market type mechanisms such as direct competition
and competitive bidding to provide incentives and allocate resources. Other complementary
changes are (Mackintosh, 1994):
i. Central government to focus on its core responsibilities, while devolving non-core
activities to local governments and non-government organizations including
privatization.
ii. Reducing costs to tax payers by improving efficiency, reducing overhead and controlling
costs, eliminating non-productive activities and exploiting opportunities to generate
revenue.
iii. Focusing management attention and accountability more on achieving result in terms of
efficiency, effectiveness and quality of service and less on compliance with detailed
rules.
iv. Paying increased attention to the service needs of programme recipients, such as easier
access, simplified procedure, published standards for service times and more courteous
service.
 v. Fostering the exchange of public management best practices and experiences with and
between governments.

Some of these changes have been implemented to varying degrees in different countries
including Nigeria. However, in many cases they remain more as statements of intent than actual
accomplishment. The changes have meant that instead of thinking in terms of processes and rigid
frameworks for service provision, institutions and individuals are encouraged to focus more on
improving the results expected of public enterprises, including exploring alternative to direct
public provision of the service provided.

14.3 Importance of Change in Public Enterprises

From the conceptualization of dynamics in the environment of public enterprise, you would
realize that the only thing that is permanent in life is change. This means that we should expect
change and be prepared to meet and accept any change that may arise in the course of managing
an organization. We proceed to examine some rationale for adopting change to the environment
of public enterprises. Specifically change is important in:

a. Meeting Peoples’ Changing Needs

Each public enterprise faces new demands from the citizens or people. The Nigerian Railway
Corporation has been improved upon in order to meet the transport demand of the people. Also
part of the Power Holding Company of Nigeria has been privatized, commercialized and
concessioned to meet growing energy demand of industries and individuals in Nigeria.

b. Meeting Changing Market Conditions

The policy of reduced protectionism and monopolistic tendency by the federal government
means that market forces will to some extent, determine fees or cost of public service delivery.
Improved capability of the private sector to go into some services such as telecommunication,
education, banking, energy and aviation has led to the withdrawal or reduced participation of
government in these sectors.
c. Taking Advantage of New Opportunities
Windows of opportunity are always opening for any organization. It is left to the organization to
take advantage of such opportunities. Change in political leadership is an example of a window
of opportunity that can lead to the review of economic and fiscal programmes and policies
affecting public enterprises.

d. Responding To Competition
The whole idea of commercialization and privatization is to boost competition, which is expected
to lead to better quality services and the desire to innovate. For example, competition between
Nigeria Postal Services and private mail delivery companies has provided the consumers with
choice and better service delivery.
In the past, it was believed that the public enterprise was perhaps immune to change. It is
doubtful, however, whether many people would think so today. The pressure for change is felt
everywhere and every time. Public enterprises are required to adopt entrepreneurial qualities of
innovation and responsiveness and shed off its toga of complacency and immunity.

14.4 Factors That Influences Change In Public Enterprises

Changes in the public enterprises may be stimulated by internal and external factors.

14.4.1 Internal Factors of Change in Public Enterprises

Pressure for change may arise from a number of sources within the public enterprises,
particularly from introduction of new strategies, technologies, public service attitudes and
behaviour.
a) New strategies for long term growth may trigger changes in the goals of public enterprises.
New strategies for forestalling power or energy failure have necessitated changes in the goal
and structure of the Power Holding Company of Nigeria.
b) Change in internal technology would lead to change in work routines, training programmes,
and compensation arrangements. Increased use of computer requires changes in work
routine.
c) Innovative suggestions coming from employees during meetings and performance review
sessions may cause changes.
d) Dynamics in the social mix and racial structures may also cause changes. Increased number
of women in the public enterprises may often call for different managerial behaviour. To
explain further, the entrance of more women into the workforce may lead to the introduction
of flexible work schedules, benefits such as day care, extended maternity leave, special
employee training programmes, etc.
e) Work dissatisfaction may lead to changes in management policies and practices, as a result of
identifying ways of minimizing the cause of dissatisfaction among public sector employees.

14.4.2 External Factors of Change in Public Enterprises

An enormous variety of external forces coming from the technological environment, economic
environment, political and legal environment, social conditions and the competitive environment
induce dynamic changes in the operations of public enterprises.

a. The Technological Environment

(I) Advance in information and technology such as computers, e-mail communication,
and atomic energy are transforming the modern public enterprises.
(II) As more productive and useful technologies become available, public enterprises will
be forced to adopt them just to keep in tune with modern trends. The use of type-
writers is a thing of the past in modern public enterprises, replaced by computers.
More and more official transactions are carried out on the internet and intranet.
b. The Economic Environment
(i) Economic factors outside the public enterprise affect its ability to function such as the
capacity to raise funds, hire qualified personnel and procure all needed materials.
(ii) Examples of economic conditions that can induce public enterprise change are
recession, growth, full employment or unemployment. Public enterprise change
occurs as bureaucrats and government adapt to changing economic conditions.

c. The Political And Legal Environment

Some of the political and legal conditions that can affect the proper functioning of public
enterprises include (Mohddin,2001):
(i) Privatization (the selling of government companies to the private sector);
(ii) Deregulation (allowing private sector participation in government organizations);
(iii) Diplomatic problems with foreign governments (sanctions are sometimes imposed on
countries with despotic leaders);
(iv) Changes in the civil service in form of reforms;
(v) Pressures from civil societies, often advocating on behalf of the vulnerable groups.

d. Social Conditions
(i) Multitudes of social factors can also entail change in public enterprise function. For
example, sensitivity to gender and physically disadvantaged persons. Some
government demands that public organizations devote a certain percentage of their
workforce to the disabled.
(ii) Public organizations must respond and adapt to various social forces if they are to
survive and prosper.

e. The Competitive Environment

Competitive pressures can also bring about significant change in public organizational
activities. This could take the following forms:
(a) Change In Work Perception
There are three key factors in the public sector that are now of great importance to the
citizens. These are respect for human rights, availability of information and, involvement
or participation in service delivery matters.
(iii) Dissatisfaction With Bureaucracy
Theorists that belong to the managerial list school believe that in order to obtain
organizational objectives, bureaucrats need to institute management practices.In other
words, they believe that organizations should move from the focus on administration to
management. Administration adheres to formalized processes and procedures, while
management is concerned with the use of resources to achieve predetermined objectives.
The concrete idea advanced in this theory is that managerial techniques similar to those
used in the private sector should be applied to the public sector enterprises.
(iii). New Public Management System
While there is a serious lack of clarity as to the differentiating characteristics and
definition of the New Public Management System’s school of thought, its principles can
be summarized as follows:
 (a) A focus on management.
(b) A focus on performance management and efficiency, involving the private sector.
(c) Utilizing cost-cutting mechanisms.
(d) A style of management which emphasizes output targets, contracts, monetary
incentives and freedom to manage.

These factors furnished the momentum in propelling policy-makers to change the work culture
and environment in public-sector organizations. Policy makers, therefore, are forced to
incorporate these factors in public service delivery.

Summary of the Study Session 14

The new way of managing public enterprises is informed by the need for improved public
service delivery to the citizens. The major areas of change are rightsizing of the public
enterprises, adoption of public information age government, good governance and democracy,
mega policy, public-private partnership, as well as policy on decentralization and eradication of
protectionism by governments. These changes are necessary for meeting changing public service
and citizens’ needs, meeting changing market conditions, responding to competitive pressure and
taking advantages of new opportunities. Many forces influence these changes. Some of these
forces are internal to the public enterprises, while others are external. Examples of internal forces
are: new strategies for long-term growth, and changes in internal technology. Examples of
external forces are changes in technological, economic, political and legal environments.

Self-Assessment Questions (SAQs) for the Study Session 14

You have just completed Study Session fourteen. You can assess yourself by attempting the
questions below. Write down your answers in your notebook and discuss them with your lecturer
in your next tutorial class.

SAQ 14.1 (Tests Learning Outcome 14.1)

1. ___________ is the reduction in the number of public/civil servants and the involvement of
government in social and economic activities.
a) Decentralization
b) Rightsizing
 c) Democracy
d) Good Governance.

SAQ 14.2 (Tests Learning Outcome 14.2)

2. All the following are ways of achieving good governance except
a) Compliance with rules of force
b) Obedience to rule of law
c) Human rights protection
d) Compliance with ethical codes of conduct.

SAQ 14.3 (Tests Learning Outcome 14.3)

3. The extent to which power, authority and decision making are delegated to lower levels in an
organization is __________
a) Devolution
b) Decentralization
c) Delegation
d) Privatization.

SAQ 14.4 (Tests Learning Outcome 14.4)

4. Which of the following is of importance to change in public enterprises?
a) To meet the demand of bureaucrat
b) in order to preserve the code of conduct
c) To grow on the job
d) Taking advantage of new opportunities.

SAQ 14.5 (Tests Learning Outcome 14.4)

5. Changes in public enterprises could take the forms of reforms, privatization deregulation, etc.
a) True
b) False
c) Indifference
References and Suggestions for Further Reading
Mohiddin (2001) cited in Fagbemi A.O (2006) Customer Services Delivery in Public Sector
Management Lagos: Concept Publication Limited
Mackintosh (1994), cited in Johnson, A. A (2012). Public Enterprises and Privatization in
Nigeria(2nded), Lagos: Macak Books Ltd

Study Session 15: Fiscal Federalism in Nigeria

Introduction
In the earlier study session, you have learnt about sources of revenue by different levels of
government and their powers to appropriate the fund, this is related to fiscal federalism
according to Bello-Imam (1999) federalism presupposes the conglomeration of subordinate of a
national sovereign government that operate independently with statutorily or constitutionally
defined spheres of functional competence. It also assumes that although the different component
units within such a federal structure are relatively independents yet because they operate within a
single national sovereign state. (Intra-sovereign units), they are coordinated with one another.
Nigeria operates a federal system of government with a federal government at the centre
(Abuja), 36 states government and 774 local governments, including six area councils located at
the federal capital territory, Abuja, each of these levels of government has its sphere of influence
and functional competence.

Learning Outcomes of Study Session 15

At the end of this study session, you should be able to:
15.1 Explain the term ‘fiscal federalism
15.2 Highlights objectives of fiscal relations among units in a federation
15.3 Explain the chronicle of Revenue allocation in Nigeria.
15.4 Explain allocations of tax-raising powers

15.1 Fiscal Federalism

It refers to a system of government where revenue and expenditure functions are divided among
the tiers levels of governments. Fiscal federalism could be said as the allocation of tax-raising
powers and expenditure responsibilities between levels of governments.
This division is usually done to enhance the government’s effective provision of public goods
and services at different levels to the citizens.
There are two revenue allocation processes which must be satisfied in order to create a workable
condition for all the jurisdiction. They are:
1. Vertical revenue allocation: this involves the sharing of revenue from the top down that
is, from the federal government to the state and to the local government.
2. Horizontal revenue allocation: this is the sharing of revenue among the jurisdiction at the
same levels of government, either state level or local level with the source of revenue
from the federal level.

ITQ
Define vertical revenue allocation
Answer: This refers to the transfer of funds from the centre to all levels of government within a
nation.

15.2 Objectives of Fiscal Relations Among Unit in a Federation

The following are some of the objectives of fiscal federalism
(a) To ensure correspondence between sub-federal expenditure responsibilities are their
financial resources (including transfer from central government) so that functions
assigned to sub-federal governments can be effectively carried out.
(b) To increase that autonomy of sub-federal government by incorporating incentive for them
to mobilize revenue of their own.
(c) To ensure that the macroeconomic management policies of central government are not
undermined or compromised
(d) To give expenditure discretion to sub-federal government in appropriate areas in order to
increase the efficiency of public spending and improve the accountability of sub-national
officials to their constituents in the provision of sub-federal service.
(e) To incorporate intergovernmental transfers that are administratively simple, transparent
and based on objective, stable and non-negotiated criteria.
(f) To minimize administrative costs and thereby economize on scarce resources.
(g) To provide equalization payments to offset the differences in fiscal capacity among states
and among local governments so as to ensure that poorer sub-national governments can
offer a sufficient amount to key public services
(h) To incorporate mechanisms to support public infrastructure development and its
appropriate financing.
(i) To support the emergence of a governmental role that is consistent with market –oriented
reform and
(j) To be consistent with nationally agreed income distribution goals.
As already identified, Nigeria is a federalism made up of one central government, 36 states
governments, the federal capital territory and about 774 local governments each performing
clearly spelt out functions and having distinguishable taxing powers.
ITQ
Mention two objectives fiscal federalism
Answer: Two objectives of fiscal federalism are:
a. To support the emergence of a governmental role that is consistent with market-oriented
reform
b. To be consistent with nationally agreed income distribution goals

15.3 Chronicle of Revenue Allocation in Nigeria

The development of federal finance started in 1946 because between 1914 and 1946, Nigeria
practiced a unitary system of government. Thus fiscal federalism in Nigeria followed a trend of
constitutional changes.

The Philipson Commission 1946

The commission was to formulate the financial and administrative procedure to be adopted under
the new constitution (The Richard constitution of 1946). For this purpose, regional revenue
(East, west and North) were divided into two declared revenue and non-declared revenue.

Declare Revenue: These were those revenue collected by the regional authorities like personal
income tax, fees, income from properties, rent etc.
Non-declared revenue: These were those revenue collected by the central government. It was
the central government that determined what portion of the non-declared that was to be shared
among the region. The commission considered three principles that could be used for the sharing
of the non-declared revenue. These are: (a) derivation (b) Even development and (c) population.

The Hicks –Philipson commission 1951

This commission was set up in 1951 as a result of the dissatisfaction with the Philipson
Scheme/Commission. Professor John Hicks and Sir. Sidney Philipson were appointed to develop
and new scheme that will achieve a more equitable distribution of revenue.
They recommended that the region should have power to raise, regulate and appropriate to
themselves certain items of revenue. They further proposed that the revenue should be shared on
the principle of derivation need and national interest.

The Chicks Commission 1953

The constitutional conference of 1953 gave an opportunity for the review of previous allocation
schemes. Sir Louis chicks was then appointed to ensure that the total revenue was allocated in a
way that the principle of deviation was followed to the maximum and compatible with the need
of the central as well as the regional governments. He further expanded allocation scheme to
include import duties excise duties, export duties, mining rents, royalties and personal income
tax.
The sharing arrangement was
Region Allocation
West 40%
North 30%
East 29%
Southern Cameroun 1%

The Raisman Commission 1958

The commission was to review the jurisdiction as well as the allocation of revenue from taxed so
that the regions will have the maximum possible proportion of their revenue within their
exclusive competence. To be able to carry out the assignment, the commission created what was
described as distributable pool Account (DPA), and for the purpose of sharing among regions,
the commission adopted two basic principles – Derivation and Need.

Derivation: the principle states that the state from which the bulk of the revenue is obtained
should have extra share over and above what other states or regions receive.
Need: this principle is based on the perceived need of each state or region. When the need of a
state is put against the needs of others, it may require the transfer of financial resources from one
state to another in the interest of efficiency.
The commission therefore recommended as follows:
Region Allocation
West 40%
North 31%
East 24%
Southern Cameroun 5%

The Binns Commission 1964

The commission was set up under section 164 of the 1963 Republican constitution. The main
duty under the constitution was to review and make appropriate re commendation with respect to
allocation of mining, rent and royalty and the distribution of funds in the Distributable Pool
Account (DPA). Due to this fact, the commission therefore applied the principle of financial
comparability, which was a hybrid between need and development and recommended as follows.
Region Allocation
West 40%
North 31%
East 21%
Southern Cameroun 8%

The Dinna’s Commission 1968

Dinna recommended basis needs, minimum national standard, balanced development and
derivation. Therefore Suggested that revenue should be allocated as follows.
Federal government 25%
State government 70%
Special Grant 5%

The Military Era (1967-1975)

The period between 1967 and 1975 was characterized by series of Decrees. Decree 15 of 1967
resolved the problem of revenue allocation by allocating equally the percentage that belonged to
the Northern region among the 6 states created in the region and that of East and West among the
new states on the basis of population. However, decree 13 of 1970 adopted two factors formula
i.e population and equality of states, but Decree 9 of 1971 gave to the federal military
government absolute right to raise revenue from on-share, rent and royalty. Decree 6 of 1975
emphasized that all revenue should be shared by the state.

The Aboyade technical Committee 1977

In 1977, the technical committee was appointed to review the existing allocation scheme the
committee specified that all federally collected revenue without distribution should be paid into
the federation account and the sharing of the proceeds should be among the three tiers of
government in the following order:
Federal government 60%
State government 30%
Special Grant 10%

The committee went further and created a special account (30% from the federal government
share) to administered by the federal ministry government to benefit the mineral producing
states. However, to achieve this goal, five-factors principles were recommended and they are:
(i) National minimum standard
(ii) Absorptive capacity
(iii) Independent revenue and tax effort
(iv) Fiscal efficiency

The Okigbo commission 1979

The commission (headed by Dr. Pius Okigbo) was set up to device an allocation scheme that
could be understood and readily acceptable and equitable. The commission therefore
recommended how the proceeds of the federation Account should be shared among the three
tiers of government as follows
Federal government 53%
State government 30%
Local government 10%
Special Grant 7%

The 7% should be applied as follows

i. Initial development of federal capital territory 2.5%
ii. Special problems of mineral – producing areas 2.0%
iii. Ecological and other similar problems 1%
iv. Revenue equalization fund 1.5%
v.
The commission also recommended the use of four-factors formula for allocation among the
state government with the following weights
a. Minimum responsibility of government 40%
b. Population 40%
c. Social development factor
Direct primary school enrolment 11.2%
Inverse primary school enrolment 3.75 - 15%
d. Internal revenue effort 5%
Other Amendment
President Babangida’s led armed forces Ruling Council (AFRC) approved the following in 1986:
Federal government 50%
State government 30%
Local government 15%
Special Grant 5%
Total 100%

In 1989 a permanent commission known as national revenue mobilization allocation and fiscal
commission (NRMFC) was set up. The 1999 constitution has made provision for 13 percent of
oil revenue for the development of the oil producing state.
ITQ
Highlight the recommendations of Dinna’s commissions of 1968
Answer: Dinna recommended basic needs, minimum national standard, balanced development
and derivation.
Therefore suggested the following manners of revenue allocation:
Federal government 25%
State government 70%
Special grant 5%

15.4 Allocations of Tax-raising Powers

Two factors have been discovered to constitute the major basis for allocating tax raising powers
among the component levels of government in any federal system. These are administrative
efficiency and fiscal independence.

The efficiency criterion demands that a tax be assigned to the level of government that will
administer it efficiently at minimum cost: while fiscal independence requires that each level of
government school, as far as possible, raise adequate resources from the revenue sources
assigned to it to meet its needs and responsibilities.

15.4.1 Functional allocation of tax power

The allocation of functions among the component units of the Nigerian federal system is spelt
out in section 4 of the federal republic of Nigeria.
The section and schedule specifies two main categories of legislative functions:
a. The exclusive legislative list: These lists contain 68 functions upon which only the federal
government can legislate.
b. The concurrent legislative list: this contain 30 functions upon which both federal and state
government can legislate.

The 1999 constitution as amended as abrogated the residual list, which implies that the federal
legislature could also legislate on many matter that is being legislated upon by the state
government.
In addition to these provisions, section 7 on the same constitution provides for the establishment
of local governments which are made creatures of the state governments and whose functions are
spelt out in the fourth schedule.

The functions are classified into two categories: the first category consists of those functions
which are solely performed by the local governments, while the second consists of those to be
performed concurrently or in participation with their respective state governments.
Summary of Study Session 15
In this study session, you have learnt:
➢ Meaning of fiscal federalism
➢ Objectives of fiscal federalism
➢ Chronicle of revenue allocation in Nigeria
➢ Allocation of tax-raising powers
➢ Functional allocation of tax-power

Self-Assessment Questions (SAQs) for the Study Session 15

Now that you have come to the end of this study session do you know how well you have fared?
Would you like to test your understanding of the session? Then, see if you can answer the
following assessment questions. Do not hesitate to write down in your notebook the topic you do
not understand or that needs further clarification. Discuss this with your lecturer in the next
tutorial you will have.
Tutor-Marked Assignment
Question
1. Briefly define the term federalism
2. Explain the two revenue allocation processes
3. Mention five objective of fiscal federalism
4. Explain the Chicks Commission of 1953 and the revenue sharing arrangement
References/Suggestion for Further Reading
Ans S. &etal (2009) Advanced Local Government Finance, Spring Time Press. Enugu.
Finance (Control and Management) Act 1958 Law of the Federal Republic of Nigeria 1958 –
Federal Government Press. Lagos
Oluranti S. &etal (1991) Fiscal Policy Planning and Management in Nigeria Secreprint Nigeria
Ltd, Ibadan
PYE Association: Public Sector Accounting: Lecture Note.
Salawu R.O (2005) Essential of Public Finance. OAU Press Ltd, Ile-Ife.
1999 Constitution of Federal Republic of Nigeria as Amended.