Fiscal Decentralization and Economic Growth in Nigeria

Abstract

Fiscal decentralization has been widely advocated as a mechanism for improving resource allocation, promoting efficient service delivery, and stimulating economic growth through increased fiscal autonomy at the subnational level. However, concerns remain regarding the effectiveness of decentralized fiscal arrangements in achieving these objectives in Nigeria due to governance and institutional challenges. Against this backdrop, this study examined the relationship between fiscal decentralization and economic growth in Nigeria. Specifically, the study investigated the effects of fiscal decentralization expenditure, fiscal decentralization revenue, retained profit, labour force, and capital formation on economic growth, measured by the Gross Domestic Product Growth Rate (GDPGR). The study employed a quantitative research design using annual time-series data spanning from 1999 to 2025. The Autoregressive Distributed Lag (ARDL) model was employed for estimation, and the findings revealed that fiscal decentralization expenditure and fiscal decentralization revenue exerted negative and significant effects on economic growth. Retained profit had a positive and significant effect on economic growth, while capital formation and labour force exhibited positive but insignificant effects. The ARDL bounds test confirmed the existence of a long-run relationship among the variables. The study concluded that fiscal decentralization has not effectively translated into economic growth in Nigeria due to inefficiencies in resource management and weak institutional structures. The study recommends strengthening fiscal accountability, transparency, and efficient resource management at the state and local government levels to reverse the adverse growth effects of fiscal decentralization expenditure and revenue. Subnational revenues and expenditures should be channeled towards productive and growth-enhancing investments.