Effectiveness of Fiscal Federalism for Poverty Reduction in Nigeria: An Analysis of Federal and State Governments’ Expenditures

Abstract One of the sustained political and economic strategies that have been adopted by various countries over three decades to achieve the desired level of development is fiscal federalism. Through this economic development strategy, various levels of government within an economy have been involved in the pursuit of reducing poverty over the decades. The purpose of this study is to examine the relationship between government expenditure on poverty reduction with respect to federal and state government expenditures respectively. The study employed the auto-regressive distributed lag (ARDL) estimation technique to establish long-run relationship, and to examine the magnitude of the effect of federal and state government expenditures in both the short-run and long-run periods using time-series data for the period 1981 to 2018. Results obtained indicate that only state government expenditure has positive effect on poverty reduction in Nigeria. The findings of this study therefore support the need for greater decentralization and increase in fiscal expenditure responsibilities and strengthening revenue capability in favor of state governments, giving that achieving desired poverty reduction could be achieved through increased state government spending.JEL Classification: E62, H50, I30