CHAPTER ONE

1. INTRODUCTION

1. BACKGROUND OF THE STUDY

To understand fiscal federalism, it is imperative to understand federalism as a larger concept, because federalism is the operational context within which fiscal federalism is situated.

Federalism according to K.C Where is the device of dividing powers so that the central and regional governments are each within a sphere, co-ordinate and independent. He opined that the characteristics of the federal principle are the division of powers and co-ordinate, not sub-ordinate of the two levels of government with respect to their functions (K.C Wheare, 1967:10).

Federalism is a system in which the power to govern is shared between federal, national and state government creating what is often called a federation (Akindele and Olopa 2002)

Fiscal federalism deals with the division of governmental functions and particularly financial relations among levels of government. The theory of fiscal federalism assumes that a federal system of government can effectively solve financial problems facing government such as, just distribution of income, effective and efficient allocation of resources.

Musgrave opined that federal or central government should be responsible for income redistribution and allocation of resources should be the responsibility of the state and local government.

National fiscal policies and financial decisions have been the predominant vehicle forming intergovernmental relations. Fiscal federalism operates through the various federal taxes, grants and transfer that occur in addition to state and localities, the federal government regulates, subsidizes taxes, provides goods and services and redistributes income.