Revenue generation of local government in Nigeria is principally derived from the statutory allocation “a direct share of the local government from the federation account and tax, a compulsory levy imposed by government on individuals and cooperate bodies for the various legitimate functions of the state.
Sources of Revenue
- The size of the Local Government Area: when the local government is large in terms of territorial and population size, diverse and rich in revenue resources, it should be allocated rich and adequate sources of revenue which enables it to cope with developmental problems of a large area.
- The scope of functions allocated to the local government: where the local government is allocated diverse functions, some of which are large in scope like education, the revenue sources to be provided should correspondingly be large in scope.
- The philosophy/policy of the national government on the role of local government towards community development
The local government has two major revenue sources :
- External sources of revenue
- Internal sources of revenue
This refers to statutory revenue allocation, loans, and grants from the federal and state government. The external sources are classified as follows:
- Statutory Allocation: it is the constitutional entitlement of the local government from the federation account.
- Loans and other forms of borrowing: the local government can take a loan or borrow from the state (federal government in as much as the procedure for this process is not circumvented.
- Grants: it is a financial aid that is given by the federal or state government and other financial institutions to enable it to discharge its donations from outsiders. There are four classes of Grant
- Block Grant: it is a financial assistance given by the central or state government to the local government to facilitate the execution of their projects and programs effectively.
- Specific Grant: this is budgeted money given to the local government by the state/central government for a specific project or service.
- Equalization Grant: this grant is paid as an aid to a less economically privileged local government whose revenue will not be enough to finance and maintain a particular essential service.
- Matching Grand: this is a percentage of money given to cover part of the total amount of a project.
Internal sources are usually referred to as internally generated revenue within the area of jurisdiction of the local government. They include:
- Rate: a rate is a tax levied on an individual person. Rate is an important source of internally generated revenue of the local government. Special rate is generally imposed for priority projects which the local government has inadequate funds to provide.
- Fees and charges: these are levies charged by the local government on certain services which it provides.
- Earnings and profits: it is the money realized from local government commercial ventures and industries establishment.
Problems of Revenue Generation in the Local Government System
- Misappropriation of funds and corruption: these mongo the local government revenue collectors deprive their local governments of a substantial amount of revenue which could have accrued them.
- Poverty: the local government revenue generation capacity will be abysmally poor due to people’s taxable capability.
- Lack of entrepreneurial and professional skills and training: the management of local government lacks foresight, innovative, and investment skills.
Strategies for enhancing Local Government Revenue Generation Capacity
- Good infrastructure: it is a sure criterion for increasing local government revenue generation capacity.
- Local government staff motivation: motivation of staff is the willingness to expend energy in order to achieve a goal.
- Establishment of profit yielding projects: local government should see it as a matter of necessity to establish projects like housing, agriculture, modern markets.