The Second-Generation Theory of Fiscal Federalism: A Critical Evaluation

Abstract

This paper evaluates the second-generation theory (SGT) of fiscal federalism. It spells out the main arguments of the theory and discusses the fiscal architecture of Nigerian federalism with a view to using the case study to work out the strengths and weaknesses of the theory. After arguing that the weaknesses of the theory outweigh its strength, the paper goes on to point out the dangers of using a particular construct of fiscal federalism as a model. It notes that SGT theory is an attempt at reviving and modelling nineteenth century American fiscal federalism as a universal standard.

Keywords

• first generation theory of fiscal federalism (FGT)
• second generation theory of fiscal federalism (SGT)
• transfer payments
• bailouts
• subnational governments
• central governments soft budget constraint (SBC)
• hard budget constraint (HBC)