Fiscal policy and poverty alleviation: some policy options for Nigeria

This study examines three different types of fiscal policies (transfers to poor households, targeting of government expenditure and import tariff adjustment) and their implication on income distribution, poverty reduction, resource allocation and output response. It argues that sectoral targeting is the most effective tool for poverty reduction. The use of import tariff to redistribute income tends to increase the reward to capital and other urban-based inputs and thus be biased against the rural poor.

In Nigeria, targeting of government expenditure is a useful tool for income redistribution and poverty reduction. Direct transfers are also a positive means of income redistribution, but it is less effective. Due to administrative inefficiency and the macroeconomic implications of large transfers (e.g. inflation), it is difficult for the government to gain support for direct transfers. Transfers and subsidies to firms are more productive than transfers to households.

Sectoral targeting of public expenditure is more politically feasible in a country like Nigeria. This type of targeting can take various forms, but the benefit would largely be in the form of expanding productive capacity for more employment. Sectoral targeting could include public expenditure on infrastructure and other means reducing cost of production. The implementation of this policy also requires an effective public service to ensure that expenditures are well targeted and effective.