This study investigated the relationship between fiscal federalism and economic development in Nigeria by employing indicators such as the Human Development Index (HDI), per capita income, gross national product (GNP), and poverty rate as dependent variables, while fiscal allocations to the federal, state, and local governments were used as explanatory variables. The analysis utilized the Ordinary Least Squares (OLS) regression technique to estimate the effects of fiscal allocations on these development indicators. The results from the first model revealed that federal government allocation exhibited a statistically significant negative relationship with HDI (coefficient = −3.047280; t = −6.209116; p = 0.0000), whereas allocations to state governments (coefficient = 1.203989; t = 3.419425; p = 0.0022) and local governments (coefficient = 0.395350; t = 2.058681; p = 0.0401) showed positive and statistically significant effects. In the second model examining per capita income, federal allocation (coefficient = 0.332232; t = 0.864598; p = 0.3966), state allocation (coefficient = 0.002188; t = 0.006754; p = 0.9947), and local government allocation (coefficient = −0.227970; t = −0.735240; p = 0.4700) were found to be statistically insignificant. The third model indicated that federal allocation had a statistically significant positive relationship with GNP (coefficient = 45.80752; t = 1.914556; p = 0.0381), while allocations to state governments (coefficient = −0.078067; t = −0.142657; p = 0.8878) and local governments (coefficient = −0.431816; t = −0.420242; p = 0.6782) did not demonstrate significant effects. Similarly, the fourth model examining poverty rate revealed that allocations to federal (coefficient = 0.154602; t = 0.636033; p = 0.5316), state (coefficient = −0.044231; t = −0.127716; p = 0.8996), and local governments (coefficient = 0.089542; t = 0.336924; p = 0.7395) were not statistically significant. Based on these findings, the study recommends reforms to the revenue-sharing formula within the federation account to allocate greater financial resources to state and local governments while strengthening mechanisms for the effective utilization of public funds. Furthermore, the establishment of a robust legal and institutional framework is necessary to ensure transparency, accountability, and improved economic development outcomes in Nigeria.