The need for effective fiscal policy management

BUDGET             FINANCE

By Juliet Akello

Uganda's fiscal policy aims to stimulate economic growth, strengthening tax administration and raising tax revenue to reduce the fiscal deficit in relation to GDP often financed by foreign inflows in terms of budget support and government borrowing (MPRA, 2005).

In FY  2020/21, Government plans to develop an appropriate, evidence-based Tax Expenditure Governance Framework to limit leakages and improve transparency as one of the policy initiatives to collect the projected sh20 trillion as tax revenue.

Discussions on how to tap into the informal sector so as to increase both tax and non-tax revenue for the FY 2020/21 is also on-going. However, Uganda has always run a deficit budget because Government expenditure is usually higher than domestic revenue growth.

For instance, the fiscal deficit was programmed to be 6.6% of GDP however the projected outturn is 7.5% which is way too high above the Charter of Fiscal Responsibility target of 3% by end of FY 2019/20.

The Ministry of Finance, however, launched the Domestic Revenue Mobilisation Strategy (DRMS) on 20^th February 2020 with the hope that it will provide direction on tax policy-making and strengthen tax administration.

The government can only realise this if planning, budgeting, and budget execution are realistic and the strategy is effectively implemented to mobilise adequate resources to finance domestic investments.

This further calls for effective coordination among Government agencies to avoid revenue leakages as highlighted by the Auditor General's Report (December 2019).

The report stated that sh54b was never collected in FY 2018/19 due to non-coordination between URA and the Gaming board; sh393.8b due to failure by URA to access the Integrated Financial Information Management System; some driving permits being issued without paying the requisite taxes; and a number of instruments being registered by the Ministry of Lands without paying the requisite stamp duty.

If these challenges continue without being addressed, they are likely to undermine the performance of the DRMS and will definitely frustrate the target of raising revenue to GDP ratio from 12.9% in FY 2018/19 based on the rebased GDP to between 18% -20% over next 5-year period as envisaged by the Ministry of Finance.

It is categorically clear that increasingly, the Government requires higher amounts of resources to provide quality services to the ever-growing population.

However, the low tax/GDP in Uganda is partly contributed to by the big size of the peasant population, poverty, inadequate tax administration capability and corruption among others which translates into how much Government can afford to deliver to citizens.

For instance, whereas the recurrent expenditure in the FY 2020/21 is scheduled to increase by UGX 1 trillion, the development budget is set to reduce by sh1.4 trillion.

Expenditure for health, education, agriculture, and social development is all set to reduce while that on interest payments is increasing by sh454.7b, higher than the allocation for 6 individual sectors' allocations which are all less than sh200b namely; Tourism, Social development, Land, Housing and Urban Development, Trade and Industry, Science, Technology and Innovation and ICT.

Indeed, Government needs to; i) address bottlenecks that would challenge the effective implementation of the DRMS to boost revenue for financing its own development,  ii) adopt the practice of realistic planning, prioritization, and budgeting within the available resource limits to avoid widening the deficit gaps that lead to borrowing; and iii) restrict itself to the fiscal policy targets set in the fiscal framework to increase budget credibility.

The writer is a Budget Policy Specialist at the Civil Society Budget Advocacy Group