Monetary policy, budget deficit and all that stuff

Last week, I met some relatives at a family function in Masaka. They asked me very tough questions about the national Budget. They wanted to know what it is about, why prices go up after the budget, why the Minister says “Madam Speaker” so many times during his budget speech. They were also not happy with the very complex terms like macro-economic outlook, monetary policy, fiscal policy, Budget deficit, etc which the Minister uses when delivering the budget speech. They challenged me on a number of issues and concepts. I promised them that I will use this column to try and demystify some of the issues that they raised, looking at them from the perspective of a lay man or woman for that matter. This is my attempt.

The national Budget is a government’s policy document that outlines the government’s planned expenditures and anticipated revenues for the financial year. It is prepared in such a way as to reflect the government’s policy priorities for a particular financial year. It is a statement that outlines a year-long cycle of measures that the government uses to raise money and how that money will be spent.
The national Budget is based on the government’s macroeconomic outlook, and a fiscal policy. A macroeconomic outlook is a forecast of how the economy is expected to perform in the coming year. It includes the government’s expectations on key metrics such as economic growth, inflation, interest rates, the foreign exchange reserves, the foreign exchange rates, balance of trade, and so on.

Macroeconomic outlook
The Uganda government’s macroeconomic objectives are to achieve and maintain a rate of real economic growth of at least 6 per cent per annum; maintain annual core inflation close to 5 per cent, gradually build up foreign exchange reserve cover of at least the equivalent of 4.5 months of imports of goods and services, and maintain a market determined real exchange rate, with foreign exchange interventions limited only to smoothing excess volatility. I expect to hear this kind of talk from the minister during his budget speech to Parliament next week.

Understanding fiscal policy
A fiscal policy in simple terms is the government’s spending policy. It is how much money the government is budgeting to spend, and how it is proposing to allocate that expenditure. For example, for the financial year 2016/17 the government is planning to spend Shs20.7 trillion. Most of this money will be spent on infrastructure development, power and energy, health and the education sectors. The government’s fiscal policy in the financial year 2016/17 and the medium term is to support the maintenance of macroeconomic stability, while at the same time stimulating economic growth and reducing Uganda’s infrastructure deficit. Again, you can expect a statement from the Minister along these lines during his budget speech next week.

The government’s budget is funded by revenue collected by the Uganda Revenue Authority (URA), grants from developing partners and government borrowings from both the local and external market. For example in the financial year 2016/17, government is expecting URA to collect Shs12.9 trillion and also receive Shs1.7 trillion in form of grants. That adds up to a resource envelope of Shs14.6 trillion in total. But the government is budgeting to spend Shs20.7 trillion. This means that government will have a deficit of Shs6.4 trillion. This deficit will be financed by government borrowing both from the local and external markets. In budget terms, a fiscal deficit is the excess of total government’s budgeted expenditure over total revenue the government expects to receive from both URA collections and grants from development partners.

Budget preparation
Preparation of the budget is the work of the Executive arm of the government, and in Uganda it is done by the Ministry of Finance. The process involves the Ministry of Finance requesting information from other government ministries, authorities and departments, relating to their proposed programmes and expenditure for the coming financial year. This information is then analysed in detail by the Ministry and where necessary, amendment and the trade-offs are made to meet the different government priorities competing for the limited resource envelope.

After this process is completed, the budget is analysed, scrutinised, debated in Parliament, and eventually approved and passed by Members of Parliament (MP). After the budget has been approved by Parliament, it is executed by funds being allocated to government institutions such as ministries, departments, authorities etc which are then tasked with the duty and obligation of spending those funds to deliver the public goods and services to the citizens of Uganda.

The last stage in the budget cycle is the auditing and evaluation of the government’s budget performance and service delivery for that particular financial year. This is done by the office of the Auditor General, or any other appropriately authorised agents. The audit findings are submitted to Parliament which is responsible for holding the government or the executive accountable for the execution of the budget.
We, members of the general public and electorate, rely on the MPs we send to Parliament to make the government accountable and ensure that public goods and services are delivered as promised in the government’s budget, and we get good value for our money. As you can see, it’s a complex process. In a nut shell, it is about prioritisation, revenue mobilisation, allocation of resources, accountability, services delivery and value for money.

NATIONAL BUDGET

The national Budget is a government’s policy document that outlines the government’s planned expenditures and anticipated revenues for the financial year. It is prepared in such a way as to reflect the government’s policy priorities for a particular financial year.

Francis Kamulegeya is the senior partner of PwC Uganda and a board member of PwC Africa. E-mail address [email protected]