Lower taxes must be followed up with smaller government

Finance minister Matia Kasaija today presents revised budget estimates for 2017/2018 cutting the National Budget from Shs30 trillion to Shs28.9 trillion ($ 8.3 billion to $8 billion).
The NRM government has since 2016 began toying with a strange orthodoxy of starting to cut taxes at a time when everything conceivable had been taxed to death. Payroll taxes have already reached a sky-high rate of 39.6 per cent and a further 10 per cent surcharge for those making more than Shs120 million a year. Employees unlike employers don’t have a chance to apply for credits to offset personal allowances and job related expenses from their income. Employers already involuntarily pony up 10 per cent per employee to NSSF, which in effect is another tax. It is only a question of time when employer surcharges will have to rise to cater for disability and long term unemployment in an economy with a notoriously high unemployment rate.

The real mess is in the import tax regime. Uganda’s import tariff regime comprises of standard import duty (that is reportable for compliance with a number of tax agreements that Uganda has with other countries). This one is a big mystery because neither URA nor the Ministry of Finance have cared to publish the tariff rates for imports save for the motor vehicle tax calculator. After Import Tax is levied, the importer has to pay both 18 per cent VAT, 6 per cent withholding tax (a stealth income tax) even though imports technically are not produced within Uganda to attract VAT. For a few years, there has been an infrastructure levy to support financing of infrastructure although the levy aspect is superfluous as these funds go into the general fund. The fuel tax regime is the same requiring all these taxes to be paid upfront, a situation that has squeezed local fuel operators and encouraged proliferation of contraband fuel.

For industries, tax exemptions will keep them competitive where imported toilet paper for example beats local toilet paper by just Shs2,000 or 60 US cents. Without delving into specifics, tax exemptions on female hygienic products is good common sense. The same wisdom should inform Parliament to reject proposed tax increases on cosmetics. In a recession people need to feel good about how they look as they navigate the tough job market and reach out to pocket wary consumers. URA should already have the figures to show that minor adjustments in the import tax regime have greatly stabilised the imported vehicle market allowing more people to import cars.
Most of us are not privy to the specific messages and reliefs that IMF Chief Christine La Garde carried here last fall. But whatever it was, it seems to be working. The currency is now stable holding steady in the 3,600-3,720 range to the greenback depending on the point of entry into the market. Banks are cautiously operating but very few are in position to make big plays in the loan segment. A very low CBR has discouraged lending with all its attendant risks. The country’s biggest bank, Stanbic saw its profit last year rise from Shs150 billion to Shs191 billion on account of corporate investment banking rather than consumer lending.

Budget cuts mean disaster for already struggling government departments. Budget cuts are going to hit service ministries like Health, Education and Infrastructure harder. But there should be equity to attack some of the untouchables, like the cost of the presidential household and security. There are also some good ideas like the youth livelihood fund which were set up without capacity to properly manage them. Some of these activities can be suspended pending proper studies on how to implement them.
There is a growing tumor in public finances, the rise in public debt. Already debt repayments are now angling close to 40 per cent of the budget. This is a situation that is out of control. High tax, high debt socialist tax regimes are a prescription to low economic growth and dysfunctional economic systems.

Mr Ssemogerere is an Attorney-at-Law and an Advocate. [email protected]