Government has fallen behind its target of increasing domestic revenue by 0.5 per cent every year as spelt out in the Domestic Revenue Mobilisation Strategy (DRMS), a PricewaterhouseCoopers (PwC) 2020/21 Budget bulletin notes.
The aim of the DRMS is to improve revenue collection, lift Uganda’s tax-to-GDP ratio to between 16 and 18 per cent within the next five financial years. This will bring Uganda closer to its theoretical potential and exceed the target of a 16 per cent tax-to-GDP ratio as set out in the National Development Plan II (NDPII) and the Charter of Fiscal Responsibility.
However, in its analysis, PwC said: “The projected ratio of domestic revenue to GDP is 14.3 per cent (tax revenue of 13.3 per cent). The government has fallen behind on the DRMS/NDP II targeted annual increase of 0.5 per cent of GDP (the average increase to FY 21/22 is projected to be 0.4 per cent).”
Uganda’s tax structure in line with international norms. Uganda’s tax system comprises several taxes instruments, including direct personal and corporate income taxes, and indirect taxes such as excise duties and Value Added Tax (VAT). The revenues that the system generates reflect a broad balance between taxes on consumption, income, and international trade.
As per the Budget for FY20/21, this is the inaugural year under the third National Development Plan (NDP III). The resource envelope totals Shs45.5 trillion, representing a 12.4 per cent increase over that budgeted for the current year.
PwC says the projected fiscal deficit is Shs13 trillion (8.6 per cent of GDP) and reflects a partial return to normal domestic revenues coupled with the extra cost of relief/stimulus measures related to the pandemic. The larger part (73 per cent) of the deficit is expected to be funded by external borrowing.
In the 2020/21 Financial Year, PwC says budgeted domestic revenue for the coming year is Shs21.8 trillion, an increase of 24 per cent on the current year projection but a comparatively modest increase of 6 per cent against the current year target.
PwC explains that the increase is expected to largely come from (partial) recovery of the economy and initiatives under the Domestic Revenue Mobilisation Strategy (DRMS), including implementation of the administrative measures that were delayed in FY19/20.
“There is only one specific tax increase mooted, being the hike in excise duty on fuel, which is expected to generate additional revenue of Shs262 billion,” PwC said.
The budgetary challenges facing the government are significant, for instance, in the past few years, government expenditure has consistently been higher than revenue. In FY2017/18, the fiscal deficit widened to 4.75 per cent of GDP, and spending exceeded the approved budget, pushing the government borrow more domestically.
The short time-to maturity on these loans, under four years on average, places additional pressure on Uganda’s Budget. Notwithstanding the domestic borrowing, Uganda’s fiscal deficit is funded by external borrowing, predominately from the World Bank’s International Development Association and China. Over the five years from FY2014/15 to FY2018/19, the debt-to-GDP ratio rose from 26.2 per cent to 36.1 per cent.
The projected outcome for the current year shows the clear impacts of the Covid-19 pandemic with significant shortfalls in domestic revenues compared to budget, but also reduced spending.
PwC said overall the expected fiscal deficit is slightly reduced to Shs10.3 trillion, representing 7.5 per cent of GDP (against the budgeted deficit of Shs10.6 trillion, 8.7 per cent of GDP prior to rebasing).
However, this compares unfavourably to the FY18/19 deficit (4.9 per cent of GDP) and the target of 3 per cent.