Will the Budget meet citizens’ hopes?

Tuesday June 21 2016

Vivo Energy Uganda AMD Hans Paulsen fuels a car

Vivo Energy Uganda AMD Hans Paulsen fuels a car recently. Just like other previous Budgets read by the finance minister, the government is in the next financial year 2016/17 proposing an increase in excise duty of Shs100 on each litre of diesel and petrol. PHOTO BY STEPHEN WANDERA 

While Ugandans kept tabs on the 2016/17 Budget presentation recently, many had high hopes anticipating proposals that will give some relief to the “common man” who is already burdened with the high cost of living. Much as some of them emerged winners, another lot of taxpayers were weighed down by a combination of increased taxes on some items. Imelda Namagga assesses whether the Budget will deliver citizens’ expectations.

Uganda presented its Shs26.361 trillion national Budget for the financial year 2016/17 on June 8, 2016. The Budget, which is a 9.7per cent increase from that of FY 2015/16, was presented under the theme; “Enhanced productivity for job creation.” In FY 2015/16, the economy grew by 4.6 per cent, with services growing at 6.6 per cent from 4.5 per cent last financial year, agriculture at 3.2 per cent in real terms compared to a growth rate of 2.3 per cent in FY 2015/16. Furthermore, the country’s foreign exchange reserves slightly grew slightly from 4.3 months of future imports of goods in March 2015 to currently stand at 4.4 months, slightly below the medium term target of 4.5 months. While this performance is quite commendable, there are fears that this may not directly trickle down to the common man.

Public debt
Gross nominal public debt is estimated to be Shs29.984 trillion by end of June 2016, of which Shs18.665.7 trillion is external debt and domestic debt Shs11.319 trillion. This is equivalent to 34.1 per cent of GDP, an increase from 25.9 per cent in FY 2013/14. Though this amount is below the Public Debt Management Framework (PDMF) threshold of 50 per cent, this figure has increased from 25.9 per cent in 2013/14 to 34.1 per cent in 2015/16. Though most indicators (for both domestic and external debt) are below the required threshold proposed in the PDMF, the ratio of domestic debt stock to private sector credit (as at June 2015) was estimated at 95.1 per cent, way above the required threshold of 75 per cent. This implies a crowding out of private sector credit with diverse effects for private investment.

Impact of tax measures on common man
In the past financial years, the government has made it a habit to increase taxes on items such as fuel. Just like other previous Budgets read by the Finance minister, the government is in the next financial year 2016/17 proposing an increase in excise duty of Shs100 on each litre of diesel and petrol. This will contribute to increasing the cost of production. Since this tax will be borne by the final consumer, this will see an increase in pump prices and will force transport fares as well as other commodity prices up. The poor will be greatly affected since they will be required to spend a larger portion of their income to meet basic commodities.

The proposal to increase registration fees for personalised number plates from Shs5 million to Shs20 million is a welcome move, since this is since as a luxury, which is mainly consumed by the rich. Likewise, the move to increase taxes on soft cup cigarettes to Shs50,000 per 1,000 sticks and hinge lid cigarettes to Shs80,000 per 1,000 sticks as well as that to increase taxes on sweets and confectionaries to 20 per cent is commendable since the above products have diverse effects on health. This move will discourage some sections of the population from consuming more of these products.

The government’s proposal to allow producers of solar, wind and geothermal energy relief on VAT incurred on their businesses inputs is a good move since it will not only promote the use of alternative sources of energy but also make them affordable to most households. With the high electricity tariffs in Uganda, some sections of Ugandans will resort to using solar, wind as well as other available cheap alternatives.


Similarly, government’s move to grant VAT relief in respect of supplies procured from the domestic market for aid-funded projects will promote the use of Ugandan products hence encourage local investments.

In FY 2016/17, the government is proposing to grant tax relief on losses to taxpayers who merge or acquire loss-making businesses and continue to operate this same business after this transaction. The move is aimed at promoting Uganda’s investment climate and facilitating mergers and acquisitions. While this is seen as a good move, measures should be put in place to ensure that this incentive is not abused by other tax payers who may deliberately declare losses with an aim of receiving tax relief. The decision to grant this should be considered after an audit is done on such businesses.

The government is commended for its efforts to expand the tax base by implementing the Taxpayer Registration Expansion Project and its plan to increase the budget of Uganda Revenue Authority (URA) by Shs40 billion to roll out the tax payer education programmes aimed at helping businesses to formalise their operations through business licensing and registration. While we hope that this will help in educating the public, a deliberate effort should also be made by the government to promote transparency and accountability in the collection of domestic revenues.

For agriculture, the backbone of Uganda’s economy, the government is planning to allocate Shs823.42 billion in FY 2016/17, a 65 per cent increase from Shs343.46 billion in FY 2015/16. In spite of this increase, the overall share of this sector’s Budget remains at a mere 3.1 per cent of the total national Budget.

Furthermore, the government has pledged to transform this sector though investing in interventions such as agricultural research and development; construction of irrigation infrastructure including on-farm valley tanks, valley dams and medium to large scale irrigation schemes for communities; financing post-harvest handling facilities for commodity storage through the agricultural credit facility; and implementation of a comprehensive National Agriculture Finance Policy and Strategy to support private sector investment in agriculture and establishing an agriculture insurance scheme to reduce farm risks and attract investment in agriculture.

With 64 per cent of the population still stuck in subsistence farming, there is a fear that most of these interventions may not benefit the bulk of the farmers, unless the government makes deliberate efforts to target these categories of people.

The education sector Budget is projected to increase from Shs2.029 trillion in 2015/16 to 2.745 trillion next financial year. While this represents a 35 per cent increment in the sector’s total Budget, a larger portion of the increment is to cater for the 15 per cent increase in teacher’s salaries. Given the increase in enrolment rates for both primary and secondary pupils, the resources available in this sector may not be adequate to cater for the increased development needs as well as address challenges that this sector is currently facing.

All in all, we await the actual implementation of this Budget in July 2016. We hope this Budget contributes towards the government’s expectations of transforming the country into a middle-income country.

Interest payments
In FY 2016/17, the government is planning to put aside a total of Shs6.4 trillion to cater for interest payments due. This reflects a total of 24 per cent of the total national Budget, the largest amount ever. Moreover, the ratio of interest payments as a percentage of GDP has continued to increase from 0.9 per cent in FY 2010/11 to 2.0 per cent in 2015/16 and is expected to rise further to 2.2 per cent in the next financial year.

Since the country has continued to borrow to finance large infrastructure projects, if these investments do not generate sufficient amounts of revenue in future, there is a growing fear that the country will continue spending huge amounts on debt service; thus, compromising allocations to other productive sectors of the economy.

In FY 2015/16, most of the domestic revenue sources performed below the planned target. Among the local revenue sources, only income taxes (i.e corporation tax and withholding tax) met the planed target. However, despite a Shs42.77 billion shortfall in trade taxes, the government managed to collect a Shs7.71billion surplus from excise duty. Even with this revenue shortfall, domestic revenues are projected to increase to Shs12.914.3 trillion in the next financial year. The question one would ask is whether given the current economic conditions, this higher projection will be met without undertaking some fundamental reforms, particularly to bring those in the informal sector under the tax net.


Tax increase in petrol and diesel for the FY2016/17.

Percentage of population in Uganda that is still stuck in subsistence farming.

URA’s revenue collection target of FY2016/17.

Imelda Namagga works with Uganda Debt Network. E-mail: inamagga@udn.or.ug