Will Budget theme meet citizens’ expectations?

During yesterday’s 2020/21 Budget speech, fiscal policy, fiscal stimulus and fiscal space are some of the key words that were used by the Minister of Finance, Planning and Economic Development Matia Kasaija.

Fiscal policy is a government plan for deciding how much money to borrow and to collect in taxes, and how best to spend in order to influence the level of economic activity.

Fiscal stimulus is an attempt by the government to increase economic activity by reducing taxes, increasing government spending or both.
Since the outbreak of Covid-19, the word fiscal stimulus has become so profound.

According to International Monetary Fund (IMF), in order to address the economic and social challenges posed by the Covid-19 pandemic, governments are using fiscal measures that take various forms and have different budgetary and debt-related implications. Additional spending or tax cuts result in immediately higher budget deficits.

IMF indicates that the immediate fiscal policy response to the Covid-19 pandemic should account for the particular nature of the health crisis that the global economy faces, one that affects supply, demand, and confidence while being timely, temporary, and targeted across all levels of governments.

“It is important to ensure that resources are used efficiently and embedded in a medium-term fiscal framework,” IMF said in a statement to Finance ministers and Central Bank governors during the IMF/World Bank spring meeting in April.

The IMF advised that the immediate fiscal policy response to the Covid-19 pandemic should account for the particular nature of the health crisis that the global economy faces, one that affects supply, demand, and confidence while being timely, temporary, and targeted across all levels of governments.

It is important to ensure that resources are used efficiently and embedded in a medium-term fiscal framework.

Budget theme
The theme for the Budget is ‘Stimulating the economy to safeguard livelihoods, jobs, businesses and industrial recovery”.

Mr Kasaija said the theme for this year’s budget was agreed at the East African Ministers of Finance Conference recently in light of the need to address the current challenges in their economies.
He said the ministry is focusing resources to the real economy by investing in areas that will recover the economy during and post Covid-19.

According to Mr Hamza Ssali, senior manager-Tax Ernst & Young Uganda, under the current situation of Covid-19 pandemic, there cannot be a better theme than this. The better question to ask as a Wanainchi is whether the government will live to the expectations of this theme.
Mr Ssali said before delving into the details of expectations as an ordinary Ugandan, it is important to understand what this theme might broadly mean.

“The objective of a stimulus package is to revive the economy and prevent or reverse a recession by boosting employment and spending,” he said.

“The theme suggests that there will be measures planned to stimulate the economy. From my reading, these measures are expected to range from short to medium so that the economy remains resilient amidst the pandemic situation. Short-term measures are likely to span between 6-12 months while medium measures might span not beyond 2-3 years,” Mr Ssali added.

Mr Ssali said there are varied packages that the government can deploy as it tries to boost the economy ranging from fiscal to monetary policies, adding that fiscal policy measures largely allude to creation favourable tax policies that can encourage production and increase aggregate demand, hence stimulating economic growth.

“We noted in recent months where the Uganda Revenue Authority (URA) came up with some business continuity measures that taxpayers can utilise to counter the unprecedented situation of Covid- 19. These included deferment of payments for taxpayers who thitherto entered into installment payment agreements prior to the current situation,” he said.

This, according to Mr Ssali was extended further to all taxpayers whose business were affected by the Covid-19 pandemic in as far as monthly tax payments such as value added tax (VAT), employment tax Pay As You Earn (PAYE)), withholding tax (WHT) and local excise duty.

He said the other measures introduced by the URA included, extension of filing due dates as well as streamlining and fast tracking of tax refund claim procedures.

“These are welcome gestures from the tax authority and literary they would be expected to provide broader package but the absence of legal instruments and mandate to propel additional measures cannot be ignored,” he said.

Ms Ssali said from the reading of this theme, one is drawn to the fact that the government will perhaps come up with additional fiscal measures that will gear up business sustainability and continuity just like other countries have implemented. Kenya for instance, outlined certain tax interventions the government intends to make to “cushion” the country against the economic effects of the COVID-19.

He further stated that these included 100 per cent tax relief for “lower income earners”; reduction of highest PAYE band from 30 per cent to 25 per cent; lower VAT from 16 per cent to 14 per cent and Corporate tax reduction to 25 per cent from 30 per cent.

About the expectation from the local citizens, he pointed out the expectation will be favourable tax measures this fiscal year. For example, similar to Kenya’s intervention measures- adjustments in tax rates (example, adjustments to the VAT standard rate from 18 per cent to [say] 16 per cent and lowering corporate income tax rate to [say] 25 per cent)

The others are the introduction of additional tax incentives to boost local production by attracting Small and Medium Enterprises (SMEs) into manufacturing/ industrialisation and /or reinstating some of earlier repealed incentives at least for one year such as-initial allowance on eligible plant and machinery with respect to entities situated within a radius of less than 50 Kilometres from Kampala.

“A comprehensive package focusing on SMEs would be ideal, ranging from fiscal to monetary policy measures. In this respect, the government may introduce special tax relief/exemptions for SMEs employing for instance 50-200 local workforce,” he said.

“Similar to what is currently existing in the Income Tax Act for companies employing 5 per cent of their workforce on a full-time basis who are persons with disabilities- whereby 2 per cent of income tax payable is considered as business expense,” he added.

Mr Ssali suggest, although there may be a hit on income tax as far as revenue collections are expected, this would be compensated by other tax contributions, such as employment tax and consumption tax/VAT through increased production, which would trigger aggregate demand considering that these products are likely to even be much cheaper than imports.

He also argued that this measure may even cushion on labour exports-which is quite fragile under the current situation and likely to suffer adversely in a foreseeable future, yet the government Ministries, Departments and Institutions (MDIs) cannot fully absorb this labour force.

“Additionally, this would be a good strategy for import substitution in the long run, thereby reducing dependency on imports,” he said.

The managing director of IMF, Kristalina Georgieva said: “Encouraging news is that all governments have sprung into action and, indeed, there has been significant coordination. “Our Fiscal Monitor shows that countries around the world have taken fiscal actions amounting to about $9 trillion. In addition, there have been massive monetary measures from the G20 and others,” she said.

Adding, “Many of the poorer nations are also taking bold fiscal and monetary action, even as they grapple with this fundamental shock to their systems—and with far less firepower than their rich-country counterparts.”

During their second online meeting convened by the United Economic Commission for Africa on March 31 the African finance ministers a number of issues, the meeting focused on five main issues, the health and human crisis; the need for debt relief and fiscal stimulus for all countries; liquidity relief to the private sector and in particular the service sectors, tourism, airlines and SMEs; call for coordinated trade policy environment; and finally the use of ICT to better manage the crisis from awareness, to support, to accountability and transparency.

[email protected]