What you need to know:
...government finds it to be good economics to subsidise companies and help rich individuals rake in hefty profits by not paying tax
A presidential address is supposed to be a very important event. In a country like Uganda where the President wields vast, somewhat unlimited powers, and trumps institutions, his word is consequential.
But in recent years, Ugandans have come to treat presidential addresses with disdain and cynicism. They either don’t tune in or do not pay enough attention to get the President’s message.
President Museveni addressed the nation last Sunday. The key issue is, and remains, the economic situation, especially the high fuel and food prices. After his address, on Facebook and Twitter many Ugandans wondered aloud what it was that the President had said.
Well, there was at least one critical message, one that is scarcely new in the school of thought we can call Musevenomics, but which is really parroted from the neoliberal thinking about unfettered markets.
Referencing the President’s speech, the Secretary to the Treasury who is also the Permanent Secretary of the Ministry of Finance, Mr Ramathan Ggoobi tweeted in praise of his boss for sticking to the principle that subsidies and tax cuts create economic distortions and are therefore plain bad economics. This is a false assertion to which I return shortly.
In his tweet, Mr Ggoobi alluded to the fact that they, perhaps meaning the Treasury and government economic technocrats writ large, will follow the President’s guidance. I found this rather astounding.
In a sense Mr Ggoobi was revealing that as the senior most economic technocrat, he goes with the President’s advice and word instead of him, as the person who knows economic issues better, advising the President on the right course of action in circumstances of economic crisis.
Museveni’s position that subsidies and cutting taxes on essential goods and services is bad economics derives from the neoliberal received wisdom which, ironically, Mr Ggoobi was very critical of when he preached ‘economics that work’ before he became Treasury secretary.
A subsidy is basically a government intervention in the market to bring down prices and ease economic difficulties for consumers. It is a measure that helps make certain goods and services available and more affordable to the consumer.
For example, the government can extend a tax credit to Madhvani Group such that the cost of a kilo of sugar is brought down and made cheaper and affordable to the consumer. In the face of mounting fuel pump prices, the government can reduce the tax on fuel to ameliorate the pain felt at the pump by consumers.
Reading from the neoliberal creed and rule book, Mr Museveni who in the past sung from the same hymn book with the late Tumusiime Mutebile, believes that such measures hurt the overall macroeconomic outlook. In fact he likes to insist that such interventions subsidise consumption rather than production and that they are not good economics for a poor country.
This argument has some sound basis but it is largely defective. Museveni is right to say that if you cut taxes in Uganda, you not only lose tax revenue but you also open up possible avenues for smuggling across the border since shrewd actors will cash in. Smuggling is a problem the state can tackle as part of national security and law enforcement. It cannot be a handy excuse for not undertaking an otherwise sensible economic measure.
But in the broader scheme of things, the case against subsidies and tax cuts does not stand up to scrutiny for several reasons. First, it presupposes that the interventions will be permanent yet they are meant to be short-term measures to ease things and help people get along in the meantime.
Second, governments world over intervene in the economy with measures to correct market imperfections, ease consumer pain and ensure that the consumer is not exclusively at the mercy of market forces.
Third, the government of Uganda has gained notoriety for granting controversial tax exemptions often to unknown companies. In fact the word exemption itself is a little misleading because the government actually pays taxes to the tax body, Uganda Revenue Authority (URA), on behalf of the companies that the ministry of Finance grants tax exemptions!
This is a rather bizarre arrangement whereby the government gives money to URA on behalf of selected beneficiaries of exemptions, then URA in turn gives that same money back to government as collected revenue.
The problem with Musevenomics, which Mr Ggoobi has quickly embraced, is that government finds it to be good economics to subsidise companies and help rich individuals rake in hefty profits by not paying tax.
Yet the same government sees it as bad economics if it undertakes short-term, stopgap, measures to benefit the wider public in times of economic uncertainty and crisis. This thinking is scandalous, to say the least!