By Keith Muhakanizi
The New Budget: What is in there for you?
The new budget, like has been the case before, is focussing largely on infrastructure development and improving service delivery.
A major accomplishment during this fiscal year 2014/15 was Parliament’s adoption of the Public Financial Management Act (PMFA) of 2015. This Act requires that the budget is approved by Parliament prior to the beginning of the financial year.
This means that the budget as appropriated by Parliament will start being fully implemented beginning on the first day of the financial year. This will give adequate time for Ministries, Departments and other government agencies to implement then programs and projects as planned.
This will address the problem that we have been facing where the implementation period was effectively about nine months, and the lengthy period of budget approval into the fiscal year made the budget unpredictable and the allocations to a particular spending entity uncertain. This will improve efficiency of the budget, increase accountability for outputs of the budget by Accounting Officers, and better outcomes of the budget.
The PFM Act has three major components, namely: increasing predictability and credibility of the budget, operationalization of the Contingencies Fund as prescribed in the Constitution, strengthening financial operations and reporting, and collection, management and investment of oil revenue. To achieve these key outcomes of the public financial management reforms, the new law makes fiscal discipline absolutely necessary by outlining clearly the duties and responsibilities for improving public financial management of government.
As regards increasing predictability and credibility of the budget, the law requires the annual budget, work plans and the Appropriation Bill to be approved by Parliament by May 31 of each year. The annual budget shall be executed as appropriated by Parliament, and no changes or reallocations by a vote can exceed 10% of the budgeted amount, and such reallocation and any other proposed changes within a vote must be approved by the Minister. Reallocations between votes, regardless of the amount involved must be approved by Parliament.
The law has operationalized the Contingencies Fund out of which supplementary budgets and disasters will be financed. The Contingencies Fund is to be replenished every year with an amount equal to 3.5% of the appropriated annual budget immediately preceding the fiscal year in question. Supplementary Budgets in total may not exceed 85% of the total amount appropriated by Parliament to the Contingencies Fund, while the 15% will be preserved for disaster handling. The powers of the Minister responsible for finance to give supplementary budgets are also very limited in the law. The Minister may approve a supplementary budget of up to 10% of the Contingencies Fund upon and this must be upon request by an accounting officer. As has been the practice, all supplemental budget requests are to be laid before Parliament in a Supplementary Appropriations Bill, and financed from the Contingencies Fund.
In order to strengthen financial operations and reporting, the new law requires the Ministry responsible for finance to prepare a Charter of Fiscal Responsibility (CFR) and submit it to Parliament for approval. This Charter must include measurable fiscal policy objectives for the next three years for revenue mobilization, prudent levels of public debt, management of petroleum revenues, and value for money analysis of expenditures. The Minister is now required to submit a semi-annual report on the fiscal performance of the government to Parliament, the Contingencies Fund, all budget reallocations, donations made to any vote, if any and performance of the Petroleum Fund. Additionally in years when a general election is to be held, the Minister must now publish a pre-election and a post-election economic and fiscal update, which must detail all election-related spending, that is accompanied by a statement of the Secretary to the Treasury.
Consolidated Fund change
The PFM Law also specifically requires the government to use the Consolidated Fund as its main bank account. So now, all funds raised from loans and all payments due on loans must be part of the Consolidated Fund and must now be included in the annual budget. In this regard, the annual budget that has been appropriated by Parliament includes Shs 4.7 trillion for payment of domestic debt maturing during financial year 2015/16. However, this Shs 4.7 trillion is actually budget neutral, because the budget includes revenue inflows of this amount, to refinance the debt throughout the coming fiscal year, commonly referred to as roll-over of debt. The government is acting just the same as when a citizen takes out a loan at the bank and then, when it comes time to pay the loan off, goes to the bank and takes out another loan in the same amount to pay off the old loan. The amount of debt remains the same, maturing debt is simply rolled over.
In preparation for the extraction of our oil resources, the PFM law prescribed the manner for the collection, management and investment of the petroleum revenue. The PFM law contains detailed provisions on the collection and accounting for petroleum revenues and how these funds are to be managed. Among others, the law requires that the Accountant General reports each year to Parliament on estimated petroleum revenues, as well as actual inflows and outflows and the volume and value of petroleum produced. It also regulates investment of these monies and places the responsibility for operational management of the investment reserves at the Bank of Uganda. This investment will be guided by an Investment Policy approved by the minister of finance.
The new PFM Act is a culmination of the reforms in the management of public resources that the Ministry of Finance, Planning and Economic Development has been implementing, including the decentralization of payment of salaries to government employees and pensions. This is an area that has previously had a lot of corruption due to ghost workers and pensioners. These reforms have resulted in significant fiscal savings on the payroll, which have helped the government for finance supplementaries that were presented to Parliament this financial year.
Under the new law, supplementatries will be financed through a contingencies fund, which will be a big relief for many ministries that have chronically suffered from budget cuts to fund other government agencies. For example, for the financial year 2014/15, while there were large supplementary expenditures, they were financed through two ways: the savings realised as a result of the reforms in the payroll, and re-allocations within and across spending agencies. This prevented total expenditure from going beyond the approved budget. In fact, the budget releases for the whole year were about 98% of the total budget including the supplementary expenditures.
Total government expenditure is estimated at Shs 13.988 trillion for the financial year ending June 30, 2015. Of this, recurrent expenditure was Shs 7.550 trillion and development expenditure was Shs 4.881 trillion, and the balance was utilized for the recapitalization of the Bank of Uganda. Next financial year, the funds available for spending by all government departments and agencies will not be significantly higher than this financial year, despite Parliament’s approval of nearly Shs 24 trillion. Of this, Shs 17.329 trillion is allocated for spending by ministries, departments and agencies (MDAs), while Shs 6.643 trillion is debt repayments plus interest for which Shs 4.7 is old debt that will be maturing in the coming financial year but has to be rolled over unless government finds new money to pay it off.
Tax revenue, which is estimated at total collections of Shs 9.577 trillion, is projected to increase to Shs 11.3 trillion in the coming year. The deficit for the financial year ending June 30 is estimated at 4.5% of GDP. This will increase to about 7% of GDP in the coming financial year on account of the expected increase in expenditure on infrastructure development particularly in roads and energy. This budget deficit will be financed largely through external borrowing, which will push up public debt. However, because of the growing economy coupled with borrowing on concessional terms in previous years, Uganda’s public debt in relation to the economy is regarded as very favourable. Our debt to GDP ratio is estimated at 31.5% (estimated at US$ 8.6 billion by June 2015), which is far below the East African Community Monetary Union convergence criteria requirement of 50%. This means that the country still has room to borrow externally to finance the key projects listed in the National Development Plan II and be able to service its debt without default.
The new budget focuses on strengthening national security and defence, facilitateon of Private Sector Investment, and growth, infrastructure development and maintenance. Addi production and productivity growth, enhancing capacity for increased tax revenue; increasing social service delivery, and enhancing efficiency in government service delivery.
Enhancing efficiency in government management and service delivery is a key theme in the budget. This is necessitated by the fact that despite the achievements in infrastructure development, agriculture and social service sectors, service delivery is still constrained by many challenges. In social services, education and health sectors suffer from staff absenteeism, ghost staff, mismanagement of facilities and supplies. In infrastructure, the transport, energy and water sectors suffer poor project formulation, design, implementation, monitoring and evaluation as well as corruption in the award and management of contracts. There are also still challenges related to coordination and monitoring of government programmes at various levels of government.
In view of this, the government is planning to implement reforms in project management to avoid unnecessary costs and delays. The proposed reforms will include providing new guidelines for project preparation and contract management. To enhance the effectiveness of public service delivery, the government is proposing introducing a performance management framework that clearly links defining budget allocations to sector outcomes and outputs, strictly monitor and enforce performance contracts, and administer strong sanctions to accounting officers who fail to implement government programmes/projects. Specifically, renewal of appointment for permanent secretaries, chief administrative officers, heads of government departments and all accounting officers will take into account a proven track record of sound implementation of government programmes/projects and after a stringent vetting process.
To address the problem of ghost workers on the government payroll, the biometric data of the government payroll recently compiled by the auditor general will be integrated into the overall government payroll and payment systems through the Integrated Personnel Payroll System and the IFMS. This will further be integrated with the National Identity Card Database. To implement this, effective FY 2015/16, all public servants will be required to have the National Identity Card before accessing the government payroll.
Other measures include clearance of all domestic arrears including salary, pension and gratuity arrears as well as installation of pre-paid meters for utilities for MDAs; strengthening procurement and contract management with emphasis on infrastructure projects through outsourcing project and management, central scrutiny of contract variations; enhancing Public Investment Management by improving project selection, appraisal and analysis; and make it mandatory for preparation of pre-feasibility studies for all projects and PPPs, before the project is approved and sanctioned for funding. Also, MDAs will be required to prepare work and procurement plans as part of project preparation; and ensuring expeditious submission of loans at both Cabinet and Parliament, for expeditious approval to enable project effectiveness.
The government will ensure that the budget is to the greatest extent possible financed through domestic revenue mobilization, with minimal external financing. However, the challenges in increasing the tax effort will take a long time to overcome. These a large informal sector that constitutes 43% of GDP, the poor tax-paying culture among many Ugandans, and lack of a comprehensive national data system to be able to identify persons in regard to their incomes, businesses, property and financial flows.
Addressing these challenges will require significant reforms in tax policy and administration, including completion of the National ID Project as well as improving further the efficiency and capacity of URA, and improving reporting and accountability of Non-Tax Revenue.
In accordance with Public Finance Management Act 2015, Parliament has already approved a number of tax measures for the coming year. The objective of these measures was to enhance revenue collection, further simplify the tax regime, provide for a comprehensive regime for taxation of the petroleum and mining sector, and enhance compliance. A summary of the tax measures is as follows:
Income Tax: To bring taxpayers in the informal sector into the tax net, expenses of income under Section 22 of the Income Tax Act will not be accepted as deductions if the taxpayers cannot provide the Tax Identification Number of their suppliers of goods or services. However, this requirement will not apply to expenses below Shs 1 million. This measure is expected to generate Shs 5 billion. There will be mandatory payment of tax for all Public Service Vehicles and goods Motor Vehicles at time of renewal of annual licenses.
There have been sweeping reforms as regards the Withholding Tax. These include:
Designating withholding agents on the basis of sectors rather than specifying companies which has led to revenue loss as some companies are inadvertently omitted.
Requiring all regulatory bodies in Uganda to request for a TIN of their clients prior to issuance of licenses/permits.
Providing for penalties for any person who fails to enforce the requirements in (ii) above.
Designating supermarkets, factories, education institutions, hotels and other commercial enterprises as withholding agents to withhold tax at 6% on supplies of agricultural produce.
Reviewing the withholding tax exemptions under section 119 to remove the supply of petroleum products, scholastic and raw materials. The exemption will be based on compliance rather than type of goods imported. Imposing a withholding tax on e-commerce provided by online platforms. This should be limited to business to business transactions.
Reducing the Withholding Tax on Re-insurance from 15% to 5%
Value Added Tax (VAT): Uganda has maintained a VAT threshold of Shs 50 million for many years since the inception of VAT in 1997. However, this has been eroded by exchange rate depreciation and inflation leading to an increase of non-value adding agents, low effective VAT rates for businesses whose turnover is low. Uganda’s VAT threshold has been low compared to the rest of the region; the threshold in Kenya is Shs 150 million, Zambia Shs 180million and South Africa Shs 240 million. The Third Schedule to the VAT Act has been amended to provide for zero-rating of VAT on cereals where they are grown, milled or produced in Uganda.
Excise Duty: excise duty on wine and ready to drink spirits has been increased from 70% to 80%, while that on Petrol and Diesel has modestly been increased by Shs 50 for purposes of generating revenue to finance the infrastructure projects. The excise duty on soft cap and Hinge Lid cigarettes has been increased from Shs 35,000 and Shs 69,000 to Shs 45,000 and Shs 75,000 respectively so as to generate revenue and an excise duty has been imposed on motor vehicle lubricants (5%), chewing gum, sweets, chocolate (10%) and furniture (10%). There is good news for international callers, the excise duty on international calls from the Northern Corridor countries has been removed, which means that calls will be relatively cheaper from within the Northern Corridor countries. This is aimed at enhancing communication and the ease of doing business environment.
Environmental levy: the environmental levy on used motor-vehicles has been increased from 20% to 35% for motor vehicles of 5-10 years old and to 55% for those above 10 years, this however excludes goods vehicles.
Passport has fees have been increased to Shs 150,000 and introduced a special passport fees at Shs 300,000 for any person applying for express passport to be produced within a period of 24 hours.