Why opportunities that theoretically exist to cut wasteful public spending are politically impossible
THE LAST WORD | ANDREW M. MWENDA | This year, Uganda has been hit by three major disasters: a locust invasion, floods and COVID-19; a combination of which will shrink economic growth. COVID-19 has been the most economically devastating and will halve GDP growth and revenue collections. Yet the government of Uganda is entering an election season where public spending has powerful implications on voter behavior. Government has decided to bury its head in the sand by making unrealistic revenue projections.
For instance, the budget projects Shs22 trillion in revenues. To be fair to government the budget was written and approved before COVID-19. I am also aware that the Minister of Finance on June 29 proposed to cabinet that this projection be reduced to Shs20 trillion. But nonetheless even projections of Shs20 trillion in revenues are grossly unrealistic.
Businesses are closing, others are downsizing while government has given many of them tax exemptions to help them recover. It makes no sense to expect that URA will this financial year collect as much tax revenue as the previous one.
In the last budget, government projected to collect Shs20 trillion. There was hardly a month when URA met its target – except in December 2019 when they hit 99%. Since March (as a result of COVID) revenues began to decline: 75% in March, 59% in April, 56% in May and 54% in June. Hence against a target of Shs20 trillion, URA collected Shs16 trillion last financial year. Any reasonable person would expect this trend in economic slowdown and revenue decline to continue beyond September, after which GPD and hence revenue growth may begin to improve.
However, it is unlikely that the improvement will be sudden and big. The more reasonable projection is that it will be slow and incremental, and won’t exceed Shs16 trillion. If my projection is right, it means government has will have a revenue shortfall of Shs4 to 6 trillion (depending on the final approved budget). Then we must ask: how does government intend to fill this gap? Remember the shortfall of Shs4 trillion in the just ended financial year led to massive borrowing. If government cannot cut it’s spending, it will be forced into more borrowing both domestic and international.
COVID came at a time when government borrowing both from the domestic and international markets was nearing its limit. With economic contraction, debt service is going to become even more difficult. Take the example of foreign currency denominated debt. Our ability to service it depends on export earnings and other foreign exchange flows. Assuming the investment in oil does not begin soon, and given the precipitous decline in tourism revenues, Uganda’s highest foreign exchange earner, our foreign exchange position is going to be considerably weakened.