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Fiscal consolidation: Where will it leave you, your business and the economy?
Revenue mobilisation from taxes has been reducing due to a slowdown in business activity amid an increase in debt servicing. Photo/ Edgar R Batte
What you need to know:
- Government says that under fiscal consolidation, which, according to Bank of Uganda, is largely a policy measure that seeks to reduce revenue deficits and debt accumulation, it will seek to increase tax collection as well as reduce consumptive expenditure.
Did you know that for every Shs100 Uganda Revenue Authority (URA) collects, some Shs30 goes into servicing public debt?
The Shs70 balance is shared between recurrent (wages) and development expenditures - which almost always - is barely enough to fund the entire government budget.
This, when factored with wastage, corruption and theft of public resources, makes the situation worse, which leaves many budget priorities unable to be implemented.
Economists, policy experts and public debt analysts interviewed for this article, suggest pressure on domestic revenue is expected to increase in the foreseeable future given that the share of revenue committed to debt servicing has been increasing, amid a decline in tax revenue.
For instance, during the 2024/25 financial year, the budget is projected at slightly more than Sh52.72 trillion, compared to Shs52.73 trillion approved in the current financial year, which reflects a decline of about Shs14b.
At the same time domestic revenue collection is projected to drop by nearly Shs3.5 trillion from Shs25.2 trillion in 2023/24 financial year to Shs21.7 trillion in the 2024/25 financial year.
Increase in debt servicing
This, according to CSBAG, “is largely due to the projected increase in the debt service obligations, including interest payments and amortisation, which is projected to rise to Shs3.2 trillion in the 2024/25 financial year from Shs2.6 trillion in the 2023/24 financial year”.
As a way out, government will seek to increase revenue collected domestically by Shs285b from Shs29.6 trillion in the 2023/24 financial year to Shs29.9 trillion in the 2024/25 financial year.
This, government says, is part of the fiscal consolidation, which according to Bank of Uganda Director of Research and Policy Adam Mugume, is largely a policy measure that seek to reduce revenue deficits and debt accumulation.
The measures, he says, are twofold - by increasing revenues through widening the tax base, reducing tax exemptions and increasing the efficiency of tax administration or scaling back on expenditure.
“The combination of the two [will] result into a lower fiscal deficit as a percentage of [gross domestic product], which is projected at 3.4 percent, down from 3.8 percent this financial and 5.5 percent in the 2022/23 financial year,” he says, and notes further that the tax-to-gross domestic product ratio is projected to increase to about 14.7 percent in the 2024/25 financial year up from 14.2 percent in this financial year.
Public debt
Despite efforts highlighted above, the 2024/25 financial year budget projection come at a time when the economy is trying to find its footing, amid a sharp increase in public debt levels, which according to CSBAG, puts significant pressure on available revenues.
This, CSBAG says, has been exacerbated by the poor performance of taxes and reduction in donor support, which has hindered government’s ability to invest in critical sectors such as infrastructure, education, and healthcare.
In his report for the period ended June 2023 Auditor General John Muwanga noted that public debt had significantly increased, rising to Shs96 trillion, of which Shs43.6 trillion or 45.4 percent was domestic, while Shs52.4 trillion or 54.6 percent was external debt.
The details above indicate that in just one year, the stock of public debt has increased by Shs9.3 trillion or 10 percent compared to Shs86.8 trillion as of June 2022.
The Auditor General also indicates that the economy expanded from Shs132 trillion in the 2018/19 financial year to Shs185 trillion in the 2022/23 financial year, which is a massive increase of about Shs53 trillion or nearly 40 percent.
However, despite the expansion, the rate at which public debt is growing is much higher than gross domestic product.
Dr Mugume, however, notes that even with the significant growth in public debt, the ratio to gross domestic product remains within limits of below 50 percent, beyond which debt for developing economies such as Uganda, is considered unsustainable.
“Although public debt to gross domestic product ratio is still lower than 50 percent, debt service as a ratio of revenue, estimated at 30 percent remains a challenge, which means that for every Shs100 collected by URA, Shs30 is taken into servicing debt,” he says.
Fiscal consolidation must emphasize reduction of consumptive expenditures in favour of development spending and also prioritize capital expenditure to projects that have high multiplier effects.
Debt servicing has increased tremendously, which continues to impact investment in pririoty sectors of the economy. PHOTO / FILE
Domestic arrears
Beyond the issue of public debt, government is also struggling with the impact of domestic arrear, especially on private sector growth.
Domestic arrears surged from Shs4.65 trillion in 2021 to Shs7.55 trillion in 2022, yet so little is being committed towards repayment of arrears over the years.
In its analysis of the 2024/25 financial year National Budget Framework Paper, Civil Society Budget Advocacy Group (CSBAG), noted that government had proposed an allocation of Shs217b towards payment of domestic arrears, which was grossly inadequate to reduce the growing stock.
“In fact, at the going rate, it would take government 35 years to clear the current stock of domestic arrears, assuming that no more arrears will accumulate,” the analysis reads in part.
To overcome these challenges, Dr Fred Muhumuza, the Makerere University Business School Forum director, says fiscal consolidation should starts with restructuring, which at a wide scale will seek to rationalise the entire government system to institute functional entities with clear functions to avoid overlapping roles.
Dr Muhumuza, a former Ministry of Finance advisor, believes that the levels at which the public debt has reached should be treated as extremely dangerous, because the 30 percent or more expenditure on debt servicing is not sustainable at all in the short and long term.
“I see people compare our situation with other countries in an effort to try to justify our public debt situation. I don’t think this is correct because if you have a budget of Shs52 trillion and you are spending Sh20 trillion to service debt, then that is unsustainable. If you are borrowing to pay salaries instead of fixing roads and rolling over debt, then that debt is not sustainable anymore,” he says.
Frequent supplementary requests
Consumptive expenditure
Government has over the years demonstrated fiscal indiscipline by tabling frequent supplementary budgets, many of which go into consumptive expenditure. Many of these are approved in a manner that is questionable and claims of bribery to pass such requests have become common.
For instance, in November last year, Parliament approved a Shs3.5 trillion supplementary budget, of which approximately Shs2 trillion went towards recurrent and consumptive expenditure. “This not only shows abuse of the supplementary provisions but also indicates poor planning practices by government [entities],” CSBAG wrote in an analysis of the projected 2024/25 budget.
All this is happening at a time when tax collections are below targets, registering a deficit of about Shs600b for the year ended 2023, according to Ministry of Finance, which has been worsened by a drop in donor support.
In August 2023, the World Bank announced it would halt new loans to Uganda, which would affect 13 pipeline projects amounting to $13.9b (about ShsShs51 trillion).
More revealing, perhaps, is that in the 2024/25 financial year, total expenditure is projected to drop to Shs38.9trillion, which is slightly less than Shs39.9trillion in the Approved Budget for financial year 2023/24.
