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.
Secondly, given the current economic situation, we need to get businesses to borrow and invest to stimulate economic activity. But if government goes to the domestic market to borrow, it will crowd the private sector out of our already constrained financial markets. The situation will be made worse by low aggregate demand resulting from job losses, leading to reduced economic output. It follows that Uganda government needs to tighten its belt considerably. Doing this in an election year is going to be difficult but is necessary.
So the question is what should government do? When one looks at the budget, there is little to cut. Ok, let me rephrase it: there may theoretically exist opportunities for cutting wasteful public spending. However, I do not think it would be politically possible to achieve this. One immediate area to cut is the over-sized State House and Security budgets. But is it possible to cut the president’s budget in an election year? It makes a lot of technical sense of course. But is it politically possible? State House is notorious for consuming its annual budget in the first half of the financial year, hence its everlasting requests for supplementary budgets.
Political and electoral debate in Uganda is always far removed from the reality of our wallet. Politicians promise entitlement programs whose budgetary needs far exceed what the country’s finances can pay for. Our government promises to meet all the health needs of every single person everywhere. Our elites expect and demand public goods and services to the quantity and quality of Belgium and Norway. Our so-called civil society does similar. The public expects and politicians promise a nanny state.
This is the reality behind Uganda (and Africa’s) persistent budget deficits. Every year we promise to spend much more than our revenues. We meet the balance by borrowing abroad and domestically. In countries like Japan, over 90% of the debt is held by its citizens. This is good because whatever is listed as a liability of the government’s balance sheet is an asset on the balance sheet of its citizens, thereby balancing the net assets of the country.
Most of the debt of the USA is held by China and Saudi Arabia, but it is denominated in dollars i.e. local currency. No country can default on debt held in its own currency, which it can print and pay. If America decided to use inflation to reduce her debt, by printing money, these countries will buy it out in order to keep the value of their debt holding. Indeed the experience of UK and France after World War Two shows that a country can use inflation to devalue her debt, thereby making it possible to pay it off.
Uganda’s domestic debt situation is complicated. First, a significant share of it is held by foreign owned commercial banks and other offshore investors seeking a quick killing. That means that a big share of government liabilities is held by foreign entities, not as assets by its citizens. These foreign entities (commercial banks) do not lend citizens to build viable businesses. They make easy money off government treasury bills and bonds; make handsome profits, which they ship abroad to their home countries as dividends.
While Ugandans are forever locked in irrelevant fights, they are blind to the big fact that foreign control of our economy could be much more damaging. It creates a continuous flow of resources out of the country to foreign investors and speculators. This is worsened because government gives tax exemptions to these foreign firms. To make money, these entities use (for free) public roads, security, ports, labour etc. all developed at taxpayer expense. If they do not pay their fair share of taxes, it means the net return on their investments could be negative.