Budget blues

By theresa nannozi

2011/12 budget disappoints Ugandans who wanted tax cuts, salary increase

The 2011/12 budget came as a disappointment for the majority of Ugandans who had expected and hoped for tax cuts on fuel, especially petrol and diesel. While the removal of taxes on kerosene (Shs 200 per litre) provided some relief to the large number of especially rural Ugandans that rely on it for lighting, it fell short of the expectations of the majority.

New Finance Minister Maria Kiwanuka said the cut would cost government Shs 12 billion in revenue, but it is expected that it will reduce kerosene prices by an amount equivalent to the tax cut of Shs 200 per litre, whose price was Shs 2,700.

Most Ugandans hoped that a tax cut would reduce the prices, which have been on a steady increase since November last year, rising from Shs 2,900 to Shs 3,600 currently, driven by rising international prices. It is argued that such a tax cut would reduced transport and production costs, and led to a reduction of the prices of most other essential goods, which have been on a steady increase since November 2010, pushed up by rising transport and production costs. The rate of inflation has risen from 3% in November 2010 to 16.1% in May, with the cost of some essential goods rising up to three-fold.

The food component whose inflation rate spiraled to 44% is likely to remain high. However, the non-food inflation was at 6.5% which gives hope to meeting the 2010/11 FY target of 5% annual consumer price inflation.

For now, the government intervention will include controlling money supply through sell of Treasury Bills and implementing measures to increase food supply.

Symbolic gesture

Experts have said that a fuel tax cut, however small, would have been be symbolic of government’s response to the suffering of ordinary citizens and might have cooled growing public resentment, as the cost of living rises beyond the means of most ordinary citizens to afford bare necessities.

It would also have reduced the cost of production, especially in the manufacturing, import and export businesses, where the cost of production has been rising as prices of inputs are driven up by inflation pressures. Transport costs are said to account for 40% of the costs of production partly due to the high cost of petrol and diesel, according to the Private Sector Foundation.

Government has long resisted calls – most vocally led by the political opposition through its Walk-to-Work public protests – to cut taxes on fuel to ease the current burden on ordinary consumers of the inflationary pressures, fuelled by rising fuel and food prices.

Like other government officials before her, including President Museveni, Kiwanuka said in her maiden budget speech that a tax cut was not necessary to cool prices. She said the main driver of inflation was food prices, caused by low production due to drought and increased regional demand, and this would be addressed by increased production in the next harvest.

“Inflation pressures are therefore expected to recede when supplies of food to domestic markets improve during the course of next financial year both headline and core inflation,” she said.
The Minister said the other factors driving inflation – including rising international oil prices, the shilling’s depreciation against major trade currencies, and imported inflation from trading partners – would not be fixed by tax cuts.

Moreover, she said, Uganda’s fuel prices were comparable to regional neighbours and did not need to be reduced.

The Minister stayed close to the arguments made by her predecessors that government

had no control over the drivers of inflation, and that a tax cut would wipe out revenues badly needed after an extravagant election campaign and growing public administration expenditure.

Future of oil prices

Without a tax cut, it is likely that the price of fuel will continue to rise, taking with it the costs of other goods and services that rely on it as an input. This is especially because the international price of oil continues to rise, currently at about US$ 117 per barrel from US$ 80 in December 2010, with continued instability in the Middle East, where the major producers are located.

Those agitating for a tax cut have argued that any shortage in revenue caused by the cuts would be compensated by new revenues from local production of oil and gas. 64 percent of respondents in the Deloitte survey made this argument.

Beware oil revenues

It is estimated that potential annual revenue from local oil production could be as high as US$ 2 billion – which would help revitalize the economy and reduce donor dependence to minimum levels.

The sector is becoming vital to the economy. In the 2010/11 FY, for example, the cost of elections and expanded security and purchase of jet fighters led the government to spend more money than budgeted. The fiscal deficit rose to 10.5% of GDP which would have been far above the 5% target. However, when money from taxes on oil and grants was added to the government coffers, the budgeting gap shrunk to 4.8% which economists agree is a manageable limit. But reliance on oil money might prove to be a poisoned chalice if it breeds budgetary indiscipline. Oil capital gains tax revenues are expected to bring in slightly over Shs 1 trillion which is equivalent to about 10% of the budget.

Oil money, increased grants, and the depreciation of the shilling led last year’s budget to swell 30% from Shs 7.5 trillion to Shs 9.2 billion. Therefore, the proposed budget estimates are fairly conservative. The actual outturn of the budget is likely to be higher.

The Private Sector Foundation has warned that government should not put all its eggs in the basket of expected oil revenues, since even when well used and protected from corruption, that level of forex inflows will cause depreciation of the shilling by up to 25% and could wipe out local manufacturing.

“Other non- oil sectors will need to improve their competitiveness by the same margin of 25% to remain at the same level of competitiveness,” said PSFU Chairman Gerald Sendaula, in a May submission to then Minister of Finance, Syda Bbumba.

“If this is not achieved, there is a risk of imports eroding the gains being made and planned in other sectors, especially agriculture and industry (The Dutch disease),” Sendaula said, calling for continued diversification of Uganda’s exports, and warning that if not handled well, the expected oil boon could destabilize and de-industrialise the economy.

East Africa

The clamor for fuel tax cuts did not only apply to Ugandans. 90% of Kenyans asked for a similar tax cut in the survey, despite a 30% fuel tax cut implemented by their government in April, in response to public protests there.

The Deloitte report said there was a strong feeling among Ugandans and Kenyans that they were being overtaxed, and some cuts could have helped to cool this sentiment.

“The feeling of being over-taxed was emphasized and it was further suggested to create more tax incentives to stimulate SMEs’ growth and expansion into East African Community (EAC),” the survey report said.

Other tax disappointments

However, fuel was not the only disappointment.

Of the 16 components of this year’s budget, only two – the Energy & Mineral Development sector and the Accountability sector – have seen a significant increase in their allocation. Seven of the rest have almost the same allocation as last year, while five – including the ministries of Health, Education, Trade, water, and Social Development – have seen their allocation decline slightly.

How then will the government deliver the jobs and improved service delivery that the budget’s theme promises?

Could the budget be mere politicking? After all, its theme; promoting economic growth, job creation, and improving service delivery, is similar to that of the NRM manifesto which was `Prosperity for all, better service delivery and job creation’.

Major losers include the media because the budget proposed 50% cuts in advertising spend for all ministries and agencies. To reduce wastage, laxity, and limited responsiveness, and save up to Shs 40 billion, it also proposed a 30 percent cut on allowances for civil servants allowances, froze the purchase of vehicles, and ordered an audit of all salaries.

The President’s State of the Union address on June 7 and the Background to the Budget documents, that emphasized improvement of the human resource had created hopes of a salary raise, especially for medical staff, but also for doctors, teachers, and civil servants to at least match inflation.

In the Deloitte survey, 64% of Ugandans had asked for a reduction of corporate income tax and an increase of the PAYE (Pay As You Earn) threshold and individual income taxes to ease the tax burden on low income earners. A similar demand was made by PSFU in its budget submission to the Minister of Finance, asking that the PAYE threshold be increased from Shs 130,000 to Shs 250,000 to enhance effective demand and broaden the tax base. This was not provided by the budget, which maintained the status quo.

PSFU asked for the VAT threshold to be raised from Shs 50 million to Shs 100 million. This was not done. The private sector agency asked for withholding tax on dividends to be reduced from 10% to 5% to match Kenya and Tanzania, and improve competitiveness and harmony in the common market. This too was not provided.

Some tax cuts, a hike

The new minister made one tax hike – doubling duty on hides and skins exports from US$ 0.4 to US$ 0.8, in a bid to stimulate local manufacturer of leather products, especially shoes. However, she offered a VAT exemption on solar energy supply and ambulances; removed stamp duty on small loans below Shs 2 million. The Minister also cut excise duty on sugar by 50 percent, a move that she said would lead to revenue loss of about Shs 8.5 billion.

In a move towards regional integration, the Minister outlined various tax provisions agreed by East African Ministers of Finance, including a 1-year extension of duty remission to Uganda’s list of raw materials and industrial inputs and tractors and trailers over 20 tonnes. Import taxes on inputs for assembly of refrigerators and freezers were reduced from 25 percent to 10 percent.

Agriculture

Generally, there was no new thinking. The Shs 20 billion provided for short-term intervention is low. Fortunately, some post-harvest interventions, including regional silo facilities have been budgeted for.

The 10% tax on hoes was removed, as was duty on premixes used in animal and poultry feeds. Import duty on food supplements was also reduced from 25% to 10%. Taxes on motor-cycle ambulances were also waived.

Unfortunately, agriculture continues to be marginalised.

As a result, cash crops earnings declined by 15.8 percent putting Agriculture’s total share of total GDP at 13.9% the lowest since 2005 compared to the services sector at 52.4% and industry at 25.3%. Coffee which contributes 60% of cash crop total value added shrunk a whopping 41.9%, Tobacco 26.1%, Tea 14.3%, and flowers/horticulture was 11.8% down. Only cotton grew 95.5% due to global demand. In the case of coffee, the economy failed to take advantage of the rise in global market prices. As a result, even with the huge decline, the sector saw a 13% rise in earnings. The average unit price of coffee rose by 25% from US$ 1.56 to US$ 1.98.

The test for Maria Kiwana Kiwanuka will be the extent to which she can implement a budget that is not hers. Days before reading the budget, she was meeting with ministry of Finance technocrats to get briefing. But because she had not been sworn in as minister and therefore, she had not taken the oath of secrecy and could not be privy to the budget. But she should be comfortable in her new job. She is well grounded in economics and financial analysis, sits on numerous boards of business and financial entities.

She has also been a major actor on both the Presidential Investors’ Round Table, which is a select advisory body of national and international corporate leaders to advise the government on competitiveness and investment issues and the National Competitiveness Forum. She has chaired some of its committees on business climate. Hopefully, all that will count in the rough and tumble of the politics of public office, where she is a novice.