Determinants of fiscal deficits in Uganda (1990-2006).

Abstract

Uganda has adopted a wide range of policy reforms aiming at fiscal deficit reduction. The major ones are expenditure management reforms (introduction of cash budgeting, fiscal consolidation, Medium Term Expenditure Framework) and revenue management reforms (introduction of new taxes, general rationalization and harmonization of tax rates, reduction in exceptions and tax administration reforms). Despite all the above reforms fiscal deficits excluding grants have remained significant, averaged at 7.9 percent of GDP for the last ten years. The study investigated the determinants of fiscal deficits in Uganda during 1990 to 2006. The study adopted a model used by Kouassy and Bohoun (1993) which was used on Cote d’Ivoire economy with some few adjustments which include: exclusion of receipts from parastatals, tax revenue and government. Wage bill was approximated by the public administration expenditure and the inclusion of donor budget support since it was highlighted by Mugume and Obwona (1998). Regression analysis (Ordinary Least Squares (OLS) technique) was used to estimate the model and quarterly data was used.

Both Long run and Short run regression results indicated that there is positive relationship between fiscal deficit and inflation rate. GDP per capita was found to be negatively related to fiscal deficits. Public administration was found to positively related to fiscal deficits. And donor budget support was found to be negatively related to fiscal deficits. This sign is divergent from what was expected due to the fact that since 2000, donors no longer fund projects directly but it is done under basket funding (fiscal consolidation).

The policy implications from the results are; to reduce persistent fiscal deficit, the government has to reduce on public administration expenditure by halting the expansion of administrative units such as districts, town councils and Ministries. Donor budget support should be encouraged in form basket funding (fiscal consolidation) not project support. GDP per capita should be increased by locating public expenditure into more productive areas. While inflation should be reduced by tackling the supply side constraints to increase production especially food.