Uganda risks piling up a huge fiscal deficit with serious implications on interest rates and national debt after parliament allowed the government to spend a half of the 2014/15 budget in the first four months of the financial year.

While the executive is allowed to spend a third of the budget without appropriation, the House last week caved in under pressure to approve unappropriated expenditure of $2.6 billion.

Coming against a background of uncertainties — ranging from aid cuts to a shaky export sector and threats by parliament to reject some of the proposed tax measures — economists warn that the decision is a high-risk gamble that could throw the budget into deficit if the Uganda Revenue Authority (URA) fails to collect sufficient taxes to meet its targets.

READ: Tax-heavy national budget leaves 7m poor Ugandans in the lurch

“The assumption is that URA will collect money to match the expenditure but, if it fails, you will have a high fiscal deficit that will in turn drive up interest rates and you will be back to firefighting,” said Prof Augustus Nuwagaba of Reev Consult.

With legislators threatening to reject some of the new taxes announced by Finance Minister Maria Kiwanuka in the June 12 budget, experts predict borrowing is likely to shoot past the projected ratio of 39.8 per cent of GDP that the finance minister committed to in her budget speech.

That excludes pending borrowing for the Karuma and Isimba power stations and the standard gauge railway.

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In the circumstances, the alternative way to achieve a balanced budget would be to impose spending cuts in sectors such as education and health as the government seeks to plug the resulting resource gap, tax experts say.

Whereas public administration costs would be a soft target for fresh spending cuts, the likely impact in this area remains unclear due to growing political pressure ahead of the 2016 General Election, according to Peter Kyambadde, tax services manager at KPMG Uganda.

“Social sectors such as education and health could suffer more from spending cuts because of deeper emphasis on infrastructure projects and defence needs,” argued Musa Mayanja, an economist at the Economic Policy Research Centre in Makerere University.

“As a result, salaries and wages in the education and health sectors will remain stable for fear of political backlash but development items such as construction of new classrooms, health centres and vehicles are likely to be shelved in order to control expenditure.

“Nevertheless, the budget was primarily designed to spur growth after three years of underperformance of the economy and this renders parliament’s decision unsustainable.”

On June 24, the government requested for an advance of $2.6 billion before parliament could scrutinise and appropriate the 2014/15 budget. But Members of Parliament refused to approve the amount, arguing that it would be illegal.

They caved in a day later after government officials claimed that 35.7 per cent of the money requested did not need appropriations anyway.

Junior Finance Minister Aston Kajara said that, in effect, the government had requested for just $1.7 billion, which is less than the $1.9 billion the Budget Act allows, an argument that parliament bought.

The remaining $950.6 million will be allocated to statutory bodies such as the Electoral Commission, Parliamentary Commission and other institutions that draw money directly from the Consolidated Fund.

Mr Kajara said parliament does not appropriate money for statutory institutions and therefore it would not be an illegality to use the funds to deal with government needs that cannot wait for parliamentary appropriations.

The government cited pressing expenditure needs tied to the population census, which is scheduled for August, the ongoing national ID project, production of EAC passports and single tourist visas.

More funds are also required to support the operations of the Government Analytical Laboratory and curb the spread of foot and mouth disease while State House has also demanded extra cash for classified expenditure.

But shadow finance minister Geoffrey Ekanya said parliament’s approval of almost half of the budget was full of illegalities as the government did not follow the procedures, which require that only a third of the budget is passed for the first four months.

He added that parliament even approved resources the government does not have yet, which would lead to increased borrowing. The Ministry of Finance may have to borrow from the domestic market to raise some of the $2.6 billion in such a short period, he said.

READ: Uganda to increase borrowing

Uganda runs a current account system where money is spent after URA has collected it. On average, the taxman is expected to collect less than $304.2 million monthly for this financial year.

Refuse to pass new taxes

“That means only $1.2 billion will be at their disposal at the end of the four months,” the MP said.

There were fears that parliament will refuse to pass some of the new taxes, which would create a shortfall for URA. Spending before knowing whether all the taxes will be approved could mean borrowing more than is good for the country.

The MPs have vowed to reject some of the taxes, which they say do not reflect the government’s rhetoric on issues such as agriculture, information technology and education. Amos Lugolobi, the chairperson of the Parliamentary Budget Committee, has said he will oppose the tax on agriculture inputs.

He was reacting to Ms Kiwanuka’s announcement that the government will start taxing farm inputs such as hoes, seeds, fertiliser, pesticide and tractors in the new financial year.

By Dicta Asiimwe and Bernard Busuulwa