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Economics of campaign promises

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Economics of campaign promises

The need to keep voters sweet can distort decision-making and do a big blow to the progress of the country’s economy

President Museveni on one of his campaign trails

President Museveni on one of his campaign trails

The old rule of political forecasting in Uganda was to look at the composition of the manifesto and the campaign team of each candidate, not in campaigns alone but also in promises.

In the previous elections, the incumbent has made more promises than his challengers. Since 1996, President Museveni has been making promises. He fulfilled some; failed to deliver on others. A recent report by the parliamentary Committee on Government Assurances indicates that the President has not delivered on 817 pledges, estimated at Shs.13 trillion.

Yet he is promising more. The incumbent has promised to increase the agriculture budget from the current Shs.484 billion to Shs.1 trillion. He has also promised to increase microfinance funding from Shs.44 billion to Shs.500 billion. He even went more explicit, promising to buy 3 hoes per the over 6 million peasant households in Uganda. Mzee also has promised to distribute exercise books, textbooks, mathematical sets, pens and pencils to all pupils in upper primary classes. The total enrolment in primary schools stands at 8.4 million pupils. Do the math and see whether these promises make economic sense.

The president is not yet done; he has promised to distribute free sanitary pads for all girls in UPE-funded schools. He also promised to donate Shs.2 million to every single Malwa group in the country. I don’t know who is keeping the register of these groups. He/she better gazette the list, lest the number of the groups grows at geometric rate by February next year!

Now, it seems the opposition politicians, notably Dr. Kizza Besigye, have learnt that after all campaign promises can be a fashion. No election in the history of Uganda has seen unscientifically made and ridiculous promises made by Presidential candidates like the ongoing.

Dr Kizza Besigye has also made some promises to the electorate

Dr Kizza Besigye has also made some promises to the electorate

Besigye’s promises

Besigye has promised to increase teachers’ salaries from Shs.400,000 to Shs.650,000 (for primary school teachers) and from Shs.700,000 to Shs.1 million (secondary school teachers). Salaries of doctors will also be increased from Shs.1.2 million to Shs.3.5 million and police officers from Shs.350,000 to Shs.650,000. This would raise the budget for education ministry alone to over Shs. 3 trillion.

He also promised to increase the agriculture budget from 3% to 10%. In money terms this means the budget for agriculture, which is currently standing at about Shs.484 billion, will rise to Shs.2.4 trillion.

Besigye too is not yet done; he has promised to offer every student in secondary school across the country a laptop computer. Data from Ministry of Education indicates that there were 806,992 students in secondary schools last year. An average, heavily discounted, laptop computer goes for Shs.1 million. This means that Besigye’s government will have to find some Shs. 807 billion to buy the computers.

Mbabazi too did not want to be left out. Apart from his key campaign slogan of “going forward” with what has so far been achieved, and also helping some of us witness for the first time a peaceful handover of power from the incumbent to a new leader, Mbabazi has promised a few other specific things. He pledged to eliminate all direct taxes, to create five million jobs for youths, and to build an electric train among others.

These promises say a lot about the politics of this country. They are not unique for Uganda. Many politicians all over the world run political campaigns on popular promises. Indeed democracy was the most successful political idea of the 20th century, until it run into trouble of political opportunism.

Promises vs. reality

The spirit of this week’s article, however, was to make the economic sense of the promises our top three presidential have so far made. Indeed one observable fact in the current promises is that we have moved from the days when promises used to be more ideological in nature –“uniting the people of Uganda”, fighting for human rights, fighting sectarianism etc — to more specific promises, like proposing precise cuts for tax rates per person, salary increment for teachers by a specified amount, buying hoes for peasants and booze for Malwa groups etc.

But the need to keep voters sweet can distort decision-making and do a big blow to the progress of the country’s economy. True, campaigning for president is essentially a marketing process, in which candidates present themselves as products, differentiate themselves from the other products and make proposals on how they will perform if they get the job.

However, while campaign promises can be enticing, talk is cheap, and even presidents with the best intentions can have difficulty making them happen. Let’s take a look at some of the economic campaign promises that candidates have made and evaluate what it takes to make these promises a reality.

Take the example of tax cuts. Dr. Besigye was the first candidate to promise to cut VAT from 18% to 16%. Although this sounds attractive, what Dr. Besigye did not tell the voters is the fact that once he wins all his promises will be paid for by way of fiscal policy.

Although by law the president has the power to directly influence tax rates, the process of effecting such a policy reform is not just pressing a few buttons and lower taxes. It is a bit more complicated than it sounds at a campaign rally. It requires legislation as well as offsetting legislation to raise revenue or lower spending.

Tax cuts need to be budget-neutral, especially if they are proposed outside of the annual budget resolution process. Campaign promises to cut taxes are quite common and appealing during elections, but they are rarely implemented without the offsetting legislation or solution that will enable the cuts.

Economics of tax cuts

However, Dr. Besigye proposes an escape route; cutting government expenditure by removing RDCs and Presidential Advisors. He also promised to cut expenditure on the presidency, parliament and police.

There are two major sources of public revenue in Uganda i.e. tax revenue and non tax revenue. Tax revenue is generated from taxes on income, profits and capital gains, taxes on goods and services which include the VAT that Besigye wants to cut and excise duty and taxes on permission to use goods or to perform certain activities for example operating a casino or lottery organisations.

The non-tax revenue sources include fees, fines or penalties, surplus from public enterprises, as well as grants and gifts from bilateral and multilateral friends of Uganda. Deficit financing is another non-tax sources of government revenue (involving borrowings either internally or externally).

Research shows that Uganda’s biggest challenge today low capacity to tax ourselves. We all know that at 13% Uganda has one the lowest tax/GDP ratios in the world.

Indirect taxes, of which VAT is the main component, contribute 40% of the little domestic tax revenues. Direct taxes (particularly PAYE, corporate tax, and withholding tax) contribute more than 56% of the domestically generated tax revenues.

Recently the IMF found that Uganda has a large VAT compliance gap as a percentage of potential VAT at around 60 percent, and that it has remained fairly steady over time. They found that our VAT efficiency could be the lowest in the world since at 30%, it is lower than the sub-Saharan African average of over 48%. And you know if your performance is poorer than the SSA average, then chances are that you are the worst performer in the world. Imagine Burundi (81%) nearly three times more efficient in collecting VAT than Uganda.

Who are the biggest defaulters of the VAT in Uganda? Construction firms, hotels, and beverage manufacturing companies (soda, beers etc). These gaps in these sectors are mainly created by exemptions and cash transactions. Now does Dr, Besigye know this? I don’t know. If he reduced VAT, who will benefit? Of course not the people he addresses at the rallies. The “flypaper theory” of taxation (the belief that the burden of the tax sticks to where the government places the tax) that politicians seem to assume often proves to be incorrect.

The IMF proposes that closing the compliance gap to about 40% of potential VAT would mean that Uganda achieves the regional average tax efficiency. This is what I expected candidates to address in their manifestos, since it would increase VAT revenues by 2.5% of GDP without raising the burden, and would be a significant contribution to achieving the government’s target of increasing tax revenues by 0.5% of GDP per year.

In any case a tax cut does not cause significant impact in an economy of Uganda’s structure. In a society such as ours, where majority of the people are in the low income category with high levels of financial impatience, and who understandably discount the future quite heavily, any role that a tax cut would have brought is already catered for by nature.

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