THE BUDGET: TAKE CARE OF THE CENTS AND THE SHILLINGS WILL TAKE CARE OF THEMSELVES

This week Finance minister Maria Kiwanuka will be reading the budget to the nation.

It’s been a hard year but we heard during the state of the nation address last week that economic growth would come in marginally lower than it did last year at 5.7%. This year’s growth was driven mainly by mining, cash crops, informal manufacturing and trade.

The budget, an account of the how the government will spend and what plans it has to raise the money to spend, serves as an x-ray of what government priorities are, forget the rhetoric.

Uganda currently collects taxes amounting to about 12% of GDP. A low figure when viewed against the Sub Saharan Africa average of 16% or even against Rwanda which has just managed 15%.

The government has almost exhausted all the taxes it can levy any new announcements will just be variations on the existing regime.

"The challenge of course is to collect all the taxes due to government from all those people or companies liable. A handful of people – mostly employees are shouldering the bulk of the tax burden....

So the trick is to widen the tax base – rope more people into the loop to spread the pain more evenly and of course collect more tax.

This is easier said than done.

Observers estimate that as much as 70% of our economy is in the informal sector, that is a lot of our economic output is generated by unregistered entities or individuals. This would not be a problem were it not for the fact that these informal operations put a ceiling on the potential of these entities and by extension the economy.

It has been argued that the cost of going formal serves as a disincentive to small businessmen, who while they may appreciate the benefits of going formal just can’t be bothered to go through the paperwork of going formal or subject themselves to the discipline to maintain the formality of their business.

Attempts to centralise set up requirements with the Registration Bureau Services is a step in the right direction.

In addition a two-year old initiative to enforce a law which for the purchase of an asset of more than sh50m a clean bill of health should be shown is a welcome innovation.

But when we talk about people meeting their tax obligations, while the informality of our economy is a problem, the amount of tax evasion even by the most respectable firms and individuals is worrying.

They are involved in creative accounting to under declare incomes or employing “higher ups” to prevent URA chasing them down for their just dues.

The latter cases are really cases of indiscipline by the higher ups and should be reported and handled administratively however in the former case we can go a long way to plugging this loophole by inserting in existing laws to two clauses.

The first being that returns should only be filed using accounts audited by credible firms and secondly, a law should be enacted that any accountant found abetting tax evasion should be disciplined to the extent of removing them from accountants roll.

One accountant hazarded that these two initiatives alone may be good for at least another two percentage points on our tax-to-GDP ratio.

In addition this would level the playing field for businesses.

As it is now legitimate businessmen are suffering because less scrupulous individuals are not being taxed properly, using this “free” cash to expand more rapidly and undercut the competition. This kind of underhand practices can have the effect of concentrating sectors in a few hands, reducing competition and its attendant benefits, which affects not only the government in lost taxes, but also employees who would be paid less than their rightful due, suppliers who will be stuck with a few clients and therefore lose their own bargain power and customers who will be stuck with no variety and poor quality goods and services.

And it is already happening.

It’s within the minister’s power on Thursday to suggest such additions to the income tax act.

RAINING ON THE WORLD CUP PARADE

I can’t wait for the World Cup to kick off.

The World Cup is without a doubt the biggest entertainment spectacle on the planet.  FIFA, the sport’s governing body estimates that 3.2 billion people watched the last edition in 2010. And of course with all these eyeballs comes money.

In 2010 South Africa spent about $4b – sh10 trillion or about the whole Ugandan annual budget, to prepare for the soccer bonanza.

Brazil it is estimated has already spent about $11b in preparing for the hosting of only their second world cup in 60 years.

Brazil have projected to earn more -- $11b with some $2.6b coming from the expected 600,000 tourists and $7.9b coming from the three million Brazilians who will be at the games.

And these mind bending figures are at the heart of the incessant protests that have plagued the South American nation in recent days.

"It is the classic case of the politicians and statistics saying one thing about a country while the truth on the ground reflects a bleaker reality...

The protestors are outraged that their country can commit such vast sums to the World Cup while poverty and inequality are rampant in the general Brazilian society.

While Brazil may be considered a middle income country with its $10,773 GDP per capita, statistics also show that the country has some of the highest economic unequal societies in the world.

Gini coefficient, which measures economic equality, for Brazil is 0.52 – the nearer this figure is to 1 the more inequality exists in a society. The same figure for Uganda is 0.44. 

Brazil is a “democracy” so one wonders how come Brasilia can be so oblivious to the outcry of the people opting for an event, which is more an aggrandisement project for the powers that be with little benefit to the general society relative to the amounts spent to host this circus?

In fact there is no evidence that any World Cup has met the vaunted expectations that justified its hosting. In South Africa it is estimated the country could have netted $500 million, which is probably overstated as they are now saddled with unviable sporting arenas around the country that are costing local councils millions to manage with no hope of return.

But as always not everyone loses out.

After the last World Cup FIFA banked a $631m surplus to their reserves which doubled to $1.2b. You can expect there are contracting firms still living off the fat of the lucrative infrastructure and business deals. It’s the same old story of a small minority deriving incalculable benefit from these kind of events and living it to the majority – the taxpayers, to foot the bill...

Beyond the thrill of having the superstars of the world game planting their feet on their home soil it is hard to see how hosting a World Cup would sell in a national referendum.

Obviously such public spectacle also play a role in diverting public attention from the real issues while lining the pockets of the connected individuals and companies.

And they have been very successful. Chances are when the world Cup kicks off the protestors will leave the picket lines and tune in to the action.

There are precedents for these kind of tactics by the powers of the day.

"In ancient Rome as the empire’s begun to totter on its foundations ever spectacular events were organised for the general public to enjoy. The Coliseum completed in the first century after Christ was born could accommodate 50,000 people --- Namboole can barely manage 40,000, to view orgies of increasingly gratuitous bloodletting and mythical fantasy to divert the people’s minds from their diminishing welfare, while the powerful elite continued to enjoy lives of pomp and plenty....

The World Cup incidentally becomes more and more spectacular for the viewing public and more profitable for the people who hold the purse strings.

Chances are this analysis will not dampen the fervour for the event. We will suspend disbelief (me too) and enjoy the skill and performance of current heros and maybe, just maybe, get back to the issues a month from now.  Sad but true!

ZIMBABWE: HOW TO RUN AN ECONOMY INTO THE GROUND!

In case you missed it Zimbabwe, after a few years of recovery is in danger of descending into deflation, the opposite of inflation, where there is not enough money to buy the goods produced and forcing a collapse in prices and dampening economic growth.

You have to feel for the people of Zimbabwe.

The economy was just beginning to grow again after eight years of contraction and bringing their hyperinflation under control. I don’t think Hyperinflation describes what Zimbabwe went through. It is estimated that inflation peaked at 500 billion percent in 2008. This means that average prices in the once food basket of southern African were rising at least 150 times a second!

So between the time you punched the amount you require from your ATM and the money actually being spat out it would have become literally worthless. 

It comes as no surprise that in the darkest days of the Zimbabwe economy the largest denomination note was for the Z$100,000,000,000,000 or a hundred trillion Zimbabwe dollars – that is 14 zeros for you!

"The situation got so bad that the country was forced to abandon the Zimbabwe dollar and adopted a basket of currencies including the South African Rand, US dollar and Chinese Yuan as legal tender in the country, which was ironic because President Robert Mugabe always want to make out that his country is the last bastion of anti-colonial resistance... 

Well using other people’s currencies to run ones economy is the ultimate capitulation to the “colonialists” and their evil schemes to take over your economy.

So how did a revolutionary leader sell his country down the river like this? How did a once vibrant agricultural and industrial economy come to this?

Mugabe came to power at the head of a struggle for majority rule in Zimbabwe. The grievances of the people were the usual clamour for the right to self-determination and a need to redress wealth inequalities, which meant mainly land redistribution.

With black self rule in the bag came the sticky issue of land redistribution. Sticky because the white owners had raised the productivity of the land to the highest probably on the continent and it would not do to destabilise that part of the economy.

As often happens early land distribution was hijacked by the “revolutionary” which meant the majority still had little or no access to land while a new class of black middle class or super rich emerged.

So the white farmers went on with their business while for the new black nouveau rich life had never been better and the black everyday man wondered whether what they had signed up to by supporting the “revolutionaries” as their collective lot had not improved, and in many cases even deteriorated since 1980.

Fast forward to 2000 and the government decided to give tacit approval to the landless to forcefully takeover the commercial farms of the white farmers.

In Uganda we need no explanation to what came next.

"The blacks unable to sustain the commercial concerns – I don’t think they even tried, regressed into subsistence farming and that was the end of Zimbabwe as a net exporter of food...

Lowered productivity affected tax collections and donor inflows forcing government to print money to sustain itself and meet its obligations – a clear recipe for inflation. Inflation happens when there is too much money – government money printing presses were working overtime, chasing too few goods – production had collapsed.

"So to redress the issue the revolutionaries had to swallow their vomit, ditch their currency and adopt foreign currencies, as this column had predicted they would in 2008 ( we take no credit for that it was the inevitable conclusion to Harare’s total disregard for basic supply-demand economics)...

This had two immediate effects one, it meant inflation had to drop because Harare could not print the foreign currencies even if it wanted to but the other consequence was that it became harder and harder to find the money to make critical imports of medicine, fuel, plant and machinery needed to jumpstart the economy after all exports had collapsed.

Which brings us to the current threat of deflation. 

How does Zimbabwe punch its way out of this downward economic spiral? 

For beginners the politicians need to put a lid on this uncalled for talk of indeginisation of foreign companies. There is a strong case for increasing the equity holding in these immensely profitable companies but there are structured ways that this can be achieved without affecting the long term economics of the company. Of course seeing how the government treated the white farmers capital is not going to wait around to see how Mugabe and his cronies will go about redistributing these company stakes. The proof of this is that factories are closing.

Zimbabwe needs to produce and export to earn the foreign currency that will jump start the economy.

"Zimbabwe is a 21^st century test case of what happens when bad politicians come up against the economy. We should take heed!...

INDIA, SOUTH AFRICA A PEEK INTO OUR DEMOCRATIC PATH

In recent weeks India and South Africa have gone to the polls the outcomes similar in that they were widely expected but different in what they say about the progression of their democratic paths.

In South Africa the African National Congress (ANC), despite serious questions about their ability to create jobs, deliver services and endemic corruption won comfortably with more than 60% of the votes cast.

In India the Bharatiya Janata Party (BJP), won the elections locking in an absolute majority in parliament, done for the first time in 30 years by any party in India and relegating the dynastic Congress Party to a miserly 44 seats in the house.

The BJP, pummelled before the poling day as everything from dangerously nationalistic to a sectarian party, benefited from the record of its leader Narendra Modi, who as governor of the Gujarat state has the most enviable development record of all his peers. His record suggests that he can jumpstart the stuttering economy of the world’s largest democracy and raise the everyday man’s collective lot.

Modi beat to the post Rahul Ghandi, scion of a political dynasty that was at the heart of the con try’s independence struggle and given India three prime ministers.

"By relegating the Congress Party to a bit player in Indian politics – they lost 162 seats they previously held,  for the first time since independence in 1947, the BJP may have changed the complexion of the Indian politics for good...

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So in India’s case it was the end of an era – the electorate feels less and less beholden to the Congress Party for its central role in the independence struggle, while in South Africa, the momentum from the anti-apartheid struggle that ended 20 years ago, remains strong. While they may have shed a percentage point or two observers believe it will be a while – a long while, before any other party will put up a credible challenge to the ANC’s stranglehold on the politics of Africa’s second largest economy.

The ejection of the Congress Party from the centre of politics in India provides useful pointers as to the eventual trajectory of politics in South Africa and by extension Uganda.

The Congress party’s stranglehold on the country’s politics – it has led the country for 49 of the 67 years of an independent India, has with time been eroded by the increasing dysfunctionality of its governments, which have become increasingly mired in bureaucratic red tape and corruption, powerless to effect any meaningful change for the majority of Indians who look across the border to China where Beijing is lifting tens of millions out of poverty every year.

"The inertia is an inevitable consequence of longevity. With every passing year ruling parties have to make unpalatable concessions and accommodate unsavory types, who bog down the system as they in turn, seek to guard their own interests to the detriment of the many....

While the ANC’s planners are in jubilant mode the Congress Party’s fate must weigh on their mind. Thousands of housing units have been built, school enrollments are up, the roll out of health facilities to the poor has been breath taking but the legacy of apartheid will not be wished away in a few years or even a generation.

It does not help that a black super-rich class, leveraging their connections in high places, has arisen to create their own unjustifiable wealth divide within the black community, that is making some question whether the struggle against apartheid was meant to replace one overlord class with another.

"It might take the ANC considerably less than 67 years to pay for their continued failure to meet post-apartheid expectations....

The emergence of the BJP as a counter force to the Congress party in 1980 may serve too as an indication of what kind of counter force ruling parties may encounter in later years.

A party that galvanises the disadvantaged, which counter to economic liberalism espouses some brand of socialism and which can appeal to majority groups who have grown disenchanted with the ruling elite is the probable  complexion of the party that will give the ANC planners sleepless nights.

In the BJP case they went a step further, taking control of regional governments, making them work and delivering tangible results for the everyday man.

"The BJP in its current form came into being 33 years after independence suggesting that the issues around which they have rallied had not matured yet or the leadership to consolidate these issues into a winning platform had not emerged....

The BJP’s success is raising interesting questions about geopolitical alignments internationally.  But for us, Indian politics and the developments in South Africa can provide useful lessons when overlaid on our own local politics.