Saturday, April 14, 2018

ECONOMICS MADE SIMPLE: Towards Parliament discussions for realistic budget

Honest Ngowi

Honest Ngowi 

By Honest Ngowi

Budget seasons in Tanzania and beyond normally attracts public debates. These are related to government’s income and expenditure for the ending and coming financial years. They include issues related to the performance of the budget in the ending fiscal year and prospects for the coming one. For the 2018/19 budget, Parliament started its sittings in Dodoma since early April and will continue until end of June. The main question so far has been whether our budgets are realistic or not. This piece contributes to this debate.


As a tool to implement government’s development agenda, budget aims at delivering public goods and services. These are delivered through development and recurrent expenditure. Whereas development expenditure focuses on investment expenditure posts, the recurrent focuses on daily none investment expenditure. The extent to which expenditure posts are attained depends on the extent to which planned revenues are attained. What is important therefore is not just budgeting but having realistic budget as outlined here.

Realistic budget

Realistic budget can be described in various ways. It is a budget that corresponds to the real situation on the ground in terms of revenues and expenditure. It is a budget that aims at collecting revenues that can be realistically collected given the status of various revenue sources. These sources include but are not limited to domestic and foreign sources. Within the domestic category are tax and non-tax revenue sources. Within the tax typology are multitudes of taxes including but not limited to Value Added Tax (VAT), withholding tax, income tax and many others. Non tax revenues include but are not limited to government revenues in terms of dividends accruing from investments where it has share and revenues from royalties. Others are revenues from various types of fines and fees.

Realistic revenues

By and large, realistic budgets are functions of realistic revenues in Tanzanian type of economies. This is because at the end of the day, what determines whether a budget is realistic or not is the extent to which a country can raise budgetary revenues that are enough to cover all the expenditure posts. Realistic budgetary revenues are revenues that can be collected as planned. Contrary to what some may argue, realistic budgetary revenues should include those from both domestic and foreign sources. This is because in reality Tanzanian type of economies can hardly mobilize enough domestic resources to fund their budgets. This is true for both domestic tax and non-tax revenues. There is therefore a necessary financing gap that will need to be bridged from foreign sources. Realistic budgetary revenues therefore imply all the revenues that can be mobilised from all sources.

Determinants of realistic revenues

To have a realistic budget, it is crucial to budget for realistic revenues. To do so for a given fiscal year, it is crucial to consider revenue determinants and situation on the ground. This has to be done for each of the revenue sources domestically and abroad. Revenue sources situational analysis is needed regularly and preferably for each year. This is because revenue sources and situations around them are dynamic and volatile--not static and casted in stone.

Attaining forecasted revenues

In order to be able to hit at the forecasted budgetary revenue thereby attaining realistic revenues, one needs to consider inter alia, the situation of businesses from which one expects tax and non tax revenues from. One needs to consider vibrancy of the economy characterised by, inter alia, number of operating enterprises, number of new enterprises, sales volumes, sales revenues, profits and taxes from the realized profits. In a sluggish economic and business situation one should expect bad prospects in terms of tax revenues. This is partly due to rather low aggregate demand that is caused by among other things low income levels.

Towards realistic budgets

For a country to have realistic budget, it has to align its expenditure to realistic revenues. Its expenditure plans should tally with and reflect the actual collectable revenues on the ground for the fiscal year in question. It may be easy to have a pro-rata budget in which a fixed per cent, say 10, is added to the preceding year’s budget each year. Instead, one should have a realistic budget that starts with assessing the reality annually.

Political sensitivities

Among the challenges of having realistic budgets include political sensitivities and considerations. This is because politicians tend to want to be politically correct in, inter alia, budgeting. They would like to have budgets that address shopping list and wishes. This is partly due to long litany of electoral promises that are given during election campaigns. Some of these may be unrealistic and attainable in terms of budgets. There are also easy temptations to divert funds by ways of reallocations.

Ways forward

It is crucial for Tanzanian authorities to be bold and at times unpopular. It may imply having budgets that are smaller than those of last years. It implies among others having fewer priorities.

The binding constraint in this case is which expenditures to forego in a country with many unfulfilled public goods and service.