expenditures – is an important aspect of the analysis, given that policy decisions should be guided by net fiscal incidence. Inchauste and Lustig (2017) point out that a particular measure that might be rejected _in isolation_ based on equity considerations (such as the increase in the value added tax rates), may be reconsidered if the transfers that the resulting revenues are financing have a large equalizing impact. The marginal contributions of each fiscal intervention presented are therefore estimated in the context of all the other fiscal activity. The use of an internationally consistent methodology allows the comparison of Uganda’s results to those of other countries in the Sub-Saharan Africa region: Ethiopia, Tanzania, South Africa, Ghana and Kenya.<sup>5</sup> In addition to development targets summarized in the NDPII, Uganda has re-committed to increasing internal revenue mobilization. The country has one of the lowest ratios of revenue-to-GDP in the region. In 2015/16, the 13 percent ratio was lower than the average of the 21 African countries by 5.1 percentage points according to the OECD (2018).<sup>6</sup> Conscious of the need to increase tax revenue, the Government of Uganda is currently preparing a new medium-term revenue mobilization strategy (World Bank, 2018b). The fiscal incidence analysis presented here can determine whether measures to increase revenues are consistent with growth and equity objectives.

Uganda faces many challenges to the efficiency, allocation and level of current public expenditure. Thus, the need for more revenues (including from taxes) will remain in the medium term. Net enrollment rates in primary education have been falling since 2005, for both boys and girls, although they are still higher than the regional average. Net enrollment in secondary education has improved but at 27.8 percent remains much lower than in the region. In addition, there are major concerns in terms of the quality of both primary and secondary education. Around 29 percent of children under the age of five are stunted, a measure of chronic malnutrition. Moreover, only 38 percent of Ugandan households have access to electricity and around 40 percent have access to improved sanitation. These challenges, underlined in World Bank (2019a), are aggravated by the high growth rate of the population, which, at 3.3 percent for 2017, stresses the systems for basic service delivery, particularly education and health.

It is important to point out some of the caveats of the methodology used. Firstly, we do not capture all items in Uganda’s public spending or revenue collections, such as the large investments in infrastructure, expenditure on national security (on the spending side) or the corporate income tax (on the revenue side), despite that these fiscal instruments provide indirect benefits (or detriments) for households.<sup>7</sup> Secondly, as Inchauste and Lustig (2017) point out, the approach does not provide information on the trade-off between long-term human capital spending - which creates higher _future_ levels of human capital (for example, a better educated and healthier, more productive citizenry) - and short-term spending on programs that bring immediate poverty relief (such as conditional cash transfers).

> 5 The corresponding publications for these analyses are: Hill et al. (2017) for Ethiopia, Younger et al. (2017) for Ghana, Inchauste et al. (2017) for South Africa, Younger et al. (2016) for Tanzania, and World Bank (2018a) for Kenya.

> 6 <u>http://www.oecd.org/tax/tax-policy/revenue-statistics-in-africa-2617653x.htm</u>

> 7 Identifying the individual beneficiaries of general infrastructure spending as well as the individuals who might bear the burden of a corporate income tax is difficult with only a standard household budget survey.  In addition, investment in infrastructure in the current fiscal year will also provide benefits in the future that are impossible to allocate to the households identified in the household survey.

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