Increasing Uganda’s Fiscal Space through Improved Revenue Mobilization and Enhanced Efficiency of Spending and Service Delivery

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Uganda's economic growth is strong, with real gross domestic product (GDP) accelerating from 6.1% to 6.8% in the nine months from July 2024 to March 2025, according to the World Bank's new Uganda Economic Update: Increasing Uganda's Fiscal Space through Improved Revenue Mobilization and Enhanced Efficiency of Spending and Service Delivery. This robust performance was driven by the supply side, with improvements in the commodity producing sectors and manufacturing. This was notable in pharmaceuticals and construction-related activities. In contrast, the services sector recorded a broad-based slowdown. On the demand side, household consumption remained strong and a key contributor to growth, followed by gov­ernment consumption. Inflation remained below the central bank's target of 5%, supported by a favorable food supply environment, stable global commodity prices, exchange rate stability, and prudent management of monetary policy.

The Uganda Economic Update, now in its 25^th edition, is a twice-yearly analysis of Uganda's near-term macroeconomic outlook. It projects growth to accelerate to 10.4% in FY2026/2027 as oil production begins, before stabilizing around 6%. The advent of oil production has the potential to make durable improvements in Uganda's external and fiscal sectors. However, production timing remains uncertain including completion of large infrastruc­ture needed to bring oil to the market and generate revenues. Furthermore, the global energy transition away from hydrocarbons to clean energy sources could lower oil prices and increase the risk of stranded assets. Other risks to the positive outlook include softening of global oil prices from lower global demand or increased supply, global supply chain disruptions due to conflict in the Middle East, global economic policy uncertainty, climate shocks, and slower-than-expected implementation of revenue-raising reforms.

Meanwhile, Uganda dramatically and significantly needs to increase investment in human capital (education, health, and social protection) to harness the demographic dividend and achieve its high-income status ambitions as reflected in the country's Vision 2040 and Ten-fold Growth Strategy. With tax-to-GDP ratio standing at nearly 14%, below peer countries and below the government's own target of 16%-18%, Uganda needs to raise more money domestically and spend it efficiently to achieve development goals.

The economic update makes several recommendations under domestic revenue mobilization and efficiency in spending.

Improve domestic revenue mobilization.

1. Review personal income tax rates and brackets to adjust for inflation and avoid bracket creep. Particularly, increase the exemption threshold to UGX4.02 million up from UGX 2.82 million per annum, maintain existing tax rates for most taxpayers, and introduce a new 35% tax band for individuals earning between UGX5.82 million and UGX120 million a year. This will strengthen revenue by nearly UGX149 billion (or 0.1% of GDP) and improve equity whereby low-income earners remain unaffected, while higher-income earners face a modest increase.
2. Strengthen the framework for taxing high-net-worth individuals.
3. Re-evaluate the exemption policy to prevent corporate income tax from becoming obsolete.
4. Rethink the qualifying thresholds and what should be considered as priority sectors to qualify for investment incentives.
5. Improve the targeting of incentives to achieve better outcomes.
6. Reassess the incentive strategy to ensure it effectively supports growth that is critical to the provision of essential public services.
7. Address the concerns of the private sector in the tax policy-making process to improve tax morale.

Improve efficiency in spending and public service delivery.

1. Pursue a balanced adjustment in spending while improv­ing the domestic revenue mobilization effort. More balanced spending would mean allocating more resources to human capital development and growth-enhancing activities.
2. Pursue policies that will reduce wasteful expenditure, which include cuts to the large public administration budget.
3. Undertake policies to reduce inefficiencies such as staff absenteeism in the social sectors, especially education and health.
4. Improve efficiency in the execution of public proj­ects by deepening reforms in public investment management.
5. Introduce a moratorium, or strict guidelines, for the creation of new administrative structures such as districts.
6. Review details of grant earmarking and enhance dialogue on grant consolidation, especially regarding allocation of facilities by administrative units rather than the populations served.
7. Undertake a comprehensive reform of own source revenue (OSR) policy framework to ensure that local governments generate levels of OSR that are comparable to other similar countries.