Cause-effect relationship of non-tax revenue and gross domestic product in Uganda (2001 – 2020)

Abstract

The study focused on causal effect relationship between non-tax revenue and Real Gross Domestic Product in Uganda for the period 2001 to 2020. The main objective was to establish whether there is short and long run causal relationship between non-tax revenue and Real Gross Domestic Product as well as establish buoyancy and elasticity between non-tax revenues with respect to Real Gross Domestic Product. The variables were Real Gross Domestic Product, Non-Tax Revenue, Government Expenditure excluding the non-tax revenue, dummy variable for use of non-tax revenue at source since 2007, foreign direct investment, real exports and population growth of Uganda. The study used Quarterly time series data for the period Quarter 1, 2001 to Quarter 4, 2020. The Error Correction Model for short run relationship and Engle and Granger causality was used to test for the long-run causal effect between the variables. The findings of the study revealed that non-tax revenues are negatively correlated to Real Gross Domestic Product with estimated elasticity of 2.89% though not significant at 5 percent level of significance but with a significant positive relationship with Gross Domestic Product in the long run with estimated elasticity of 0.0099, implying a 10 percent change in non-tax revenue will lead to 0.09 percentage in Gross Domestic Product all factors constant. In addition, non-tax revenue was found to Granger cause Gross Domestic Product. In the long run, buoyancy was estimated at 1.225, meaning that for a one percent increase in Gross Domestic Product leads to 1.3 percent increase in the non-tax revenues in Uganda while on elasticity, it was found out that a one percent increase in Gross Domestic Product will lead to an increase non-tax revenues by 2.4 percent taking in consideration the policy change measures of using the collections of non-tax revenue at source. The study recommended that efforts to stabilize the rates/fees charged for different non-tax revenues items, strengthened administrative measures to minimize the negative effects on Gross Domestic Product in the short run. This should include strengthening the non-tax collection measures and ensuring monitoring and evaluation of its performance at all sources where it is collected from hence increasing Gross Domestic Product. It was also recommended that policy makers should focus part of the government expenditure towards collection and administration of additional non-tax revenues.