The effect of domestic revenues on domestic development expenditure in Uganda (2000-2025).

Abstract

This study is a quantitative, explanatory time-series investigation examining the effect of domestic revenues on domestic development expenditure in Uganda over the period January 2000 to December 2025. The study was motivated by the persistent disconnection between Uganda's growing domestic revenue base and the quality and volume of domestically financed development expenditure, compounded by a rapidly rising domestic debt service burden that crowds out capital investment. The study pursued four specific objectives: to analyze trends and patterns in domestic revenue and domestic development expenditure; to determine the relationship between the two variables; to assess the extent to which domestic debt service obligations crowd out development expenditure; and to propose evidence-based policy recommendations. Monthly time-series data comprising 312 observations were sourced from the Uganda Macro Data Portal maintained by the Ministry of Finance, Planning and Economic Development, the Uganda Revenue Authority. Analysis was conducted in Stata using descriptive statistics, Augmented Dickey-Fuller and Kwiatkowski-Phillips-Schmidt-Shin unit root tests, the Autoregressive Distributed Lag bounds testing framework, an Error Correction Model and Granger causality tests within a Vector Autoregressive framework. The study revealed that domestic revenues grew 32-fold between 2000 and 2025, yet the transmission to development expenditure was erratic and structurally unstable. The ARDL bounds test confirmed a stable long-run cointegrating relationship, with a long-run elasticity of +1.752, meaning a 1% increase in domestic revenues produces a more than proportionate 1.752% increase in domestic development expenditure. The error correction term of −0.639 confirms that 63.9% of short-run deviations are corrected within one month. Bidirectional Granger causality between domestic revenues and domestic development expenditure supports the Musgrave fiscal synchronization hypothesis. The domestic debt service burden, which consumed 25.26% of domestic revenues by 2025, was found to crowd out development expenditure with a long-run elasticity of −0.269. The COVID-19 fiscal shock caused a permanent 45% structural decline in development expenditure. The study concludes that while domestic revenues are a powerful driver of domestic development investment, escalating domestic debt service obligations are progressively eroding Uganda's fiscal space. The study recommends that accelerating domestic revenue mobilization, imposing a binding legislative ceiling on the debt service-to-revenue ratio at 30%, establishing a Development Expenditure Protection Fund and amending the Public Finance Management Act to institutionalize fiscal rules that protect development spending.