Budget subsidy formula in today’s federal government

06 Dec 2017

Since the incumbent government has come to power in 1991, it has introduced federal system of governance as the best means to resolve the quest for nationality, freedom, equality and justice which were the tough national issues chanted during the struggle for freedom. Thus, the ethnic based federalism has come to exist in response, following the social contract of the previously oppressed national nationalities and peoples to the dictatorial regime. Hence, the Federal Democratic Republic of Ethiopia (FDRE) Constitution to respond to the several questions related to self-administration, justice and equality, has clearly address them in the Constitution.

These questions have been fully addressed within the current political system and the issue in today’s federal structure is to grow together to build one political and economic community. To ensure this endeavor, the federal government has been employing several mechanisms to bring about balanced development among the nine states and two city governments.

In accordance with the provisions of Article 62/7 of the Constitution, the House of Federation (HoF) of the Federal Democratic Republic of Ethiopia has been given the power and responsibility to distribute subsidy from the federal budget to the states.

The HoF facilitates the recruitment process which will enable it to bring about balanced development among states party to the federation and support the emerging states.

It was assumed that the formula used since the 2013 would have to be improved for as of the 2017/18 fiscal year for three subsequent years when it was approved by the House.

The HoF, in accordance to the stated Article of the Constitution, has been given the authority to determine the formula for the distribution of subsidies to states.

“It shall determine the division of revenues derived from joint Federal and State tax sources and the subsidies that the Federal Government may provide to the States,” as Article 62 of the Constitution dictates.

The federal government allocated annual budget support to the states has begun by the 1995. In order to ensure justice, the House has been working to make the budget distribution fair and based on the principles of the Constitution.

Since the introduction of the federal system of governance, eight federal budget distribution formulas have been developed and used. All the formulas, as well as other government policies, strategies and programs, have been developed based on the principles and objectives of the Constitution..

In view of this, a number of activities have been done to ensure the appropriate use of these funds. The quality of data used for the preparation of budget subsidy has been improved and the subsidy framework is being revised over time.

In its decision to adopt the current subsidy formula, the HoF has been developing the new formula which will be used for three years based on the realities on the ground and country's current development status.

It has been a great effort to make the new formula more transparent than ever before and make it easily understandable by all.

Furthermore, all the stakeholders have been invited to working on the results and have been able to understand and coordinate throughout the process. The use of inputs in the consultative forums has also been included in the draft.

The preparation was formal and engaging._Many stakeholders have played an active role in the process. The HoF as the leading organ of the activities and the House’s Revenue, Budget Affairs Standing Committee, Heads of the various offices in the HoF and federal institutions were involved to the process._ Representatives of the regional states have also been actively participated in the activity as key stakeholders._

Finding the most important sources of information from federal sources has been used to provide additional inputs necessary for the study to determine the views and interests of each region.

This approach also demands for the states to determine the types of taxes and the determination of tax bases and tax collection capacity._

Furthermore, over the last three years, the total tax revenues have been used to calculate income tax revenues, income taxes, land use fees, taxes and other revenues._

Estimates of the tax rates for selected tax sources have been taken from the Central Statistics Agency (CSA) to determine the applicable tax rates for each type of tax. And it is not by taking the average indigenous groups, but by taking the weight based on the paying capacity of taxpayers in each state._

Likewise, the gross income of all states has been calculated from the sources of income derived in each source of revenue collected by each state. Therefore, the House has allocated subsidies to the states based on the new formula.

Accordingly, while the share percentages of Tigrai and Afar States from the federal budget are 6.03 and 3.02 respectively, Amhara and Oromia States shares are 21.60, and 34.46 respectively. In the same way, the formula has allotted for the Ethiopian Somali State 9.89, Benishangul-Gumuz 1.83, Southern Nations, Nationalities and Peoples 20.11, Gmabella 1.33, Harari 0.76 and Dire Dawa City Administration 0.88 percent.

The new federal subsidy formula has been prepared in the light of improving the existing one being used over the past years, with a view to realizing the development endeavors of the country. The plan was based on factual information and the format was also participatory and concise at every level.

The formula will be used for subsequent three years, The Ethiopian Herald learnt.

Translated from Hibre Biher Magazine, special edition for the 12th Nations, Nationalities and People's (NNP's) Day which is going to be celebrated in Samara, Afar State this Friday.





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