Chapter four: Economic governance and management 403. The nominal value of project grants varies with the pace of implementing capital projects and the quality of donor reporting to the government accounting system. Government received budget support grants from the EU between 2001/2002 and 2004/2005. 404. There are now threats to SACU revenue, the largest source of revenue. These emanate from the global meltdown. Two factors from this meltdown were identified. One is the decline in imports of vehicles into SACU as demand declines generally. The other is the decline in imports of raw materials for the textile industry as US demand for textiles slows down. Both factors are negatively affecting SACU receipts. There is thus a need to develop and expand the domestic revenue base. Expanding the tax base will require improved GDP growth rates and more efficient tax collection methods. While the effective implementation of the growth strategies that are in place could be relied upon for improved growth performance, the new Lesotho Tax Authority should be able to capitalise on that to be able to broaden the tax base and collect revenue more efficiently. There is also scope for broadening the base of nontax revenue like fees and fines. Receipts from nontax revenue (royalties from the LHWP, dividends from the operations of publicly owned corporations, and compensation paid by the South African Reserve Bank for rand circulating in Lesotho) can be significant. However, the government has limited options for increasing the revenue base. 405. As part of its annual budgeting process, the government produces a Medium-Term Fiscal Framework (MTFF) that looks at revenues and expenditure for three to five years. The overall objective of the MTFF is to ensure that Lesotho’s budget supports the country’s macroeconomic policy objectives and maintains a sustainable fiscal position. The MTFF achieves this by providing an assessment of expected resource availability and expenditure commitments for the next three financial years based on current policy decisions. This allows the government to set indicative ceilings that show the division of future ministerial expenditure allocations by economic classification (wages and salaries; goods and services; transfers and subsidies; and capital). 406. One concern for fiscal policy is that the public sector absorbs nearly half of GDP. This is exceptionally high by African and developing-country standards. A major contributory factor is Lesotho’s membership of regional customs and monetary arrangements. Prices (including wages) are set at levels that require a high level of expenditure, while the revenue-sharing arrangements of the customs union provide the required level of financing. In order to reduce this dependence, the government is pursuing the policy objective of encouraging rapid and sustained private sector development to diversify the economy and reduce the scale of public sector activity. Another contributory factor is the sheer size of the public sector. The public sector absorbed about 75 per cent of total domestic expenditure between 2002/2003 and 2007/2008. Compensation to employees absorbed 38.5 per cent, while the purchase of goods and services absorbed 36.2 per cent. Perhaps this is because of the excessive reliance on fiscal policy as a tool for managing demand. An additional concern is that there is evidence of annual underspending by government departments, particularly of capital budget. This is because of the weak absorptive capacity of government departments and poor budgeting practices that tend to include projects for which there is no adequate preparation in the budget. Thus any observed budget surplus does not show prudent management. Instead, as one official expresses it, its “development deficit” is nothing more than lost development opportunities. 113