14 June 2018

Kenya: Tough Balancing Act for Treasury in Bid to Finance National Budget

Photo: Benson Rioba/Thomson Reuters Foundation
Store in Loglogo village, near Marsabit town (file photo)

It's a delicate balancing act for Treasury secretary Henry Rotich as he Thursday presents a budget whose growth is expected to be largely financed by tax increases which critics feel are unjustified in light of deeply entrenched corruption in government.

Mr Rotich's Sh3 trillion spending plan for the next financial year starting July 1, represents an increase of about Sh400 billion on the current year's Sh2.6 trillion budget which closes end month.

The increase will have to be financed by additional tax revenues or debt, or both. But analysts interviewed reckon the country has nearly exhausted its borrowing headroom while taxpayers are already overburdened by State charges.

"The proposed tax increases, if passed, will make us the worst tax jurisdiction in our environment. The government needs to look at its expenditure. That is the disease, everything else is a symptom of that disease," said Aly-Khan Satchu, an independent analyst."I believe we have squeezed existing taxpayers until the pips have squeaked."

The Treasury expects the additional revenue to come from higher sin taxes and income tax, along with the introduction of a 16 per cent value-added tax (VAT) on petroleum products.

But tax experts on Wednesday said tax hikes were likely to stifle consumer spending power and weaken aggregate demand for goods and services.

"This is like continuing to milk a heavily pregnant cow. Increasing taxes will not help, it instead runs the risk of killing businesses," said Michael Mburugu, a senior tax expert at PKF. He advised the national government to instead expand the tax base, enhance compliance and rethink its financing model for the 47 counties.

"There is a lot of wastage and duplication of functions between the county government and national government. It is time for Kenya to have a candid conversation on sustainability of the 47 county governments as well as the need for a bicameral house."

The KRA is expected to raise Sh1.7 trillion in taxes for the next financial year ending June 2019, up from this year's Sh1.4 trillion.

The taxman is, however, likely to miss the Sh1.4 trillion target for this year given that the most recent available data shows that he raised Sh1 trillion in the 10 months to April, short of Sh400 billion with only two months left.

The economists pointed out that the country was running an unsustainable model where a huge share of State revenues is going towards repaying debt and financing recurrent expenses. Public debt stands at over half the country's gross domestic product (GDP).

"Debt to GDP is now flashing amber. Envelope space to put more debt on the balance sheet has eroded," said Mr Satchu, a position shared by Central Bank of Kenya governor Patrick Njoroge along with multilateral lenders like the IMF.

Treasury records indicate that development expenditure accounted for a paltry 15.4 per cent of the total cash released by the Exchequer in the 10 months through April, highlighting increased demand from administrative expenses and debt servicing.

The national government spent Sh67.21 billion less on development projects between July 2017 and April 2018 compared with the same period a year earlier.

Recurrent expenditure and debt repayments gobbled up the lion's share of the nearly Sh1.37 trillion, which was released from the exchequer in the review period, leaving only Sh210.2 billion for development.

"The balance sheet is maxed out. Our investments are not producing a meaningful ROI (return on investment), at this point," said Mr Satchu.

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