Deficit stalks Kenya’s first trillion budget

Finance minister Uhuru Kenyatta will on Thursday afternoon unveil a trillion shilling budget containing a package of measures designed to secure growth.

The Sh996 billion budget, is Sh110 billion larger than last year’s or nearly half of Kenya’s GDP affirming the government’s position as a key player in the two trillion economy.

But with the tax revenues trailing the target of Sh580 billion in the current financial year and growth expected to remain subdued during coming fiscal period, Mr Kenyatta’s mega budget could come with a large deficit and an equally large provision for borrowing besides increasing the country’s dependence on donor financing.

According to Treasury estimates, Sh630 billion will be collected in taxes in the next financial year and Sh143 billion from development partners.

That would leave a financing gap of nearly Sh223 billion to be bridged through a domestic borrowing in the absence of asset sales coming through or a sovereign bond being floated.

Treasury has indicated that it plans to keep domestic borrowing at the current level of Sh109 billion leaving analysts groping in the dark as to how he will raise additional revenue for the expanded budget.

Steve Okello, head of tax consultancy firm PricewaterhouseCoopers (PwC) said the economic environment raises the possibility of new taxes, such as capital gains tax, being introduced as well as upward adjustments on sin taxes (levies on beer and cigarettes) that were left untouched last year.

Mr Okello said tax payers should also expect to see a more aggressive Kenya Revenue Authority (KRA) working to narrow the deficit gap.

The estimates also show a significant rise in provision for Appropriation in Aid – signalling that Kenyans will be asked to pay more for public services.

Other analysts said Kenyatta could also use the push for a harmonized tax structure for the East African Community member states to increase the Value Added Tax (VAT) from 16 per cent to 18 per cent level charged by Uganda and Tanzania.

The move, which amounts to increasing the tax burden on consumption, could however prove counterproductive as it bears the risk of slowing down consumer demand and ultimately pulling back the rate of economic growth.

Estimates tabled in Parliament by Finance Assistant minister Oburu Oginga on Wednesday show that Treasury, Energy, Education, Water and Public Health will be the key beneficiaries of increased public spending that is comprised of Sh675 in recurrent spending and Sh321 billion in development expenditure -- a 26 per cent jump from last year’s budget.

The Ministry of Education has maintained its position as the biggest item on government’s expenditure plan that will also receive a significant fraction of the additional funds to pay higher for teachers and university lecturers.

About Sh7 billion will go to teachers’ salary for a total pay bill of Sh65 billion up from Sh57 billion pushing the Ministry of Education’s share of the budget to Sh150 billion.

Treasury has more than doubled its budget to Sh53 billion to provide funds to offset pending bills owed to Telkom Kenya by various government bodies before it was privatised in 2007.

There is also Sh4.1 billion for budget reserves and contingencies.

With a targeted growth rate of 4-5 per cent this year, analysts said Mr Kenyatta will have to enhance the stimulus package, in an environment where government revenues are way below targets against rising demand for off-budget expenditure such as disaster relief.

Experts reckon key sectors such as agriculture, building and construction and manufacturing will require a heavy dose of policy and financial interventions to boost productivity in the private sector and reduce the country’s reliance on public spending for economic expansion to stonewall growth.

The Kenya Revenue Authority (KRA) targets to raise Sh675 billion in 2010/2011 financial year up from Sh580 billion in the current year.

Statistics released by the tax man in April showed that between January and March 2010 it collected Sh123.1 billion against a target of Sh126.8 billion after all departments failed to meet their goals.

The Kenya Revenue Authority is banking on the expected economic rebound to help bolster its full -year performance after missing its revenue targets for the third quarter.

Next year’s budget has also been inflated by allocations for three new energy firms —The Kenya Electricity Transmission Company, the Rural Electrification Authority and the geothermal Development Company created under the ministry of Energy to enhance the generation of energy to cushion manufacturers and domestic users from intermittent power supplies.

Provisions for the three new energy outfits will increase the ministry of energy’s budget to Sh2 billion compared to Sh206 million in the last budget.

But the Ministry of Agriculture, the backbone of Kenya’s economy that supports millions of households, has had only minimal increment of Sh95 million for an Sh8 billion budget.

This is likely not to sit well with farmers in Kenya’s bread basket—the Rift Valley and other parts of the country who have been angling for cheaper or subsidized farm inputs to enhance produce.

This year’s budget is also swelled by the government’s increased expenditure on salaries of medical workers recently employed by the ministry of Public Health and Sanitation.

The ministry will be allocated Sh9 billion up from Sh7 billion in the last budget with Sh102 million earmarked for staff salaries compared to Sh87 million spend in the last budget.

The ministry of Justice, National Cohesion and Constitutional Affairs has also been allocated Sh2 billion, an increase of Sh208 billion to cater for the on-going constitution reforms which will culminate in the August 4 national referendum on the draft constitution.

The constitution review is a key plank of the Agenda four—a negotiated instrument that stopped violence that followed the disputed 2007 Presidential election.

The government holds the implementation of Agenda four items such as the constitution review and land reforms as key to peaceful coexistence among Kenyans—catalyst for peaceful general elections in 2012.

The ministry of lands has also been allocated Sh185 million for computerisation.

However the reduced allocations to electoral body—the Interim Independent Electoral Commission from Sh6.8 billion last year to Sh5.3 billion in this year’s budget is set to raise eye brows as Treasury says it has scaled down provision for voter registration at a time when the country is facing numerous by-elections.

The country is facing four by-elections in South Mugirango, Matuga, Juja and Makadara between June and July.

Voter registration for the August 4 national referendum on the draft constitution was dealt with under the Sh42 billion supplementary budget approved by Parliament in April.