Treasury secretary Henry Rotich’s Sh2.6 trillion budget for the 2017-18 fiscal year must have come with some degree of surprise to many. This is because the realities on the ground – whether one is looking at the amount of resources available, the bureaucracy’s capacity to absorb the funds or even the track record of budget spending – do not support the expansionary path.
Take the current financial year, for instance, where a tough economic environment has seen the taxman miss revenue targets by large margins, and the budget revised down by Sh200 billion. This was in recognition of the fact that the initial estimates were too high and could not be met in light of the realities of the day.
Corporate taxpayers could not support the expected revenue collection, many having been forced to issue profit warnings and laid off staff. It has been argued that the expansionary budget path is supported by robust economic growth expected to stand at about six per cent this year. Experience has, however, shown that most growth projections have been overly optimistic, making them unsuitable tools on which to anchor a spending plan. As things stand, the weather is expected to pose a challenge to growth in the first quarter of this year. Intensity of politics in an election year will take its share of economic momentum and there is nothing to suggest that corporate profitability is going to improve in the near term.
That is not all. Commercial banks have, for example, been reluctant to lend to the private sector and there is nothing to show that this is about to change. The Treasury has, in fact, made things worse for purposes of credit growth by drastically ramping up the part of deficit financing that is to benefit from domestic borrowing from this year’s Sh227 billion to Sh329 billion next year. The Sh102 billion increase in domestic borrowing can only be to the advantage of financial institutions, especially commercial banks, whose bidding for government securities can only be expected to rise in both volumes and pricing.
What the proposed budget clearly demonstrates is that the Treasury’s appetite for debt-financing will remain intact despite rising to touch high points as a proportion of GDP.
One of the major causes of the higher spending is the intended swelling of emoluments of civil servants by Sh100 billion from July this year. The question must be asked as to whether the higher government spending is in any way related to the coming General Election, a move that would make budgeting a political and not financial endeavour.