Promoting growth, cutting recurrent spending Kenya’s best bet on budget deficit

Within the next two weeks, Treasury secretary Henry Rotich will read this year’s budget speech.

A quick read through the 2016/2017 Budget Policy Statement puts budgeted expenditure for the next financial year at Sh2.05 trillion. This represents an eight per cent growth compared to the current financial year.

The same budget policy report says that the government intends to finance the 2016/2017 budget using Sh1.5 trillion in local tax revenues and expected grant income.

The projected budget deficit therefore stands at about Sh555.4 billion!

Although the budget deficit of Sh555.4 billion is six per cent lower than the revised one of 2015/2016, this is still a lot of money that the government must generate within a year to fully finance its expenditure plans.

The key question always remains how the Treasury will finance the budget deficit without negatively affecting economic fundamentals such as inflation, as a result of heavy borrowing or tax increases that may have a negative impact on projected economic growth of roughly about six per cent of the gross domestic product (GDP).

With the pending General Election in 2017, another key consideration is the conditional allocations required for the Justice, Law and Order programmes — given that institutions such as the Independent Electoral and Boundaries Commission (IEBC) must be funded to commence preparation for the elections.

In terms of funding, there are sectors that have been given priority. These include education and agriculture, which contributed to about 30 per cent of the GDP in the 2015/2016 financial year as per the official Economic Survey.

This is not to forget the Jubilee government’s key infrastructure projects such as the planned extension of the standard gauge railway, which although debt funded, have implications on the overall debt ceiling.

The above realities leave the Treasury with the very important question of how to fund the budget deficit. This calls for austerity in addition to well thought-out fiscal measures.

From a macroeconomic perspective, it is important for the government to avoid the temptation of overborrowing from the domestic market. Our economy is to a large extent private sector-driven.

Therefore, when the government crowds the domestic borrowing market, this creates competition between business and the government for the same funds. This will see interest rates skyrocket, hence slowing down economic growth.

Another area that the government needs to examine in detail for purposes of minimising the budget deficit is the bludgeoning recurrent expenditure, especially on salaries and emoluments to both the national and county government staff.

Recurrent expenditure simply consumes and does not create wealth. Even as the government expects economic growth to stand around 6.1 per cent in 2016/17, there should be a modest attempt to reduce the recurrent expenditure burden, based on the budget estimates.

It is also important that sector-specific budget allocation is utilised for its purpose rather than diverted to areas that may not be of priority.

Institutions that have the mandate to fight the corruption menace should continually be strengthened.

The budget estimates that were released last month include some Sh280.3 billion to county governments as part of the equitable allocation segment of the revenue sharing formula.

This amount excludes conditional allocations that will be undertaken through specific projects such as Level Five hospitals and county rural roads. It is important that these funds are used efficiently in order to add value to Kenyans.

From a fiscal perspective, the government can consider a number of measures that enhance tax revenues by widening the tax base while spurring overall GDP growth.

One potential area for consideration is the Pay as You Earn (PAYE) tax applicable on employment emoluments. PAYE contributes a large proportion to Kenya’s tax revenue. However, the current PAYE brackets have been in existence for about 12 years.

Taking into consideration the inflation over the years and the change in income levels, the PAYE brackets should be widened and personal relief increased.

This measure will give reprieve to individual taxpayers who are already contributing a lot through National Social Security (NSSF) and National Hospital Insurance Fund (NHIF) deductions.

This will also lead to increased savings that will in turn increase the amount of disposable income available, hence spurring growth.

Secondly, the current Income Tax Act is largely outdated and does not reflect the current realities in Kenya where a large portion of income is earned from the informal sector.

It is important that the income tax regime is reviewed to broaden the tax base to bring onboard the informal sector. This measure will assist the Treasury and the Kenya Revenue Authority (KRA) in realising increased revenue growth.

In addition to the cost of credit, local manufacturers have had to contend with outstanding value-added tax (VAT) refunds from the KRA.

It is time the government came up with measures to solve this long outstanding issue once for all. Further, to avoid delays the Treasury should include VAT refunds in the budget and have monthly allocations set aside for payments.

Besides, a framework should be developed which outlines the number of days a refund should take to be paid and possibly an interest-based system on delayed payments.

Finally, the government should review the overregulation and the levies in the manufacturing sector that make our locally produced goods uncompetitive even within the East African Community (EAC).

The Railway Development Levy was introduced for purposes of railway infrastructure. The objective from a revenue perspective must have been achieved by the government hence it is time to remove the levy.

In addition, the fact that the other EAC nations do not charge such a levy makes our goods (where raw materials are imported) more expensive in the region.

Ultimately, in view of the fact that the Treasury is faced with an immense challenge of raising revenue the Treasury secretary’s budget speech on June 9, 2016 will require a balancing act.

Mr Maina is a tax expert currently working with Nairobi-based consultancy firm Rödl & Partner.