The National Treasury has presented a supplementary budget cutting development spending for the current financial year by Sh30 billion.
Additionally, the Independent Electoral and Boundaries Commission(IEBC) has requested Sh12 billion for the presidential election re-run. These developments are problematic for several reasons.
The first problem is Kenya is in an already compromised fiscal position where recurrent expenditure accounts for 58.8 per cent of the 2017/2018 budget.
We already have a budget with subpar development spending, which translates to less money being channelled to productive spending; instead the bulk of funds sit in non-productive recurrent spending.
Thus the cut in development spending will skew the development-recurrent ratio even further pushing Kenya into a position where government spending will have an even more muted effect on contributing to the economic growth.
Secondly, the government’s revenue collection for the fiscal year starting July was behind target by Sh 29 billion. As much money as possible should stay in the development docket so it is used to spur economic growth and raise domestic revenue to better manage growing spending and debt needs and obligations.
The cut in development spending will mean revenue targets will likely not be hit and government will have to borrow aggressively next financial year to plug the fiscal deficit due to subpar revenue generation catalysed by the cut in development spending.
Thirdly, private sector will be negatively affected. The supplementary budget indicates that development plans in roads, water, power plants, real estate projects and electricity transmission, will be affected.
Domestic private sector usually contracted to implement such projects will not get contracts which would have ensured they remain productive.
Bear in mind, the cut in development spending occurs in a context of muted economic growth due to a combination of election, the drought and the interest rate cap.
Thus the development spending cut will exacerbate an already difficult year for many businesses, further compromising economic growth.
Finally, there is a real risk that the cut in development expenditure will be shifted to recurrent spending.
While the National Treasury indicates it also seeks to make cuts in recurrent spending by limiting travel of individuals on the government payroll, they will likely be unable to save enough to finance the Sh 12 billion requested for the election.
It is likely that the election re-run will be partially or fully funded by money previously earmarked for development spending.
This is deeply worrying as the government borrows to meet development expenditure. Thus there is an emerging situation where the country will likely use debt to finance recurrent expenditure; this is untenable. This puts the country on an even more precarious fiscal path.
Government seems to have a habit of using supplementary budgets to shift money from development to recurrent spending, making it difficult to track the ratio between the two types of spending and analyse the extent to which debt is financing recurrent expenditure.
While this year the surprise election re-run has put the National Treasury in a difficult position by generating expenditure momentum in the wrong direction, the features of this supplementary budget are not new.
Greater caution needs to exercised in developing supplementary budgets so that this process is used to strengthen, not weaken Kenya’s fiscal position.