Ideas & Debate

How Kenya can restructure fiscal policy in 5 years

Salaries and Remuneration Commission chairperson Sarah Serem (right) with vice chairperson Daniel Ogutu. FILE PHOTO | NMG
Salaries and Remuneration Commission chairperson Sarah Serem (right) with vice chairperson Daniel Ogutu. FILE PHOTO | NMG 

Fiscal policy in Kenya over the past five years has been characterised by a number of features, prominent amongst them aggressive growth in expenditure.

Cytonn Investment makes the point that over the past six years, total expenditure in annual budgets has grown at an average of 14.7 per cent yet revenue growth has only increased by 12.7 per cent.

This has led to more borrowing and expanding fiscal deficits with an increase in debt levels from 40.7 per cent debt to GDP ratio in 2011 to the current 54.4 per cent.

While some argue that Kenya’s debt is not at distress levels, if current patterns of spending continue the distress point will be quickly reached.

Thus, it is important to ask how policy should be structured over the next five years to put the country on a more sustainable fiscal path.

At national level, fiscal focus should target cutting non-essential expenditure; government needs to be very firm on this and make the hard decisions required to prevent profligate spending, particularly in recurrent expenditure. Cytonn makes the point that recurrent expenditure accounts for 58.8 per cent of the 2017/2018 budget.

One way to address this issue is through robust support of the Salaries and Remuneration Commission (SRC) to cut salaries and better align compensation packages to reflect the economic reality of a developing African economy.

The current association between public office and wealth accrual needs to be severed and stern fiscal policy backed by political commitment can make this happen.

Further, a keener eye should be cast over the efficiency of government spending — procurement at national and county must focus on value generated by funds spent.

Without doing so, Kenya will find itself on a path where careless and inefficient spending leads to debt pile-up that does not stimulate the economic growth required to meet debt obligations.

Secondly, revenue generation needs to be ramped up; expenditure is growing faster than revenue.  Revenue collection has to grow faster than expenditure if the country is to have greater funds available for public investment.

One way to do this is by better supporting the Kenya Revenue Authority to prevent illicit financial flows from the country, a serious problem for African countries.

The United Nations Economic Commission for Africa estimates that Africa loses more than $50 billion through illicit financial outflows per year.

Devex, a platform for development community, points out that companies evade and avoid tax by shifting profits to low tax locations, claiming large allowable deductions, carrying losses forward indefinitely, and using transfer pricing.

Government ought to undertake an audit of tax policy, restructure outdated tax laws and correct faulty tax arrangements with multinational companies. The KRA needs to be supported to improve enforcement of the law.

At county level, fiscal policy needs to be characterised by, again, cutting down on unnecessary spending.

County governments have to take the initiative on this and so far there have been encouraging signs of newly elected governors choosing to fully or partially redirect massive inauguration budgets to more productive areas.

Further, county government budget processes ought to be more transparent. At the moment there are significant gaps in understanding how county budgets are formulated and implemented.

More counties should follow in the footsteps of Elgeyo Marakwet County and develop a transparent, formula-based budget development process that prevents elite capture in budget formulation and deployment.