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Do we really need a debt ceiling?

At the baseline, the proposed public debt ceiling is likely to be breached by June 2024
At the baseline, the proposed public debt ceiling is likely to be breached by June 2024 if the financing deficits targets are anything to go by. FILE PHOTO | NMG 

Last Wednesday, Parliament approved a Treasury notice on increasing the debt ceiling to Sh9 trillion. The fact that the amendment was passed unanimously by MPs says much about the broken structure of our fiscal regime.

Has Parliament just opened a duty-free liquor store inside a rehabilitation centre?

In the Treasury’s amendment there lies two distinct changes. First is moving the debt ceiling from being weighted on GDP to an absolute figure. This is sensible because debt-to-GDP has proven to be flawed because they shift with unforeseen changes in the economy and requires Parliament to chase targets it cannot control.

The Treasury has been getting away from Parliament’s accountability by playing around with the Net Present Value numbers of our GDP, so an absolute figure gives Parliament a clear and precise objective in legislating the debt ceiling issue.

Second, which is the crux of the matter, is the change that will allow Treasury to borrow up to 9 trillion citing that Kenya has little room to raise taxes, therefore, needs to raise the debt ceiling to avoid derailing the budget and the Big 4 agenda.

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Now, this legal limit legislation is a safety-gap for Parliament as the constitutional body mandated to oversight the executive, to champion debt discipline against reckless spending by government. In the US where we draw much experiment on debt ceiling, one of the few developed countries that has a debt ceiling legal structure, was created in 1917 to allow the Treasury Department to pay expenses for government activities through borrowing without having to submit requests to Congress to approve already allotted spending for that fiscal year.

When Treasury reaches hits the debt limit, it provides a good opportunity for Congress to periodically revisit public debt and make demands to discipline government spending going forward.

Thus, debt ceiling is the Rubicon moment that prompts and mandate Parliament to take action that puts the budget spending back on a sustainable path. So, it was unfortunately stupendous to hear the chairman of the Budget and Appropriation Committee siding with Treasury that the budget passed this year is not implementable without expanding the debt ceiling without calling in check government spending.

It is within his constitutional mandate to make sure that government lives within its means, but the Chairman seem to have rescinded his constitutional duty for political entrepreneurship.

Back to our amended law, it has been wrongly anchored because we have given Treasury acres of debt headroom that will not be subject to review by Parliament anytime soon. This will just encourage government reckless spending and looking at our debt sustainability trajectory, the taxpayer stands over-burdened by more public debt leading to a default even before we reach the Sh9 trillion limit.

But sober looking at the whole debt ceiling issue, the big question about it as a policy intervention response is, do we really need a debt ceiling?

This question arising from the fact that the problem with debt ceiling is that it attempts to stop the debt without directly addressing the processes that generate debt.

Debt ceiling is a mathematical absurdity because Parliament has the last say on the appropriation process deciding what and how governments spends as well as the tax laws that determine how much revenue comes in – and this are the laws and processes that actually determine how indebted we become as a country.

So, having a debt ceiling is just legislative gymnastics afterthought, spending reductions and revenue control measures must be predominant elements that are part of the solution if we are having a conversation about controlling out public debt.

In fact, chairman of Budget and Appropriation Committee admits that anytime government wants to borrow, it comes to Parliament” so do we need a debt ceiling or a Parliament that enforces its constitutional mandate on having the country on a sustainable fiscal path.

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