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Columnists

How the budget hasn't changed

State spending is already too high that pumping
State spending is already too high that pumping in more can only bring diminishing returns. FILE PHOTO | NMG 

So, what did I find interesting or remarkable about this year’s budget statement. In terms of new ideas and significant policy pronouncement, the promise to establish Biashara Bank of Kenya within this financial year caught my eye.

I also find the idea of introducing laws and regulations to force prompt payments to suppliers significant. In Treasury Secretary Henry Rotich’s words, the government now says that it wants to control buyer power. Clearly, the predicament that has befallen suppliers of entities such as the troubled supermarkets, including Uchumi and Nakumatt, has at last captured the attention of the Treasury.

Suppliers of goods and services to the national and county governments were also in the minister’s mind as he prepared the budget. The announcement and promise he made that the National Treasury would be releasing Sh10.9 billion to verified pending bills was remarkable.

The ambition to establish the proposed Kenya Development Bank with entities like the Industrial Development Bank, Industrial Commercial and Development Corporation and the Kenya Industrial Estates within the next financial year and establishment of the proposed Sovereign Wealth Fund was also fresh.

But let’s wait and see whether Parliament will agree to scrap interest rates caps as promised by the minister. Mr Rotich’s argument is that since he will be introducing a credit guarantee scheme within the financial year and because the ‘stawi’ loans programme will be in place, the interest rate caps will have become superfluous.

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Still, and I say this as a veteran journalist who commented and reported on budget speeches for many years, the most remarkable thing is just how much things have not changed. By and large, budget statements in Kenya are about the usual combination of bean counting, playing to a variety of constituencies and doling out tax exemptions to organised and influential groups.

The structure of the spending programme has not changed in years. We still spend more on wages and debt service than we spend on development.

Spending on security agencies still gobbles more resources than health and agriculture.

With prospects for the economy look grim, the trends in tax revenue collections not looking so bright, debt service costs at 37 percent, a burgeoning wage bill and a pension bill that has now come to a whopping Sh 86 billion- Mr Rotich had little room for manoeuvre. Pundits had predicted that Mr Rotich would institute crippling new taxes to cover the big hole in his spending plans- a budget deficit figure now calculated at Sh680 million. He did not.

Like other previous budgets, this year’s budget is based on the policy of tax and spend on the philosophy of growth through expansionary spending. The administration of former president Mwai Kibaki implemented expansionary spending economic logit to its limits. They spent massively on free education, on rehabilitating dead commodity marketing monopolies- KCC, KMC, Pyrethrum Board of Kenya- and wrote off huge government loans owed by State-owned sugar companies. They spent billions on reviving the National Bank of Kenya.

The biggest spending happened in the roads sector. Tax and spend also made it possible for billions to flow into the Constituency Development Fund that was introduced through the Kibaki regime.

Kibakinomics was very simple: spending more on investment than consumption equals more tax collection and- therefore higher growth rates. On the monetary policy side, the Kibaki regime also effected major experiments at quantitative easing. The late Finance minister David Mwiraria woke up one morning and reduced the cash ration from 10 to six per cent which released billions for commercial banks to lend. The Treasury Bill fell to below one percent.

For the first time in many years, banks found it profitable to lend to small borrowers. Today, we are a long way from the Kibaki years where a massive and unprecedented injection in State spending galvanised the economy out of depression. Today, State spending is already too high that pumping in more can only bring diminishing returns. That the explains the paradox that we face today: more State spending and falling revenue collections.

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