EDITORIAL: Restrain from loading taxes on primary goods

Finding that Kenyan workers’ real earnings declined 2.9 per cent last year –the first time in five years— is a statistic that should worry policymakers and business leaders alike.

Weaker purchasing power, in aggregate, means reduced demand for goods and services and lower consumption taxes for the government.

Kenyan economy grew 4.9 per cent last year having decelerated from a 5.9 per cent expansion rate the previous year, partly capturing the impact of subdued demand.

The average real wage slipped to Sh30,750 per month, or Sh369,004 a year, down from Sh31,664, according to the 2018 Economic Survey.

Inflation-adjusted pay is technically known as real wage and is ordinarily taken as the best indicator of the workers’ ability to purchase goods and services based on prevailing prices – meaning that workers lose purchasing power with its fall and vice versa.

This year, the government has set 5.5 per cent as the growth target and to achieve that goal, inflation will have to fall from the current levels of about nine per cent to mitigate its impact on demand for goods and services such as food and electricity.

READ: Inflation, stagnant wages left workers poorer in 2017

The more popular short-term alternative is to raise wages, a position that workers will be sure to articulate on Labour Day.

Employers on the other hand have long argued that pay increments should be based on productivity.

It is obvious that a mix of carefully planned pay rises and supply-side policy interventions will work best.

It is particularly important to shield the lowest-income earners from the ravages of price growth. These categories of workers, including security guards and drivers, have traditionally received sporadic blanket pay hikes, with the government setting their minimum wages.

The challenge is that measures to keep inflation sustainably low require years to bear fruit.

The government, for instance, says it is investing heavily in irrigation to boost food security and stabilise pricing.

Besides boosting supply of critical products at lower costs, there must also be restraint on the urge to keep loading taxes on primary goods such as petroleum that also fuels inflation.

The weaker performance of companies in various sectors, including manufacturing is a warning that negative wages are not sustainable.