Crafting fiscal strategy in tough Covid-19 times

Appearing on the JKL Live “At Home”, programme on Wednesday night, Business Daily columnist and respected medic Dr Frank Njenga described the coronavirus pandemic as an existential “Noah’s Ark” moment for the world.

As “phased reopening” Africa continues to mitigate, many are monitoring new infection waves in the Asia-Pacific region and Europe, and the crisis in the US, Brazil and India (which now jointly account for 50 per cent of all cases).

The search for the “Holy Grail” of a preventative coronavirus vaccine and a curative (or palliative) Covid-19 disease treatment is in full flow, as is apparent “quackery” around hydroxychloroquine, et al.

Humanity’s “post-covid/with-covid” vocabulary is hopeful. New Normal. Next Normal. Great Reset. Build Back Better (a personal favourite). New terminology too. In the 2020 Nelson Mandela Annual Lecture a fortnight ago, UN Secretary-General Antonio Gutteres spoke of an “inequality pandemic” exacerbated by two “mega-issues”, digitisation and climate change, at a time of global demographic transition. Futurists are adding health care and diversity to our “next steps for humanity” inbox.

Hope springs eternal. Leaders view the pandemic fight as war. The science speculates this thing is airborne (hence, super-infectious like those diseases we were vaccinated against as kids), with uncertainty over post-recovery immunity (so much for Covid-19 passports). Clearly, the virus is busying us in what battle-hardened soldiers call “Whiskey-Tango-Foxtrot” (WTF) moments of panicky reflection.

Six months on, more billions and trillions of stimulus flow into stabilisation and recovery in high-income America and Europe, while middle-income China, the world’s largest economy on a PPP basis, keeps its powder keg dry. Is this indebted Africa’s (and Kenya’s) “yam and knife” moment?

Let’s digress briefly. Exhausted by “corona-news”, Kenyans this week focused on the political cacophony around the third basis for the horizontal division between counties of the equitable share of 2020/21 public revenues. The politically-coined term “one man, one shilling, one vote” has been interpreted as a choice between population and geography (“many people/small space” vs “few people/big space”).

A quick examination of CRA’s new rationale around service delivery, balanced development and fiscal incentive surfaces four things. First, population has a direct or indirect weighting effect on 55percent, not 65, percent of the total allocation, as against 45 percent in the first and second sharing “bases”. Second, this increment is achieved by reduced weights for equal share and poverty, while the technical weight (fiscal incentive) is up. Third, the “space” allocation for land remains unchanged since inception.

Fourth, allowing that the actual calculation formulae for each factor were also revised, the correct focus should be how population volumes and health, agriculture, roads and urban service outcomes are linked. If this hasn’t been discussed in six Senate sessions then something else is at play. Here’s a hint.

The elephant in Kenya’s Covid-19 room is the state of our fiscus. Counties haven’t received final 2019/20 fiscal transfers totaling Sh30 billion. Without Senate agreement on the “basis”, the County Allocation of Revenue Act cannot be passed, so there’s no cash, one full month into fiscal 2020/21.

The final quarter of 2019/20 experienced a Sh90 billion tax shortfall, basically Sh1 billion a day on account of muted activity and tax reliefs. The World Bank, in its 2020 Kenya Public Expenditure Review (PER), had estimated the slowdown and tax measures would cost us 2.3 percent of GDP (Sh230 billion).

Jump into the 2020/21 budget. As presented, national government (recurrent and development) will cost Sh1.89 trillion, while all recurrent expenditure (including counties) would cost Sh1.82 trillion. This from a projected tax take of Sh1.62 trillion out of Sh1.96 trillion in total receipts. Recall that consolidated fund services (debt service, pensions, etc) of Sh1 trillion are a first charge on the consolidated fund. Add a wage bill of Sh500 billion across government.

If the tax reliefs continue as long as Covid-19 does (Sh300-450 billion shortfall?) then, connecting the dots, where’s the cash to send to counties when Senate eventually comes to agreement?

Back to yam and knife. The PER explored three fiscal scenarios for Kenya. “Business as Usual” grows debt to 68 percent of GDP (Sh8.5 trillion) by June 2022; 73 percent (Sh12.7 trillion) by 2024. A “Baseline” with rationalised spend gives us 67 percent (Sh8.4 trillion) and 65 percent (Sh11.2 trillion). “Reform” gets us to 66 percent (Sh8.3 trillion), but more happily, 57 percent (9.9 trillion) by June 2024.

The bad news is that the reform needs to start now. Wage bill, procurement and public investment expenditure rationalisation saves us 2.6 percent of GDP (Sh260 billion). And that’s only with one-third of stalled public investment projects, not all of them.

Income tax measures and a regionally harmonised VAT rate add 2.5 per cent of GDP (Sh250 billion). Removing half of income tax and VAT exemptions contributes a similar proportion. In the bank’s words, a primary (non-interest) budget surplus is feasible by 2024 (four years from now).

Yes, this is an ambitious perspective from a “knife-holder”, but once we’ve turned our stunned gaze away from the Covid-19 headlights, that’s where we need to go. We have the yam; what of the knife?

Consider this our “Build Back Better” thought for the day. As Government. As People Too.