Ideas & Debate

Three key options for fiscal policy this year

Treasury CS Henry Rotich can change tack and truly implement aggressive austerity measures. file photo | nmg
Treasury CS Henry Rotich can change tack and truly implement aggressive austerity measures. file photo | nmg 

Henry Rotich, the Treasury CS, is putting together the Budget for 2018/19, the first in the second era of devolution and in a context where a second Eurobond has been issued and there is growing concern over sustainability of Kenya’s debt.

This is also the first budget in the second and final term of President Uhuru Kenyatta and thus can give an insight into the type of fiscal legacy he intends to leave behind.
Fiscal policy over Kenyatta’s first term was defined by three main features.

The first is subpar revenue generation; while revenue generation has been growing, targets are often not met, and revenue is not growing at a rate that can effectively fund expenditure.

The second feature is aggressive growth in expenditure where the 2018/19 budget looks to be about Sh2.5 trillion, up from Sh1.6 trillion in 2013/14. This has led to the final feature of fiscal policy, which is an expanding appetite for debt. Mr Rotich has three main options for fiscal policy in the 2018/19 financial year.

Firstly, the budget can be more or less what has been done in the past. And if one looks at the February 2018 Budget Policy Statement (BPS), it seems as though this year’s budget will be more of the same.

Allocations to dockets are within similar ranges as in the past, expenditure has grown aggressively and the high appetite for debt continues. Should Mr Rotich choose to stick to this fiscal path, concerns over the country’s debt growth will continue to be voiced as it is precisely this fiscal path that has gotten Kenya to the stage at which we are now.

Secondly however, Mr Rotich can change tact and truly implement aggressive austerity measures in the context of fiscal consolidation where concrete policies are created to reduce government deficits and debt accumulation and results tracked.

Several bodies have called for fiscal consolidation and thus it would be prudent for the Treasury to heed that call. The concern over previous budgets is that the Treasury asserts that austerity measures will be implemented and spending cut, but budget implementation indicates that this does not happen.

Mr Rotich has a chance to make significant cuts in unnecessary spending, enforce fiscal discipline, allocate more money to development spending and implement measures to ensure development funds are absorbed.

The final path is one where Mr Rotich puts significant funds into President Kenyatta’s Big Four and uses expenditure to finance the sectors of health, industrialisation, housing and agriculture in order to catalyse economic growth, create jobs and reduce poverty.

Mr Rotich can present the argument that prudent and disciplined spending targeting the four dockets will put Kenya on a growth path where the country hits the Vision 2030 growth rate of 10 per cent.

Sadly, however, there is no indication of notable fiscal support to the Big Four in the February BPS. There is a section dedicated to the Big Four in the BPS but if one takes a close look at allocations, one finds no difference in allocation patterns that would indicate that the fiscal process is focused on the Big Four.

In short, the budget for 2018/19 will set the tone of fiscal policy making for the next four years and let Kenyans and the world know the extent to which the government will leverage fiscal policy to put the country on a dynamic growth path that is fiscally sustainable and catalytic.