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Austerity fails to contain public spending pressure

National Treasury building
The National Treasury building in Nairobi. FILE PHOTO | NMG 
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Despite freezing new development projects, instituting budget cuts and a freeze on hiring, the National Treasury was unable to tame State expenditure.

Budget Review Outlook Paper published by the Treasury shows it only managed to save Sh149 billion by mostly cutting on pension, operations and maintenance.

It saved Sh39.3 billion on development spending, confirming doubts that it could not renege on project commitments after President Uhuru Kenyatta announced that all new projects would be frozen until ongoing ones are completed in July last year.

The Treasury had estimated that hundreds of billions would be freed up by the order but ended up splashing Sh300 billion on projects.

“Some of the policy measures that the Government has been implementing include adoption of the zero-based budgeting process, adoption of the “no new projects” policy, a review of portfolio of externally funded projects to restructure and re-align them with the “Big Four” Plan and reducing spending on programmes, which are not of high priority,” acting Finance Secretary Ukur Yatani said.

The budget assessment shows that the Government saved Sh13.8 billion on pension following an exercise to weed out ghost retirees.

A two-month census that started in February did not capture about 50,000 pensioners, with the Pensions Department confirming that 40,000 of them are dead.

The Treasury also managed to save Sh10.5 billion in wages and salaries which may be partly due to a freeze in employment and payroll cleaning to weed out ghost workers.

In April, President Kenyatta said the National Police Service Information Management System listing weeded out 5,000 ghost workers and saved the country Sh1.8 billion annually. The budget records show that the Government made the biggest cut in operations and maintenance where the Treasury cut Sh65.2 billion of expenses.

But even as the Government made efforts to cut spending, revenues fell further by Sh123.5 billion, cancelling out the gains and pushing the Treasury to borrow Sh721 billion from a target of Sh650 billion.

The Treasury has this year again announced new round of budget cuts on non-essential items like trips, training and car expenses but many feel this may be cosmetic in terms of delivering an affordable budget. “My thinking is that unless there is a commensurate spending cut through subsequent Supplementary budget(s), we are likely to see “austerity” taking the form of kick-the-can-down-the-road spending by the respective MDAs (Ministries, Departments and Agencies). This was the case in the previous budget cycle which also had the hallmarks of austerity at the front end, yet we underwent two mini budgets which further swelled the overall spending,” Churchill Ogutu Senior Research Analyst at Genghis Capital.

When governments run out of money to spend and room to borrow, they either find new avenues to raise taxes or cut expenditure.

For the last couple of years, the National Treasury has pursued a policy of consolidation based on the hope that the country will raise more revenues, after all the GDP— sum of goods and services produced in the country was growing at an average of 5.7 per cent over the last five years.

If the GDP was rising, then surely taxes would automatically go up. But this has not happened and instead revenue as a portion of GDP has shrunk.

The World Bank, in the Kenya Public Expenditure Analysis 2019, argues that change in tax policy and administration including iTax, integrating IFMIS and NHIF, rollout of integrated Customs management, and expansion of tax bases, is inadequate to raise significant revenues under the current structure of the economy.

Agriculture, which makes up a third of the economy, contributes only 2.6 per cent of Kenya Revenue Authority taxes, making it difficult for revenues to keep up with the country’s growth. “Tax revenue as a share of GDP has decreased from (18.1) percent of GDP in FY2013/14 to (15.7) percent in FY2017/18,” World Bank said.

The Treasury knows that its easier to hope revenue will grow than to cut expenditure since State- led expenses are sticky.

A government elected on political promises will always want to spend, and austerity can only save a few coins on tea and samosas.

Firing public servants will require monumental costs of sendoff packages, may be politically suicidal and leads to poor service delivery in essential goods as most employees work in schools, hospitals and security forces.

“As at the end of FY 2018/19, expenditures by the Ministry of Education, the Teachers Service Commission and Ministry of Health (Social Sector) accounted for 44.6 percent of total recurrent expenditure, while the State Department for Interior and the Ministry of Defence accounted for 10.4 percent and 9.8 percent of total recurrent respectively,” Mr Yatani said.

Continued wage agitations from among others, nurses, teachers, doctors, Members of Parliament, and award of police housing allowances could add fiscal pressures and raise the wage bill. The World Bank said although the Kenyan government remains committed to a planned fiscal consolidation pathway, which should help contain public debt stock at a sustainable level, its promise for Big Four Development plan may hamper the targets.

“There are significant challenges stemming from a slowdown in revenue collection, a growing demand for transfers to county governments, and the need to fund the Big 4 agenda. These issues raise the probability for fiscal slippages, requiring adequate mitigation to safeguard macroeconomic stability,” the World Bank said.

Then there is a problem that only amendment of the new constitution can fix. More than half of the Kenyan budget has been written into the constitution, including debt, county transfers and salaries of top State officials as money that must be spent before anything else.

The World Bank said approximately 68 percent of the central government budget is on items of high to medium rigidity (items that cannot easily be adjusted due to high judicial, political or social costs).

Spending on recurrent items such as transfers (to counties, State owned Enterprises (SoEs), Parliament, and the Judiciary), interest payments, and compensation of employees presents a large portion of expenditures that is implicitly non-discretionary and undermines ability of the Government to re-allocate resources to say the Big Four priority sectors.

The World Bank now recommends that the Government prioritise completion of ongoing investment/development projects, clearance of any pending bills and arrears owed to suppliers. “Ensure promptness in payments for government supplies to de-risk contracts and general supplies to government,” the report reads.

The Bretton Woods Institution is also calling for improvement on budget execution and absorption of development budget by building staff capacity for project appraisal, selection, budgeting and implementation across all levels of government.

Kenya must also contain growth in the wage bill by cleaning the payroll register (to ensure it reflects current staff establishment), ensuring that personal allowances are in the base wage, and restricting new hires to critical and technical services (for example teaching, security and healthcare).

Counties must also strive to raise their own income to reduce dependency on the Government while State organs must cut wastages, ensuring value for money in procurement, and tightening public financial management systems.

Lastly, the World Bank says the Government should find ways to onboard private companies to fund Big Four projects though public private partnership initiatives but must first improve the regulatory environment and have appropriate incentive structure (or a risk sharing mechanism).

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