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More budget cuts expected to meet low deficit target

NT

The National Treasury building in Nairobi. FILE PHOTO | NMG

The Treasury could be forced into steeper spending cuts than previously anticipated at the beginning of the year if it is to achieve the projected fiscal deficit of 5.7 percent by next June due to flagging revenue performance.

The government has already cut billions in the budget amidst tax rise.

Economic analysts at Commercial Bank of Africa (CBA) say in the latest weekly note that the shortfall of Sh60.5 billion in tax collections for the three months to September 2018 means the Treasury has a tight balancing act of cutting expenditure without harming the prospects of growth, with higher borrowing one of the options on the table.

Latest official statistics from the Treasury show tax revenue for the period stood at Sh320.3 billion against a target of Sh380.8 billion, with all main tax classes— income, customs, VAT and excise—underperforming due to a slowdown in economic activity and delayed implementation of some new tax measures.

“While the upward revision in the gross domestic product (GDP) figures for the country could somewhat dilute the deficit as a percentage of GDP, the fact that Treasury remains behind target could necessitate more aggressive spending cuts to keep the envisaged 5.7 percent deficit for the year in sight,” said the CBA analysts.

“Due to the likely negative impact of fiscal contraction on economic activity, the government may be compelled to borrow slightly more than expected to plug the gap.”

The deficit, which in the 2017/18 fiscal year stood at 7.2 percent, is expected to contract further to three per cent by June 2021.

In targeting a lower fiscal deficit, the Treasury has largely banked on improved revenue performance, given that the budget for the current fiscal year reflects an expansion on the previous year’s outlay in terms of expenditure projections.

However, following the back-and-forth on the new tax measures, the Treasury has scaled back some of the expenditure plans.

The cuts are, however, mainly on the development vote, leading to a caution from the World Bank last month that cutting development budget to reduce budget deficits and borrowing may stifle growth in the near future.

The World Bank further warned that these non-recurrent cuts at a time private sector is also struggling to access credit could leave the economy running at sub-optimal level.