Miscalculations that make Jubilee’s economic goals back-breaking

Opinion and Analysis

 

By MOHAMED WEHLIYE

There is a clear message for the government from the recent cash crunch (which is not over yet and will resurface sooner rather than later).

There is just no room for complacency on the economy front. Better planning in allocating and managing the scarce resources is needed.

There’s no denying that this government has taken a number of steps to get the economy going in its almost three years of office, but that is just not translating into good numbers.

There are three overarching reasons, in my opinion, why the administration is struggling with the management of the economy.

Unrealistic assumptions; pie in the sky revenue projections

The Budget is an essential policy vehicle for any government. After the Constitution, it is the second most important instrument of governance. It is a crucial tool in stabilising the economy, distributing income and allocating scarce fiscal resources to address competing needs.

It is essentially the basic plan for the business of government.

Unfortunately, the National Treasury has in the last few budgets gotten the assumptions for some of its key budget features wrong. The most significant feature of the budget is the projection of tax revenues.

One of the delightful mysteries of Henry Rotich’s last budget maths is that he expects a 21 per cent jump in gross tax receipts this financial year when he actually fell short of his original target in 2013-14 from the budgeted estimate.

So the Treasury is essentially saying that tax revenues will go from a negative position to plus 21 per cent in a year in which no one is expecting a spectacular growth of the economy.

The National Treasury has, in fact, overestimated revenues in the past three financial years which resulted in missed targets by the Kenya Revenue Authority (KRA) and resultant increased borrowing to cover for the revenue gaps.

The major weakness in the tax revenue projections is that Treasury simply calculates nominal GDP, grows it at a figure that looks like they have picked from thin air — normally an IMF one used for debt stress testing — and then sets the KRA a 20 to 21 percent of the resultant GDP figure as a tax revenue target.

The KRA normally would not meet such a target because the GDP growth rates used is not based on either income or expenditure side calculations.

Interestingly, at some point during the financial year, the National Treasury would come to its senses and revise its economic growth projections but the KRA’s target would remain based on the original flawed assumptions; thus throwing the authority under the bus whenever there is a funding gap.

This, of course, means the funding shortfalls have to be met through more borrowing which then exacerbates fiscal indiscipline and affect the quality of spending. To avoid this kind of a problem, the National Treasury should treat expenditure rather than revenue as a residual item. Finalise the size of the purse, first.

The National Treasury should forecast revenue on the basis of projected realistic economic activity levels, add non-tax revenue and the desired levels of borrowed resources to the product budgeted deficit so that domestic resource mobilisation and borrowed resources to finance the fiscal deficit, and determine the size of the purse available to the government to finance its expenditure plan.

With a known purse, it becomes much simpler to finalise expenditure with little chance of slippages.

Spreading money thinly across projects to near doing nothing

Rather than first putting runs on the board, the administration decided to make so much haste to accomplish everything it promised in one breath and in the process risking doing nothing at all.

The government is undertaking 52 major projects that will require over Sh1.2 trillion to complete.

This financial year budget has Sh294 billion for these projects. Assuming 10 per cent cost overruns and six inflation (compounded), if the government continues to allocate resources at this level, it will take eight years for these projects to be completed.

This is assuming no new projects are introduced in subsequent budgets and that the growth in government investments continues at the current unsustainable levels of six per cent of GDP.

What all this means is that accumulation of capital (gross fixed capital formation) is exceedingly low in spite of high government investment because the planners have spread the money too thinly across too many projects.

Without the accumulation of capital, total factor productivity can only reduce in the long run as the current capital depreciates, becomes obsolete and such problems as traffic jams constrain economic growth.

As President Uhuru Kenyatta’s own office now takes charge of budgeting and prioritisation of resources, there is an urgent need to address this issue and ensure spreading resources too thinly across key government projects does not lead to a situation where infrastructure development is not in tandem with economic growth.

Consumption rather than development expenditure

The rate of growth of recurrent expenditure is now outstripping that of internally generated revenues.

Whereas average growth in tax revenue over the last three years was at 14.8 per cent, government consumption grew by 15.7 per cent in the financial year 2014/15.

Government consumption has grown by an average of six per cent in the years before the Jubilee Administration took office.

If the national government’s recurrent expenditure continues to increase by many folds without the trend of revenue growth improving, then we are in for an economic upheaval.

The Operations and Maintenance (O&M) of the national government has also grown at an average of 20 per cent since 2013/14 while the five years before that it was growing at an average of 13 per cent.

What all these means is that there is a deliberate trend of reallocation of resources to consumptive rather than developmental expenditure at a time when GDP growth averaged only 4.8 per cent over the last three years.

Increasing government consumption is also not helped by the fact that what is being set aside for development is not all being spent.

There is a low absorption rate for development expenditure at both national and county government levels which averaged 52 per cent and 63 per cent respectively in the last financial year.

What this means is that in spite of making plans, budgeting for them and providing the money in the budget, both levels of government are unable to spend development resources.

This obviously has a systemic drag on the economy especially considering that development resources are borrowed. The government needs to enact law that penalises officials who fail to use development budget on time.

Otherwise capital budget use will continue to remain low and that will continue to negatively impact on economic growth.

It is in its own interest that the administration seeks more involvement of other stakeholders such as the parliamentary budget office (PBO), relevant professional bodies and think tanks during budgeting.

Budget targets are meant to be practically achieved, not just presented to the general public. Budget assumptions also need not be secret.

Projecting budgetary targets with a fair degree of accuracy is an essential element of sound fiscal management and discipline.

Wehliye is senior vice president, Financial Risk Management, Riyad Bank, KSA.