National Treasury Cabinet Secretary Henry Rotich poses for a photo
outside The National Treasury Building ahead of the 2018/19 budget
presentation at Parliament on June 14, 2018. PHOTO | DIANA NGILA | NMG
The budget speech for FY
2018/19 is of much interest because desires of government seem to be in
opposition. On one hand is the previously articulated intent for fiscal
consolidation and on the other, the need to finance the ‘Big Four’.
This
article will examine fiscal consolidation and assess the budget using
this lens with a focus on planned expenditure, revenue generation and
borrowing. Under fiscal consolidation, expenditure should reduce,
revenue generation increase and borrowing reduce.
Already
we can see that appetite for increased expenditure continues unabated.
Planned total expenditure for the FY 2018/19 is Sh2.56 trillion
(equivalent to 26.3 per cent of our gross domestic product (GDP). Under
the current administration, projected spending has gone up from Sh1.6
trillion in 2013/14 to Sh2.29 trillion in 2017/18 and now to Sh2.56 for
2018/19.
Clearly, expenditure continues to grow
indicating an inability to effect fiscal consolidation measures, which
are exacerbated by weaknesses in the composition of expenditure. Of the
planned spending, recurrent expenditure will amount to Sh1.55 trillion,
development expenditure is projected at Sh625 billion, and transfers to
County Governments will amount to Sh376.4 billion.
It seems the element of expenditure that has been cut is the
most economically productive, namely development expenditure. Indeed,
development expenditure will only be 24 per cent of total spending
(below the 30 per cent threshold), recurrent about 60 per cent and
transfers to counties wll account for only 15 per cent.
So
the government seems to be cutting development expenditure while
allowing the excesses of recurrent spending to continue, thus it is not
leveraging the budget to drive public spending in an economically
productive manner.
In terms of revenue generation, the
government argues that revenues will rise by 17.5 per cent to about
Sh1.95 trillion (equivalent to 20 per cent of GDP) in the FY 2018/19
from the estimated Sh1.66 trillion collected in the FY 2017/18. Part of
the ‘revenue enhancement’ steps include higher corporate tax as well as a
tax on the informal economy. What may materialise is, however, not more
revenue, but less.
Kenya already struggles with high
costs of production attributed to expensive power, transport and labour
costs, as well as endemic corruption and rent seeking. These are
dynamics that affect both big and small private sector investors.
Increasing
tax on the private sector may well push them to a level where the
combined effect of high production costs and higher taxes cut into
profits substantially reducing the total government can claim as tax
revenue.
Finally,
the government announced that in the fiscal year ending June, they
estimate a fiscal deficit of 7.2 per cent of GDP, down from 9.1 per cent
of GDP in the previous year.
Indeed, under, their
fiscal consolidation plan, the government projects the fiscal deficit to
narrow to 5.7 per cent of GDP in the FY 2018/19 and further to around
three per cent of GDP by FY 2021/22.
While this is a
step in the right direction, the government seems to have a problem in
keeping on a disciplined path of fiscal deficit reduction. Last year its
target for the 2018/19 fiscal deficit was six per cent, yet here we are
at 7.2 per cent.
The fiscal deficit of Sh558.9 billion
will be financed by external financing amounting to Sh287.0 billion,
while domestic financing will amount to Sh271.9 billion.
This
clearly indicates that domestic borrowing will be substantial. In the
context of an interest rate cap, the government surely knows that
continued heavy borrowing in the domestic market squeezes out private
sector and places upward pressure on interest rates.
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