Monday, 3 April 2017

A Review of the 2017/18 Budget Policy Statement

The Budget Policy Statement, otherwise commonly referred to as the government budget, is a policy edifice that reveals how the government plans to raise revenue and how it intends to spend the revenue that it anticipates to collect. On Thursday March 30th this year, the Cabinet Secretary in charge of The National Treasury Henry Rotich presented in the National Assembly the fifth budgetary estimates under the Jubilee administration. The trend set by the current administration, a liking for highly ambitious budgets, again took centre stage when Mr. Rotich presented the 2017/2018 Budget Policy Statement (BPS). Since the inception of the Jubilee administration the highly ambitious budgets that have been drafted by The National Treasury with instructions from the Executive have led to a steady increase in the level and/or amount of the total public debt.

A budget being a supreme policy tool is at the same time a political tool; the policy-making process is not insulated from the political forces and the political process. This is primarily based on the simple logic that the President would always want to oversee the allocation of funds that would facilitate the implementation of the development projects especially those that were part of the campaign pledges. 2017 being a year that the Kenyan polity is expected to have general elections, the budget as obviously expected outlined the agenda of the current administration ostensibly to have an edge as far as the re-election of President Uhuru Kenyatta is concerned.

CS Rotich with Budget Appropriations Committee chair Mutava Musyimi (Left) and CS Devolution Mwangi Kiunjuri (Right) before presenting the budget.
Image: Courtesy
Termed as a pro-Wanjiku budget by those who politically orient towards the Jubilee administration and pronounced as a populist policy/development agenda by the members of the opposite side of the political divide, it is vitally important to stick to the available facts and at the same time avoid fictitious information. The 2017/18 budget amounts to Kshs.2.643 trillion which represents the largest budget ever in Kenya’s history. Out of the Kshs.2.6 trillion that the government is planning to spend it can only manage to finance this expenditure by Kshs.1.549 trillion which is the total amount of revenue that is expected to be raised by the Kenya Revenue Authority in the next financial year. However, the total amount of revenue that is inclusive of the Appropriations-In-Aid (AIA) or grants is expected to be Kshs.1.704 trillion.

With expenditure expected to amount to Kshs.2.6 trillion and the total revenue at Kshs.1.7 trillion, this creates a budgetary deficit of Kshs.880.4 billion. It is important to note that CS Rotich was very economical on the total amount of expenditure and net lending for the next fiscal year, 2017/2018. According to the budget statement that he presented in the National Assembly, the total expenditure and net lending for 2017/18 is Kshs.2.287 trillion with a fiscal deficit of Kshs.524.6 billion. There is something that the CS never wanted to reveal to the Kenyans who are seriously concerned about the state of affairs in this Republic. The purported deficit of Kshs.524.6 billion was arrived at after leaving out the exact expenditure of the county governments. With the inclusion of the expenditure by the county governments the fiscal deficit amounts to Kshs.880.4 billion.

The Overarching Positives
There are a number of positive policy proposals that stand out from the 2017/2018 Budget Policy Statement (BPS) from a macroeconomic standpoint. The manufacturing sector is a crucial sector in terms of accelerating the economic growth and structural transformation of an economy. Over the years, a number of policy proposals in view of the sector have always been drafted so as to inject a high degree of vibrancy into the sector. Earlier on, such policies fronted for the establishment of the Export Processing Zones (EPZs) and currently, the establishment of the Special Economic Zones (SEZs) in Lamu, Mombasa and Kisumu.

Provision of incentives such as exemption from Value Added Tax (VAT), periodical reduction in the corporate tax rates, quality infrastructure and one stop shops for licenses as outlined in the Budget Policy Statement (BPS) will pave way for the establishment of the SEZs. For instance, the CS National Treasury made the following proposals to create an enabling environment with respect to the SEZs:
  • ·   Amendment of the Income Tax Act to exempt the dividends paid to non-residents by the firms located in the SEZs.
  • ·         A reduction of 15% to 5% of the withholding tax on interest payable to non-residents by the SEZ-located firms.
  • ·   Allow SEZ firms to deduct 100% of the investment cost of building and machinery.
  • ·    Exempt goods imported by SEZ firms from export duty and exemption of imported goods from Import Declaration Fees by the same firms.

Furthermore, the current administration seems to be focused on positioning Kenya as a vehicle assembling hub in the region as evidenced in the Budget Policy Statement (BPS). The CS made a proposal to amend the Income Tax Act so as to reduce the corporate tax for new vehicle assemblers from 30% to 15% in the first five years of their establishment. In addition, the proclamation by the CS on the completion of the Comprehensive Automotive Industry Development Policy and the Automotive Industry Development Plan will be key in promoting the growth of the vehicle assembly industry.

Food security has been and is still a big challenge for the country because of the prevailing inconsistencies in the implementation of the existing food security policies. To promote agricultural production, the irrigation projects have been allocated a total of Kshs.6.3 billion while the fertilizer subsidization programme has been allocated Kshs.4.1 billion.

The 2017/18 BPS presented a win for a significant number of the low income earners. This is in view of the expansion of the tax band by 10% and increase of the tax relief by 10% implying that a significant number of the low income earners will be exempted from paying income tax. As a result, the lowest taxable income has been raised from Kshs.11, 135 to Kshs.13, 486 per month. In addition to these tax exemptions and reliefs, the next financial year will also see the low income earners continue enjoying tax exemption on bonuses, overtime allowance and retirement benefits that were effected in the on-going fiscal year. Holding other factors constant, this will increase the level of disposable income for the low income earners though it comes out as a policy meant to gain political mileage as these earners form the largest proportion of the voters who turn out to vote.

CS Rotich presenting the Budget Policy Statement in the National Assembly.
Image: Courtesy
Amid the hue and cry of the majority of Kenyans on the rising cost of maize flour and other food stuff, The National Treasury CS scrapped off the input tax charged on maize and wheat flour by zero-rating the two commodities. This implies that the prices of maize and wheat flour need to decrease significantly. The maize that will be imported in the next four months will be exempted from import duty which in effect implies that common end products from maize and wheat flour need to be relatively cheaper. The CS put on notice the county governments which have perfected the act of double taxation. This has created a hostile business environment.

The continued investment in infrastructure is vitally important in enhancing the productive capacity of the country’s economy. In the 2017/18 BPS, Kshs.134.9 billion has been set aside for roads, Kshs.75.6 billion for the development of the Standard Gauge Railway, Kshs.10 billion for the LAPSSET project, Kshs.2.6 billion for the expansion of airports and Kshs.16.4 billion for expansion of the energy projects.

Macroeconomic & Fiscal Concerns
There are sensitive issues which are supposed to be looked at objectively as far as the BPS is concerned. The first issue is the accumulating level of the total public debt which, according to the latest statistics by The National Treasury, stands at Kshs.3.827 trillion. Whether using the fiscal deficit of Kshs.880.4 billion or Kshs.524 billion, the level of public debt is set to hit the Kshs.4 trillion mark at the end of the first quarter of the 2017/18 financial year. Despite constant reassurances that the public debt level is sustainable, the situation will sooner or later run out of control if the level of borrowing is not checked.

The capping of the interest rates has no doubt resulted in relatively lower levels of credit advanced to the private sector especially the small and medium-sized enterprises (SMEs). The CS informed Kenyans as he tabled the BPS that the government in conjunction with the Kenya Bankers Association will commission a study to ascertain the impact of the interest law caps. To me, that would be a waste of time as the effects have already been felt. It will be economically prudent to do away with the caps on the interest rates if at all employment opportunities are to be created by the SMEs. As long as the interest cap is in place, the banks will comfortably lend money to the government at the expense of the private sector, more specifically the SMEs.

Another key concern is the rate and level of absorption of the budgeted finances. Research statistics indicate that only 60% of the finances set aside for development purposes are absorbed. The rest is either returned to The National Treasury at the end of the fiscal year or misappropriated/embezzled. Compound this with the fact that close to one-third of the national budget (expenditure) is never accounted for. This calls for the need to exercise financial prudence by the government institutions. In addition, the Office of the Auditor General must be guaranteed of its institutional independence in order to fast track the auditing of the accounts of the national government offices.

The public wage bill issue will still be fundamental in the 2017/18 fiscal year. If only 2% of the country’s population composed of public servants is paid 50% of the total revenue then it implies that out of the Kshs.1.5 trillion expected to be raised by KRA around Kshs.750 billion will go towards the payment of salaries and allowances. As a consequence, this has necessitated the freezing of employment apart from the security personnel, health workers, teachers and a number of technical staff as outlined in the BPS. The policy recommendations of the Salaries and Remuneration Commission (SRC) ought to be implemented to the latter but I am pessimistic because political expediency may override this matter of national importance.

The Bottom Line
At the end of the day, the implementation of the policy proposals highlighted in the 2017/18 BPS will truly determine if indeed the government is committed to creating jobs and delivering a better life for all Kenyans as per the thematic outline of the BPS presented by CS Rotich. This is especially the case with the food security measures and the proposals to establish a vibrant manufacturing sector in the country. The common denominator therein lies on the level of political will that will be exercised by the Executive and Parliament.

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