When Austerity Measures Become the Answer: On Statements of Convenience

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“…But we still face a financing gap. This measure will not suffice to balance our budget, as required by law. It is my responsibility to put Kenyans first. I must balance between short-term pain and long-term gain.” – Uhuru Kenyatta.

“We must grow the economy, and we can only do this through additional taxes, so Kenyans must dig deeper into their pockets for this to happen.” – Henry Rotich.

When desperate situations dictate that desperate measures be adopted, then wobbly, wanton statements of convenience such as the above two become common.

I still find it ridiculous that members of the general public are up in arms against the proposed taxation measures contained in the Finance Bill 2018 signed into law by Uhuru Kenyatta.

Any sober Kenyan ought not to be surprised by the Executive’s desperate attempts to clutch at a straw considering that the Jubilee administration has a record of being in favour of contorted economic policies, a clear demonstration of its incompetence.

Economic mismanagement under the Jubilee administration is no longer news with the undemocratic process of passing the Finance Bill in the National Assembly sending a signal of a broke government managed by masters of “brick and mortar development.”

“Brick and mortar development” in this case refers to the development narrative fashioned by the current administration that hugely focuses on very costly infrastructural projects with lower returns on investment than say agriculture whose potential in terms of reducing poverty levels is quite high.

Kenya’s public finance is faced with the problem of unnecessary spending which the Executive is running around like headless chicken to curb.

It is on record that the Jubilee administration has adopted the liking for huge budgets with massive deficits. Financing these massive deficits necessitated increased borrowing in the name of prioritizing flagship mega projects none of which seems to have yielded any returns or promising to do so in the long-term.

Good examples of such projects include the standard gauge railway line and the Galana-Kulalu food security project whose dismal performances raise serious doubts on whether feasibility studies were conducted before being commissioned.

Just like business enterprises or organizations which collapse majorly due to poor cash flow management, the case is not different for countries which are brought down because of poor management of public finances.

Each spending ought to be accounted for but owing to Kenya’s disturbing public finance history then the misses in regards to spending are highly visible. It is well known that a third of the country’s budget is never accounted for, a fact ignored by the Executive and Parliament, and leads to billions of shillings being lost.

Big budgets have no merit at all if the process of accountability is not taken seriously. In as much as the Jubilee administration would want to pretend to be keen on driving the development agenda, the truth of the matter is that development cannot be achieved by failing to take into account the fundamentals that occasion socio-economic progress.

Fundamentals such as allocating financial resources to sectors where the poor eke out their living like the informal sector in addition to running a clean, mean and lean government are prerequisites for moving all people up the escalator.

One of the unnecessary narratives sold at the moment by the Jubilee administration is the legacy of one Uhuru Kenyatta premised on the 2022 succession politics. I believe his legacy was framed during his first term in office and there is nothing much he can convincingly do to be in the right books of Kenya’s politico-economic history.

With the austerity measures targeting to cut spending by Kshs.52 billion, there are grave concerns on how Treasury will plug the Kshs.600 billion deficit for the current financial year. The country’s economic woes in regards to raising revenue and spending primarily stem from the borrowing which the Jubilee administration has used as a tool to pursue its development agenda hinged on mega projects.

Economically speaking, the most suitable way to address an economic challenge is to identify its root-cause. For the current situation, the root-cause lies first in the administration’s big budgets with huge deficits and secondly, the excessive borrowing.

Fronting austerity measures would not be the ideal policy prescription to curb the budgetary constraints. Rather, the most viable policy at this time would be to heavily cut on borrowing though it is a policy that can't be used in isolation. It can best be used by combining it with significant cuts on spending. 

Governments facing financial crises have always turned to austerity policy measures as shock therapy to address their economic difficulties. Austerity measures hardly lead to economic progress since people’s levels of income in the economy do not rise in line with the tax increases. In fact, considering the tax increases that lead to a rise in the cost of living, people’s level of income actually falls.

Historically, when governments are suddenly compelled to pursue austerity policies there is no doubt that they are staring at economic crises.

Good politics, as they say, is bad economics. This has highly been exemplified by the Jubilee administration. Amid concerns that the debt level was spiraling upwards at an alarming rate due to excessive borrowing, the issue turned political with the administration defending itself on the basis of various globally approved metrics.

Firstly, the administration’s top guns and ignorant supporters would state that the World Bank’s threshold for public debt to GDP ratio for developing economies is 74%. Kenya’s current debt to GDP ratio is 60%. Secondly, unintelligent comparisons of the country’s public debt with that of other developed or strong emerging economies would be put up.

There is a fundamental problem when a country spends half of its revenue on debt repayment. Such is Kenya’s case with Treasury having allocated Kshs.870 billion towards repayment of debt against targeted revenue of Kshs.1.8 trillion for the 2018/2019 financial year.

Elementally, the World Bank’s metric on debt to GDP ratio ignores the fact that the 74% has to be considered in the context of an economy’s productivity. Kenya’s debt repayment taking half of the revenue is a sign of the economy’s low productivity.

Drawing comparisons between Kenya’s debt level with those of advanced economies misses the mark. More developed economies are highly productive and repay their debts at lower interest rates unlike Kenya.

As a matter of fact, comparing the debt situation with say USA (105% of GDP) or Japan (253%) or any other advanced economy is a statement of convenience. Folks fond of propagating this argument would never want to mention some of the African countries whose economic fortunes faltered with relatively high debt levels.

Ghana, for instance, experienced financial problems when its debt to GDP ratio hit above 65%. Mozambique’s ratio was 115% as at 2017 with the country’s economy grinding to a halt forcing government officials to endlessly knock the doors of the International Monetary Fund (IMF). Zambia’s debt to GDP ratio in 2017 was 62% yet the country is experiencing economic difficulties due to debt distress. These are examples of what the supporters of the regime failed/fail to mention.

Reality of the austerity measures has suddenly enraged the administration’s supporters to regret their voting decision. This is pretence. Jubilee has messed up the economy from 2013 and it has nothing new to offer Kenyans except presiding over more economic misery.

Uhuru Kenyatta definitely lied about short-term pain and long-term gain. Kenyans should instead prepare for long-term pain with the gain not in any way in sight.

Rotich bears the tag of Kenya’s most incompetent Treasury chief since 1963. Additional taxes cannot grow the economy, instead they are bound to increase inequality and make the society worse off.

But even as Kenyans complain loudly about Jubilee’s incompetence it should serve as a reminder on why elections are moments to evaluate those in power and vote them out for their failures. Let the administration increase taxes the way it wants after all it is the government of the so-called majority that voted without serious thinking.

Sometimes enduring moments of pain does not necessarily lead to making a gain, and that is the case when administering shock therapy (austerity policy prescriptions) to a mismanaged economy.