It will be a tough balancing act for Treasury Cabinet secretary Henry Rotich tomorrow when he unveils funding proposals for the next financial year’s Sh3.08 trillion budget.
Rotich will present his Budget Statement to Parliament amidst dwindling tax collections, revenue leakages, an economy soaking up more debt despite hitting headroom and inflationary pressure fears.
He will also have to figure out how he will plug the budget deficit even as wastage of public resources and corruption remain key concerns.
With such tight fiscal space, experts say Treasury will put pressure on the Kenya Revenue Authority (KRA) to increase revenue collection and seal leakages in the new financial year, which begins on July 1.
Widen tax base
However, fears abound because KRA has been unable to meet collection targets in recent years despite digitising administration to make it easier for taxpayers to remit money and widening the tax base.
In 2014/15 financial year, KRA missed the revenue target by Sh86 billion, in 2015/16 by Sh12.4 billion, 2016/17 by Sh66.6 billion and in the last financial year by Sh105.9 billion.
In the 2017/18 financial year, KRA was tasked to collect Sh1.499 trillion which was revised downwards to Sh1.439 trillion and further reduced to Sh1.415 trillion.
However, despite the downward revisions, KRA managed to collect Sh1.37 trillion.
Ernst and Young Partner Francis Kamau said Rotich must increase the tax target, adding that the CS “will have little choice but expand the pool of taxpayers and task KRA to aggressively collect tax”.
Of the Sh2.08 trillion total domestic revenue projection in 2019/20, Sh1.877 trillion is expected to come from local taxes and Sh203 billion through Appropriations-in-Aid (AIA).
“Apart from expanding the tax base by casting the tax net wider, Treasury must also cut down on government spending, and withhold new projects until ongoing ones are completed,” says Raphael Matu, an economist.
The 2019/20 budget deficit is higher than the Budget Policy Statement (BPS) approved ceiling by Sh78 billion, indicating Treasury’s propensity to spend despite the need for austerity. The higher expenditure levels have been accommodated through upward adjustments in the revenue projections from the BPS level by approximately Sh35 billion.
Revised total revenue in 2019/20 is projected at Sh2.1 trillion from the BPS 2019 projection of Sh2.08 trillion.
Should Treasury increase taxes, the action could spike the cost of living on the already overburdened Kenyans. However, the CS has limited options on tax increase.
Ernst & Young official Christopher Kiraithe warns that the CS has in the recent past introduced new taxes and effected increases, which have been challenged in court, such as the Housing Fund Levy and Robin Hood taxes.
Allocate resources
“Capacity for any additional tax increases or introduction of new ones seems remote both economically and politically, and with the penchant by Kenyans to challenge new taxes in court, this would not be a favourable option,” he warned.
PFK consulting partner Michael Mburugu said the government should put in place tax measures to improve compliance and efficiency in administration, while at the same time creating a conducive environment for business to grow.
“It is time to give serious thought on systems at KRA to strengthen governance, motivate staff and build an efficient result-oriented tax authority,” he said.
Despite a ballooning public debt, Rotich will be in the market for more borrowing, a move that is bound to sink the country deeper in debt that has now surpassed the Sh5.5 trillion mark.
According the Budget Statement 2019, Treasury will shift from domestic to foreign borrowing, and more importantly, seek to lengthen the repayment period.
“This is useful because: first, it stops government from crowding out private sector, meaning MSMEs can access credit and secondly, it will drive economic growth,” said Robert Waruiru from KPMG East Africa.
By lengthening the debt maturity period, government spending on debt repayment is eased and Treasury can allocate more resources to development.
But should Rotich move to bring more taxpayers into the bracket, it could spell doom due their cash flow position, which has been adversely affected by slowdown of credit from banks.
Despite tough choices, Rotich has a number of “safe” options to achieve a balanced budget. Waruiru said demonetisation of the Sh1,000 notes could give KRA a window of opportunity to collect taxes. Rotich can also speed up privatisation of state-owned enterprises that continue to gobble up resources since they are financed through the exchequer.
This can be achieved through listing of shares at the Nairobi Securities Exchange.
