The President’s Memorandum: Crunching the Numbers

With the stroke of a pen in a memorandum to Parliament, the President has stirred debate on complex economic jargon, created a political storm and attracted diverse opinions among experts.

But where is ‘Wanjiku’ in this and what does it all mean for her?

Ultimately, all debate narrows down to three main questions: What is the relationship between Government spending programmes and the lives of ordinary people? How do the consumption habits of microeconomic spending units (individuals, households and firms) relate to the macroeconomic environment? Who benefits and who pays?

Wanjiku and Government expenditure

To answer the first question: In reality, the Government is the largest consumer in any economy and its expenditure programmes are used to achieve certain policy objectives. In the 2018/19 financial year, the Government is authorised to spend Sh2.5566 trillion.

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As Government spends, it injects money into the economy and creates business opportunities for its people. In return, these businesses create employment opportunities for other people and pay taxes back to the Government.

Those employed also pay taxes and consume other household and individual goods and services. If that economic order is maintained, there is a multiplier effect, synergies in the productive capacity of the economy and consequently improved welfare for everyone. Any distortions in this order potent economic trouble, especially for the people on the streets.

In his memorandum, President Uhuru Kenyatta proposed cuts of up to Sh55 billion from various activities. However, the question to ask here is whether these proposals shall distort the requisite synergistic order that improves the welfare of everybody in the economy. The answer is yes. Most of the targeted programmes are implemented at the grassroots. The small businesses for youths, women and persons with disabilities often targeted in these initiatives lose out and so do the Wanjiku’s who depend on them.

The problems in our budgets are more complex and can’t be solved by cosmetic cuts. For starters, approved Government budgets only set the upper ceiling of expenditure. Further, once assented to, the budget becomes a legal document and grants authority in the approved limits. But therein lies the ‘devil’.    

The proposed taxes and their implications

Turning to question two and three, what the specific taxes mean for Wanjiku and whether they are good for economy as a whole shall depend on, one, if the individual or household consumption decisions are based on a rational choice or if it is habitual; two, if the tax has a permanent or transitory effect on the disposable income. Let’s analyse the specific taxes and their likely implication.

First, the 8 per cent VAT on petroleum products and Sh18 per litre on kerosene. These two are the most disruptive, insensitive and punish the poor the most. From the Economic Survey 2018, out of an estimated 16.9 million jobs in the economy by end of 2017, 84.3 per cent are in the informal sector, self-employed or non-paid family business. Only 15.7 per cent are in formal employment. The data excludes those engaged in rural smallscale agriculture and pastoralist activities.

The FinAccess Household Survey 2016 indicates about 2.7 million Kenyans of 16 years of age and above earned Sh0 -1,500 a month and about 90.2 per cent earned Sh30,000 and below. Only about 1.4 per cent had earnings of over Sh100,000 a month. In sum total, the net effect is to plunge the majority deeper into poverty and reduce economic activity overall.  

Increased taxes on banking, telephone and internet services

Consumption of telephone services is largely habitual and its quite unlikely consumers shall change their habits. While it’s unlikely that people shall close accounts simply because of increased excise tax, the activity level doesn’t look bright. Corporate accounts and the high net worth individuals shall bear the brunt of this.

Housing fund

The Housing Fund contribution is probably the most controversial. According to the Economic Survey 2018, the average gross salary in the formal sector in 2017 was Sh56,624 and Sh57,915 in the private and public sectors respectively. Overall, this translates to less than Sh45,000 a month net of taxes and other statutory deductions.

Now start allocating to monthly household expenditures and mortgage at a rate of the proposed Sh12,000 to Sh20,000 a month! I’m not a pessimist on average, but just what is going to be different now? But more fundamentally, is it the Government’s business to build people houses in a non-centralised planning economy?