Reality dawns on Treasury over tax revenue targets

The National Treasury has been forced to eat humble pie, admitting for the first time that they have been pushing the revenue collection target to unrealistic levels.

Acting National Treasury Cabinet Secretary Ukur Yattani said they had since learnt from the years of revenue shortfalls that they have been setting targets too high.

As a result, he told National Assembly’s Budget and Appropriations Committee, Treasury had decided to cut the target for the current financial year.

Mr Yattani, who has so far impressed some analysts with his candidness particularly on the country’s debt situation, might have scored yet another point.

For a while, Treasury officials have refused to acknowledge the unmet tax collection targets, which have resulted to increased borrowing to plug the deficit.

The Treasury had set a tax collection target of Sh1.8 trillion in the current financial year, despite Kenya Revenue Authority (KRA) missing last year’s revised target by about Sh100 billion.

“To avoid going back, making budget based on false assumptions, this time we have decided to be realistic. We know our deficit last year, we know our deficit for many financial years,” said Yattani. “So we have adjusted our revenue estimation to a figure that is near realistic.”

He said he will reveal the new tax collection target soon. In the meantime, the Treasury is in talks with KRA to come up with the target, as the new leadership at the Exchequer strives to clean the fiscal mess that was left by suspended Cabinet Secretary Henry Rotich.

“Revenue has been underperforming for the last 10 years,” said Yattani when he met a section of MPs on Friday to review the Government’s revenue performance in the first three months of the year.

The revision of target was welcomed by the chairperson of the Budget and Appropriations Committee Kimani Ichung’wa.

“Definitely, we are living in hard times and hard times call for hard and difficult decisions to be made,” said Mr Ichung’wa.

“We had expressed concerns at the beginning of this financial year through the budget reports... on revenue estimates for 2019/20. And we are glad that the National Treasury has now come to that realisation,” added the MP for Kikuyu Constituency.

Jibran Qureishi, the Regional Economist at Stanbic Bank, also lauded the move. “That is the right thing to do,” said Mr Qureishi, adding that the fiscal consolidation that is currently being undertaken needs to be aligned with the need for economic growth.  

Yattani is getting credit for the reforms he has so far unveiled since his and Principal Secretary Julius Muia’s arrival at the Treasury to replace Mr Rotich and Kamau Thugge.

The Treasury has also proposed that Kenya moves from having a debt limit that is pegged on gross domestic product to an absolute figure of Sh9 trillion, which Yattani insists will encourage transparency on debt.  

The National Assembly has already approved the changes and the Treasury is awaiting the decision of the Senate.

Simon Kitchen and Vinita Kotedia of EFG Hermes Holding, in a research report, noted that Rotich’s departure seems to have unlocked a number of things.

“We understand that economic coordination has improved since Rotich’s departure, potentially easing the path for the rate cap reform, renewed fiscal consolidation and future IMF talks,” said the researchers in a Strategy Note.

But the analysts raised fears about impending political temperature as the prospect of a constitutional referendum increases. This is based on the heated conversation around the law reforms, with the political rivals pulling in different directions.

They noted that although Kenya stands out in undertaking fiscal reforms, its debt-to-GDP, currently at 63 per cent, still remains high among its peers including Rwanda, Uganda and Tanzania.  

The decision to reduce the tax targets has informed the recent austerity campaign, which will see a number of discretionary expenditure including foreign travel, advertisement, training and advertisements slashed by half.

About Sh131 billion has been taken away from State corporations, including Sh78 billion from agencies’ savings and excess funds.

Those proposals will soon be brought to Parliament through a supplementary budget. There were reports that the meeting on Friday between the Treasury and MPs was about these spending cuts but Ichung’wa denied such a discussion featured. Yattani himself has come short of accusing his predecessor of the growing debt burden, noting that it will not be business as usual as far as borrowing is concerned.  

“I want to assure you that we are not only serious, but we have no other option. Because we have to live within our means,” he said.

“We cannot continue borrowing. And the easier route is that we cut down on our expenditure,” said the CS, noting that while they have no leeway on cutting salaries and statutory deductions, there were things ministries could do without.

On Friday, he said revenue performance in the first quarter of the current financial year had recorded improved performance with 12.6 per cent growth. “This is as a result of additional measures that KRA with the support of Treasury has put in place, particularly in the areas of automation. Treasury has also allocated more resources for KRA and the various outreach engagements have gone a long way in supporting this process,” he said.

“We are also able to gauge the expenditure. We are 23 per cent this quarter, and ideally we are supposed to be at 25 per cent, which is within the range.”

The former Marsabit governor talked of measures they have come up with in support of a rationalised budget. Austerity measures are in areas with discretionary powers such as foreign and domestic travel, advertisement and supply of newspapers. “It is painful but unavoidable, we have no other option,” said Yattani.

Other than the ministries, departments and agencies (MDAs), other entities that do business with them such as hotels and media houses will also feel the pinch as Government reduces its spending.

The Treasury plans to reduce the fiscal deficit to Sh578.3 billion (about to 5.1 per cent of GDP) in the 2019/20 financial year and further to Sh504.5 billion (equivalent to 3.1 per cent of GDP) in 2022/23.

In the last financial year, recurrent expenditure –­ spending on salaries and administrative costs –­ increased to Sh1 trillion, up from Sh913 billion recorded the previous year, even as taxes stagnated.

As a result, the country’s fiscal deficit –­ the difference between revenues and expenditure –­ widened to 7.4 per cent of GDP .

This saw Kenya’s stock of public and publicly guaranteed debt surge to Sh6 trillion as August.

Treasury borrowed Sh770 billion in the 2018/19 financial year that ended in June, against an initial target of Sh635.5 billion, or 6.3 per cent of the GDP, as increased wages and interest on loans forced the country back into the debt market.

This was a growth of 15.2 per cent from Sh5.039 trillion recorded in the previous year to Sh5.8 trillion debt in the period under review.

Most of the new loans during this period were external, with foreign debt rising to Sh3.13 trillion after Kenya received Sh110 billion, mostly from the World Bank and African Development Bank.

The Treasury borrowed Sh90 billion from local investors for budgetary support which saw domestic debt reach Sh2.87 trillion, data from Central Bank of Kenya shows.