The intense debate since the National Treasury submitted the budget estimates and Finance Bill 2023 to the National Assembly signify these are not ordinary times.

Legally, the Treasury is obligated to submit the two documents by April 30th to the National Assembly. This is provided under Article 221(4)&(5) of the Constitution.

The purpose of this stage in the budget making process is to: one, provide opportunity for relevant sector specific committees to make inputs as part of their representation responsibilities; and two, for the Budget Appropriation Committee (BAC) to facilitate a direct public participation of citizens. The Constitution obligates the BAC to take into account the contributions of the electorate in making their final report to Treasury.

It is only after this that an Appropriation Bill is tabled before a committee of the full House for consideration and approval. Parliament must approve both the Appropriation Bill and the Finance Bill 2023 before midnight, 30th June, 2023. The Constitution and the Public Finance Management Act (2012) does not contemplate any other date to pass a legal budget and the accompanying revenue raising proposals.

This year, probably driven by the sustained high cost of basic needs and thinning household incomes, the publics seem particularly alert to the government proposals. The revenue raising measures have elicited the most debate to the extend of crowding out a proper scrutiny of the proposed expenditures. Here, I address the difficult revenue choices the government faces to navigate the difficult days ahead.

Necessary evil

In an article on the complexity of designing an effective tax policy for developing countries, Vito Tanzi and Howell Zee of IMF argue that taxes are the only practical means for any government to raise revenues. Published on March 2001, they demonstrate the challenges policy makers in developing countries face as opposed to their counterparts in advanced economies.

Primarily, the central problem for a policy maker in a developing economy is threefold: to find a balance between raising essential revenues without excessive government borrowing; achieving desired revenue targets without discouraging economic activity; and establishing a tax system that does not deviate too much from other countries.

Accurate records

The bolts and nuts for an effective tax system for most developing countries crumple due to structure of the economy, complex tax administration needs, informality of the economy, and uneven distribution of income. For many developing countries, most jobs are in agricultural, small or informal enterprises with off the books payment systems. It thus becomes extremely hard to determine an accurate tax base.

Besides, workers do not spend their incomes or buy from big stores and thus no accurate records exist. Therefore, income and consumer taxes do not work, and thus play a diminishing role in these economies. Take for instance our current economic context. At least about 83 per cent of people in active economic activities are in this segment of the economy, excluding small scale farming and livestock activities.

These folks do not exist in the tax net and operate exclusively by the 'Kadogo economy'. Even regressive taxes like VAT rarely reflect in their daily transactions. That explains why the Hustler fund and the housing levy are at best only good politics and flatly bad economics.

Single sweep

A cost-benefit analysis makes many taxes impossible in highly informalised economies. For instance, it is an open secret that billions of shillings are exchanged in the 'Jua Kali sub-sector' and within the open air markets. Why does KRA not just collect these taxes? What will it take and cost to bring these folks to pay their dues to the state? Even the urban housing and rental incomes are rarely taxed; yet we know much of the stolen public funds are cleansed through this sub-sector.

A highly informal economy lacks reliable data that can inform policy choices. Poliy makers have limited ability to assess potential impact of major changes to the tax system. Thus, the only feasible approach would be a 'piece-meal' approach to tax policy reforms. This would probably explain the public uproar over the Finance Bill 2023 that attempts to make drastic and far reaching changes in a single sweep.

Finally, most developing economies suffer from not only pre-exisitng but also increasing income inequalities. The principle of equity in taxation demands that the rich get taxed more based on their ability to pay. Through higher taxes, they sacrifice as much as the poor towards the provision of public goods and services. However, due to their economic and political power, the rich are able to prevent tax reforms that target to increase their tax burden. Could this be the reason for the proposed tax exemptions for helicopters in the Bill?

Sustainable options

Though her economic policies elicit different reactions from her supporters and critics, a video clip circulating on social media captures Margaret Thatcher, UK's longest serving Prime Minister in the 20th century, arguing against high taxes. Commonly referred to as 'Thatcherism', she opines that high taxes remove power from people to the government which is bad economics.

The OECD revenue statistics report for Africa provides interesting revelation for the country's sources of income tax. According to the 2022 report, the largest source of tax revenue is taxes on goods and services other than VAT that accounted for 29 per cent in 2020. This is followed by personal income tax, VAT, corporate tax and other taxes at 26, 23, 11 and 8 per cents respectively. Social security contributions are the least.

This compares differently for OECD countries that have social security contributions as the highest source of tax revenue at 26 per cent, followed by personal income taxes that contribute 23 per cent. VAT, taxes on goods and services, corporate tax and other taxes follow at 20, 12, 10 and 8 per cents respectively.

Outside the box?

For 31 African countries included in the analysis, the highest sources of tax revenue are VAT, taxes of goods and services, corporate tax and personal income taxes at 28, 23, 29 and 18 per cents respectively.

This would explain why ordinary folks in the country are feeling the pinch of high cost of living because majority of our taxes are loaded in essential goods and services, VAT and personal income taxes. On the government spending programmes, the Controller of Budgets (CoB) report for 2021/22 fiscal year reveals a tendency towards low public investments on the part of the government.

Of total exchequer approvals for the year, development expenditures by Ministries, Departments and Agencies (MDAs) at the national level accounted for only 11.1 per cent with recurrent consuming a whooping 77.9 per cent. 11 per cent went to the devolved units that equally spend only about 26.6 on development. The half year CoB report for 2022/23 demonstrate a similar pattern with only 8.9 per cent going to development by MDAs.

Curiously, the bells of Public Initial Offerings (IPOs) that earned the Kibaki administration billions went silent about a decade ago? Is the Kenya Kwanza administration going to bring them back to life again? How much can be mobilised from the capital budget? The country still has strategic assets like the Kenya Ports Authority, Kenya Pipeline, National Oil Corporation, Kenya Airways, Kengen and other prime state agencies.

Instead of bringing the government and the people billions of dollars in return, these agencies have either been bred to almost certain death or are the play field for political and bureaucratic wheeler dealers. Doesn't this summon Treasury policy makers not to think outside the box, but instead to think without the box?