We must be clear on our macroeconomic policies

Macro-economic policy trend [Courtesy]

We are at a defining moment. This debate on fuel pricing could be an indicator of a lack of planning and decision capacity at the Treasury.

It is time our Government stopped being reactive and became proactive on sensitive issues such as VAT on fuel.

The national and county governments must start training a new breed of top economists just as was done immediately after independence.

Train them and seek attachments for them in developed countries so that they can learn the science and art of economic planning.

Why do I say this? There could be a well-qualified economist at the Treasury, but maybe we lost them to something we do not know.

The current state of the economy is bad and from that, we deduce poor planning.

Parliament should put the Treasury on notice, specifically, it should tell us why we are struggling to service our loans, why our economy is not expanding to create jobs for the youth.

What was their plan when they took the loans, or are they telling us that their planning models have collapsed?

How come we have loans we cannot service and we are forced to VAT petrol?

Why was petrol not subjected to VAT in the first case and why have those reasons changed?

Writing about the interaction between oil price and economic growth, economist Latife Ghalayini’s asserts that oil has always been an indicator for economic stability in modern times, largely due to the world’s high dependence on its products.

Furthermore, the price of oil is of critical importance in today’s world economy, given that it is the largest internationally traded good, both in volume and value terms (creating what some analysts have called a ‘hydrocarbon economy’). In addition, the prices of energy-intensive goods and services are linked to energy prices, of which oil makes up the single most important share.

Finally, the price of oil is linked, to some extent, to the price of other fuels (even though oil is not fully substitutable for natural gas, coal and electricity, particularly in the transportation sector).

For these reasons, abrupt changes in the price of oil have wide-ranging ramifications for both oil producing and consuming countries.

It is difficult accepting that we have good planners when our quality of life keeps on deteriorating. 

We have a Treasury that is keen on taxing us and borrowing on our behalf but appears indifferent on how that revenue is spent.

Full employment

How will this VAT push us to full employment, where every able-bodied person who is willing to work at the prevailing rate of wages is, in fact, employed?

We were taught that prices are only stable when there is full employment.

The Treasury should defend its position by explaining how this VAT will affect the demand and supply for goods and services, and I believe Kenyans will understand and support their actions.

Again, the Treasury must be loud about its fiscal policy, specifically how it is harmonising the tax policy with Government spending to achieve macroeconomic objectives.

I am not sure repaying a national debt is a macroeconomic objective.

Fiscal policy can be expansionary or contractionary depending on the level of employment.

The question is: do we need to increase the demand for services and goods or reduce it?

If the amount raised from this VAT increase was to be invested in infrastructure projects, then that would expand the economy and will benefit the citizens. 

However, it appears that this VAT might be used to service debt.

The best the Government can do is to renegotiate the debt or arrange refinancing, widen the tax base and reduce the tax rate.

Reducing tax is expansionary in nature because citizens can save and invest, and businesses can invest in new assets that will generate additional income and raise additional taxation.

Surely this is not difficult to understand.

The writer teaches at the University of Nairobi