Treasury budget projection recipe for failure

National Treasury Building. [Jonah Onyango, Standard]
The draft budget policy document is available on the Treasury’s website. The document outlines the government’s projected expenditures over the next few years. And since budget is policy, the document’s contents reveal the government’s intentions as far as steering the economy and creating incentives for private sector investment are concerned. A few things stand out and are therefore worth consideration here.

The Treasury’s budget policy statement betrays what most reasonable people would consider to be unwarranted optimism. Consider the deficit – the difference between the government’s net revenues and expenditures. The document projects a reduction in deficits from almost 8 per cent of total output (GDP) in the fiscal year 2018/19 to around 3 per cent by 2023/24. Is that possible? Not likely. We are about to enter a heated campaign season – for a possible referendum and then the General Election in 2022. Both will necessarily require significant outlays to please voters. It is highly unlikely that the Jubilee administration will be disciplined enough to tighten its belt under such circumstances. We are already seeing this with the return to roadside pronouncements from the president committing Treasury to spend billions of shillings on his pet projects. This will only get worse as the president battles to secure a favorable successor and salvage his legacy. Expect significant levels of wasteful spending in the name of the Big 4 Agenda. All to say that it is highly improbable that fiscal policy will match Treasury’s rosy projections.

The other assumption worth scrutinising is the size and nature of economic growth. The Treasury’s projections expect growth rates to fluctuate between 6-7 per cent over the next four years, and that government revenue as a share of GDP will be 18.4 per cent throughout the same period. There are two reasons to doubt these growth figures. First, the global economy is not as healthy as the Treasury appears to believe. Second, it is common knowledge that our growth trends over the last few years have been powered by significant public infrastructure investments. As the government cuts back on these outlays in the name of fiscal consolidation, overall growth is likely to suffer. The anaemic private sector is in no position to fill the void left by the government. Under the circumstances, it will be very hard to clock 6-7 percent growth.

Notice that the government’s revenue projections and ability to reduce the deficit are both dependent on growth. The idea is that a growing economy will spur enough new private sector sources of the revenue to keep the share at 18.4 per cent of total output, even as GDP rises. But so far, the track record tells a different story. Growth in GDP has not been matched by growth in revenue. The Kenya Revenue Authority (KRA) keeps missing targets. The Treasury’s proposed reforms will take some time to implement, and are likely to fail. It is hard to believe that nearing an election year, the government will suddenly begin cracking down on tax evasion.

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The first step of having a rational public finance management system is to be honest with the numbers. If we keep lying to ourselves about the true state of the economy, what ails it, and what we need to do to turn things around, we will soon run out of runway. I hope that Bunge will now comb through the Budget Policy Statement and force Treasury to accept the truth and act accordingly. Kenyans deserve an honest and numerate government.

- The writer is an Assistant Professor at Georgetown University

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