Budget Office faults State's economy plan

President William Ruto. [PCS]

The Parliamentary Budget Office (PBO) has poked holes in President William Ruto’s ambitious revenue raising measures and his plans to tame the country’s appetite for debt.

The team noted that the higher tax measures contained in the Finance Act 2023 as well as other planned reforms in tax administration might shock consumers into spending less, resulting in less tax revenue.

The new taxes that include higher VAT on fuel, the 1.5 per cent housing levy fund, taxation of digital assets and increasing turnover tax for small businesses to three per cent from one per cent have been criticised as too steep, and could hinder economic growth.

Other measures that came into force with the implementation of the Finance Act and are expected to increase revenue include taxation of income drawn from digital content monetisation, limiting the deduction of foreign exchange losses, change of the threshold and rate for turnover tax, enforcement of the use of Electronic Tax Invoice Management System, expansion of the pay as you earn (PAYE) bands and withholding tax on advertising. 

These measures are expected to enable Kenya Revenue Authority to increase ordinary tax revenue to Sh2.57 trillion or 15.8 per cent of gross domestic product (GDP) from Sh2.04 trillion collected in the 2022/23 financial year, which was 14.1 per cent of GDP.

“The highlighted revenue-raising measures and others contained in the Finance Act 2023 are expected to enhance revenue collection and expand the tax base,” said the PBO in a new report.

“However, the achievement of the ambitious revenue targets is premised on the assumption that the tax measures will not alter consumer behaviour or hamper economic activity and hinder growth. Slower economic growth and the possibility of the reversal of some of the measures contained in the Finance Act 2023 might result in the National Treasury failing to meet the set revenue targets.”

The law has also been challenged in court on claims that some clauses of the legislation are unconstitutional, with the Budget Office cautioning that “if some of the tax measures contained in the Finance Act of 2023 are affected by litigation processes, the ambitious revenue collection targets may not be met.”

The government had expected to reduce the amount of loans it would take over the current financial year, instead relying more on tax collections to meet budgetary requirements.

PBO, however, noted that to reduce this fiscal deficit, it would have to meet the tax collection targets, which will depend on a strong economic performance.

The fiscal deficit as a share of GDP is expected to decline from 5.7 per cent or Sh834 billion in the 2022/23 financial year to 4.4 per cent Sh718 billion in 2023/24 financial year. 

“This is in line with the fiscal consolidation effort of the Government that is aimed at addressing unsustainable debt accumulation as well as curbing future expenditures on debt servicing. The ambitious target set for 2023/24 financial is to have a surplus fiscal primary balance as a share of GDP of 0.3 percent,” said PBO.

“It should, however, be noted that the projected reduction in the overall fiscal deficit and the resultant surplus in the primary balance is partially attributed to an ambitious projection in tax revenue collection that is pegged on full implementation of the Finance Act 2023 as well as robust economic growth. Consequently, in order to attain the fiscal deficit target, expenditure targets will need to be aligned to revenue performance if there are any supplementary budgets.”

PBO is a non-partisan professional office created to enhance the capacity of the National Assembly to scrutinise the budget and oversight budget implementation.

The Office provides technical and financial oversight.