How Treasury plans to raid your pockets to finance Sh4.2tr budget

Financial Standard
By Macharia Kamau and Esther Dianah | Feb 20, 2024
Treasury CS Njuguna Ndung'u. [Elvis Ogina, Standard]

The government plans to spend Sh4.2 trillion over the next financial year, an increase of 7.7 per cent from Sh3.9 trillion that it expects to have spent by the end of the current financial year that closes on June 30. 

And to finance this, the government will come down even harder on Kenyans, seeking more taxes, with the Kenya Revenue Authority (KRA) having been given a higher target.

The taxman is expected to raise Sh2.948 trillion over the 2024-25 financial year in ordinary revenue, which is 12.5 per cent higher than Sh2.62 trillion that KRA is supposed to collect in the current financial year as ordinary revenue. 

The National Treasury in its Budget Policy Statement for the 2024-25 financial year said KRA would achieve this target through a mix of factors that include widening the tax base and improving tax compliance.

“The overall expenditure and net lending is projected at Sh4.188 trillion compared to a projection of Sh3.9 trillion in the FY 2023/24 budget,” said Treasury in the Budget Policy Statement, adding that while actual spending will go up compared to current financial year, government expenditure as a share of GDP for the 2024-25 financial year is projected to decline to 23.2 per cent from the projection of 24.2 per cent of GDP in the 2023-24 financial year.

The Treasury said total revenue for the year including Appropriation in Aid (A-i-A, which are funds collected by ministries and government agencies) will reach Sh3.435 trillion up from a projected Sh3.07 trillion over the current financial year. 

Ordinary revenue, which is what KRA collects through taxes, will increase to Sh2.948 trillion or 16.4 per cent of GDP up from the Sh2.62 trillion or 16.3 per cent of GDP that the taxman is expected to collect this financial year. 

“Revenue performance will be underpinned by the ongoing reforms in tax policy and revenue administration measures geared towards expanding the tax base and improving tax compliance,” said Treasury. 

The reforms are part of the medium-term strategy that is expected to see KRA increase total collections to Sh4 trillion  in the coming years. 

Total revenues including the ministerial appropriation in aid, are expected to increase to Sh3.44 trillion by the next financial year, go up to Sh3.83 trillion in the 2025.26 financial year and reach Sh4.38 trillion in the 2026-27 financial year. 

Treasury said the objectives of the Kenya Kwanza Medium-Term Revenue Strategy (MTRS) are to improve efficiency in revenue administration, ensure equity and fairness in the tax regime and enhance tax-payer compliance with tax obligations.

It also plans to expand the tax base, create certainty in the tax regime to attract investment and promote investment across various sectors by removing market distortions.

“The implementation of MTRS is expected to among others raise revenue to GDP ratio from 14.3 per cent in 2022-2023 financial year to 20.0 per cent by end of the 2026-2027 year,” said Treasury.

It is also aimed at increasing the tax compliance rate from 70 per cent in 2022-2023 to 90 per cent by 2026-2027.

The MTRS will be implemented within three years beginning the 2024-2025 financial year to 2026/27.

“Tax policy reforms will be implemented through the Finance Acts and regulations, beginning with the Finance Act 2024 while revenue administration reforms will begin from January 2024 as per the implementation matrix annexed to the MTRS,” said Treasury.

“The implementation of the strategy will involve ministries, departments and agencies; the Legislature, Judiciary; County Governments; private sector players and development partners.”

The reforms are expected to play a part in curing the challenges that KRA has had in revenue collection, which is marked by a history of underperformance. 

According to the BPS, revenue collection over the five months to September registered a shortfall of Sh98.7 billion with ordinary revenue missing the November 2023 target by Sh98.2 billion and ministerial AiA recording a shortfall of Sh0.5 billion. 

KRA offices at Times Tower, Nairobi. [Wilberforce Okwiri, Standard]

Treasury’s spending plans for the next financial year came under heavy criticism, with the National Democratic Institute Monday terming the proposals in the BPS “structurally deficient, lofty and confused” as the document does not show any real discussions on job creation.

The institute has also called out the Treasury for leaving out some tax policies in its document, saying it is a prospect for cheating.

Economist Ndiritu Muriithi has said the estimates are outrageous and cautioned that parliament should not approve it.

Further accusing the Treasury of leaving out specific tax policies in the document it published last week which had been contained in the initial draft published in December last year.

“In the original draft, there were some specific tax proposals. In this officially tabled document, there are no specific taxation measures, it speaks in general terms.

“It says that they are going to increase in the medium term, tax to GDP ratio from 14 to 20 per cent,” said Muriithi during a discussion on the BPS in Nairobi.

In addition, despite the omission of specific tax policies, the estimated figures have not changed, “they still talk about increasing total taxes by 324 billion, where will it come from?” Muriithi posed.

The National Democratic Institute also said it is doubtful that the Kenyan economy is in a position to yield an additional Sh324 billion in taxes.

This, Muriithi said, with an estimated five million taxpayers, Kenyans would be required to part with about Sh65,000 each in taxes in the coming financial year.

“This will be too punitive and a big burden for Kenyans to bear.”

The economist further termed the document lofty because, “expectations should be realistic, it is a big projection hence not realistic.”

In the document, the government stresses agriculture which remains a core pillar for the realisation of the Bottom-Up Economic Transformation Agenda.

A deep dive is seen in the fertiliser subsidy programme that has made available 5.5 million bags to farmers across Kenya and reduced cost of production.

Muriithi said that upon scrutiny, the provision for agricultural transformation is not sufficient.

“When you say you want to transform agriculture, provision of subsidised fertiliser alone is not enough to transform agriculture, when you want to transform MSMEs, dwelling on Hustler Fund alone is not sufficient.”

Faulting the provisions for transforming the MSMEs, the National Democratic Institute said: “The plan you present to fulfil that objective for transformation is very scanty.”

Parliament has until February 28 to approve the document. Ndiritu, however, cautioned that parliament should instead send the government back to the drawing board.

Vegetable vendors at Nyeri's Wakulima Market. [Amos Kiarie, Standard]

“I think parliament shouldn’t approve the document, they have a choice, they must ask the government to provide specific measures so that they are just not approving a blanket increase of Sh324 billion.

“Parliament should actually send the government back to the drawing board, and tell them to do a better job of managing this economy.”

Over the 2024-25 financial year, the government plans to borrow Sh703 billion, which is lower than the Sh785 billion that it plans to borrow by the end of the current financial year.

The bulk of this money is expected to be borrowed locally at Sh377.7 billion while the balance will be borrowed from international lenders and further increase the country’s public debt, which stood at Sh11.14 trillion as at December last year. 

“Reflecting the projected expenditures and revenues, the fiscal deficit (including grants), is projected at Sh703.9 billion (3.9 per cent of GDP) in 2024-25 financial year compared to the projected fiscal deficit of Sh785 billion (4.9 per cent of GDP) in FY2023-24,” said Treasury.

“The fiscal deficit in FY2024-25 will be financed by net external financing of Sh326.1 billion (1.8 per cent of GDP), and net domestic borrowing of Sh377.7 billion (2.1 per cent of GDP).”

The 2024-25 budget will be the second budget by the Kenya Kwanza administration which has been implementing its Bottom-Up Economic Transformation Agenda (Beta).

Through the agenda, Treasury said it is implementing different initiatives aimed at lowering the cost of living and improving livelihoods. 

“This is meant to reverse the economic recession and ignite economic recovery. This development agenda recognises the importance of managing the cost of living through well-functioning markets to enhance productivity, availability and affordability of goods and services for all citizens,” said Treasury. 

“We have noted that market failures in sectors that supported the economy are glaring.

The interventions target five core priority areas namely: agricultural transformation and inclusive growth; micro, small and medium enterprise (MSME) economy; housing and settlement; iv)Healthcare; and digital superhighway and creative industry.”

It noted that it has so far put interventions in place that have seen the economy post a strong performance in 2023, growing by an average of 5.6 per cent over the first three quarters of last year.

It expects the economy to grow 5.5 per cent in 2023 and 2024, up from 4.8 per cent in 2022. 

“This growth outlook will be supported by broad-based private sector growth, continued robust performance of services sectors, the rebound of agriculture and the ongoing implementation of policy measures to boost economic activity in the priority sectors of the Beta,” said Treasury.  

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