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Going in blind? Risks facing early budget

By Otiato Guguyu | Updated Tue, January 31st 2017 at 14:57 GMT +3

This year’s Budget will be presented to Parliament in April, two months earlier than usual, as the country prepares for the August elections.

But this early Budget may be so removed from reality that the administration that comes in would be forced to change it through a Supplementary Budget.

The change in reading dates is not expected to have an effect on the current Budget outlay, as the start of the new fiscal year will not change from July 1, 2017.

However, the new Budget may be blind, with little knowledge on how much the Kenya Revenue Authority (KRA) will collect in taxes for the year, or how much Government spending will be by June.

“In normal years, Budget expenditure is based on estimates since the Budget is prepared before the end of the financial year. However, this year the estimates will be prepared well in advance with the likelihood that the Government will not have a full picture of the expenditure and revenue performance for the past year,” said Clive Akora, an associate director at KPMG Advisory Services.

This could have an impact on Government numbers, especially on tax revenue targets, the size of the Budget deficit, and expenditure forecasts. This would result in adjustments to Government spending and revenue projections in the course of the financial year.

Big unknown

According to Jason Lakin, the country manager of International Budget Partnership Kenya, the big unknown with election year budgets is what will happen if a different government comes into office.

“For example, if a different president were to take office in August, then they would be likely to want to adjust the Budget through a supplementary, effectively changing many aspects of the Budget agreed to now,” he said.

He added that another big challenge is that the Salaries and Remuneration Commission (SRC) is reviewing the pay for State officers and has not determined how much new State officers will be paid from August.

“This will almost certainly end up destabilising the Budget as well if it turns out that these officers are not receiving Year 1 salaries as current guidelines. It does not seem likely that SRC will stick to those salaries, so the wage bill is set to increase further,” Mr Lakin said.

It will also be difficult to track the absorption of the Budget to cater for money that will be left over from the previous spending plan.

The Government works largely on a cash basis, with any funds that are not spent in a financial year being returned to the Treasury for reallocation. This is why there is normally a rush in Government departments and agencies towards the end of a financial year to spend budgetary allocations.

Lakin, however, said the balance brought forward is not known at the time a Budget is tabled and it has not tended to be significant at a national level, but it could be significant for counties.

“In any case, it will have to be dealt with through a Supplementary Budget,” he said.

After the Budget statement is read, the Treasury is expected to submit to Parliament a Finance Bill through which the Government will implement changes to tax laws to be passed within 90 days of presentation.

This may be delayed to the next Parliament if sittings are adjourned after the Budget is approved.

The details of the Bill will reveal in advance how the Government plans to fund its expenditure, including tax measures.

This may cause hoarding in anticipation of price moves, creating artificial shortages and inflationary pressures in a year that has already seen massive stockpiling to cash in on the ongoing drought.

Quorum hitches

Normally, measures with revenue implications will have different effective dates, with those measures that have an impact on prices taking effect immediately.

This is designed to avert hoarding when changes in fiscal policy have an impact on the pricing of goods.

If the Government were to state new tax measures to roll out in July, then it would influence the market in terms of hoarding and price readjustments.

“On the issue of the Finance Bill, you raise a valid concern if people know about tax changes far in advance. The Budget calendar I have does not mention the Finance Bill, and I have a feeling this will be pushed back, although I don’t have specific information about the Finance Bill,” Lakin said.

However, Mr Akora said while hoarding was a common feature in the days of price controls, with liberalisation, the impact of a change in Budget reading dates is significantly lower.

The early Budget also faces the challenge of rallying enough MPs to pass it.

“The main problem expected is ... lack of quorum in the National Assembly as its members seek nominations from their parties to contest the elections,” Akora said.

Nominations need to be concluded 60 days before the August General Election, with the expectation that nominees will commence campaigns immediately after.

This creates the likelihood that the National Assembly may not have the numbers to pass the Budget – and any Supplementary Budget approvals that may be required to allow the Government to finance its operations until the new Budget is approved.

The Auditor General had warned that the election calendar would have an adverse effect on the country’s ability to plan its finances.

In November last year, a working group that carried out a three-year audit of the Constitution said the current poll arrangement would not allow MPs to effectively review the following year’s Budget.

Political campaigns

They said although the Constitution stipulates that general elections will be held on the second Tuesday of August every five years, it also requires that the Budget be read in June.

“Budget making in an election year is problematic. The Constitution provides for elections to be held in August of the election year, yet the Budget should be finalised and presented during the month of June,” Auditor General Edward Ouko said.

“This is a period of intense political campaigns. There is a risk of MPs lacking sufficient time to review and pass the budgets. There is a risk that there will be delays.”

Even in Parliament, there was widespread agreement that the election date be moved to December. However, how this would be done posed a challenge given that it amounts to changing the Constitution.

Unlike in the old constitution, the 2010 law is not clear on whether MPs have the window to use a Bill seeking to amend the Constitution, or if such a change will require a referendum.

Ugenya MP David Ochieng sponsored the Constitution of Kenya (Amendment) Bill 2015, seeking to shift the date of the next General Election to December 2017.

Mr Ochieng wanted the poll date moved to avoid disrupting the Budget cycle, the national examination calendar and peak tourism season.

While it received support from the floor, legislators could not agree on whether the Bill should be subjected to a referendum or not.

The early Budget will also be the first time in recent times that Kenya will be presenting its Budget on a different date from its East African Community (EAC) peers.

“A number of tax measures, especially those affecting customs duties, are agreed jointly with the other East African governments and published in the East African Gazette. It is unlikely that the Kenyan Budget process will affect these revenue measures, which we expect to proceed as before,” Akora said.

He added that as this is something that occurs once in five years, the early reading of the Budget in Kenya will have limited impact on EAC harmonisation.

However, it sets a precedence where other countries facing an election or a similar national event may opt to defer or bring forward their budget process.

This would distort the budget synchronisation that is an important pillar in the pursuit of a fully integrated common market.



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