Numbers don't add up: Treasury understates deficit

National Treasury and Planning CS Henry Rotich exchanging Documents with Ministry of Trade and Industry, Singapore, Dr. Koh Poh koon (left). [John Muchucha/Standard]
Treasury has used an ‘accounting trick’ to make Kenya’s budget smaller than it actually is and help cover a Sh500 billion shortfall.

The Institute of Economic Affairs (IEA), a public policy think tank, says Treasury is not being honest on the actual size of Kenya’s budget.

The budget proposal data that he will be presenting today shows that after receiving tax revenue, grants, Government fees, including court fees and revenue from parastatals, there is a big mismatch between revenue and expenditure plans.

“Difference between Sh2.5 trillion and Sh3 trillion is principal debt amortisation and rollovers, which are not treated as expenditures above the line. Our Financial Statement to be submitted tomorrow (today) will provide the details on the accounting treatment,” Treasury Cabinet Secretary Henry Rotich told The Standard in a statement.

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Confusion on the actual size of the budget was first captured by Parliament when it tabled values of next year’s budget. Planned expenditure exceeds the targeted revenue by Sh540 billion. To have a balanced budget, income must be equal to expenditure.

On page nine of the Budget and Appropriations Committee report on the budget estimates for the financial year 2018-2019, legislators put the overall budget for the new financial year at Sh3.074 trillion. This amount can build 10 standard gauge railways from Mombasa to Nairobi or build 30 Thika super highways.

The committee breaks down the budget into five key expenditure lines. It has allocated Sh1.6 trillion to the national government to run its operations and fund the big four agenda.

If the budget is implemented as planned, the Judiciary and Parliament will receive Sh17.7 billion and Sh42.5 billion respectively.

The Consolidated Fund Services (CFS), where Government gets money to repay public debt, pay salaries and allowances for constitutional office holders and subscriptions to international organisations got Sh962.5 billion. Counties received Sh372.7 billion. This brings the total budget to Sh3.07 trillion.

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To balance the budget, Treasury is required to declare how it plans to fund the budget through taxes, grants and borrowing.

Treasury plans to raise Sh1.74 trillion from ordinary revenue, which is the money the taxman will collect through the various taxes Kenyans will pay among them the income tax, value added tax and custom tax.

Another Sh179.9 billion is expected to be raised from Appropriations in Aid (AiA), which is the income that a Government agency is allowed to collect and retain by charging for their various services. 

Treasury also hopes to receive grants of Sh47 billion from donor agencies and other development partners. It plans to borrow Sh562.7 billion from both the local and international lenders.

This brings the total revenue to Sh2.5 trillion. With this revenue, the Government did not explain where the remaining Sh540 billion will come from to balance its budget.

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Contacted for comment, Mr Rotich said he would provide full details of how it treats the financing gap when he presents his budget statement in Parliament today.

But the Institute of Economic Affairs (IEA), a public policy think tank, says Treasury should be honest with Kenyans on the actual size of Kenya’s budget.

Institute of Economic Affairs (IEA) Chief Executive Officer Kwame Owino says the total expenditure for the financial year starting July adds up to Sh3 trillion.

“However, Treasury will take away debt redemption of about Sh480 billion. This then brings the total expenditure to Sh2.5 trillion. It is a trick to make the budget smaller than it is," the economist told The Standard on phone.

Scholastica Odhiambo, an economics lecturer at Maseno University, says the ‘gap’ is caused by the regular repayment of domestic and external debt over time.

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“Debt repayment especially on capital projects are not recurrent per se. He (Rotich) considers them to fall under development expenditure,” says Dr Odhiambo.

She adds that whenever the Government repays the principal debt, interest payment on the loans qualifies as recurrent, assuming that it is an investment on the ongoing hardcore projects.

“For example if Government borrows a principal debt of Sh20 billion to finance a road. It is an investment hence qualifies as development expenditure. The interest paid on that amount is what qualifies as a recurrent,” she adds.

Kenya’s budget process is quite tedious and this makes it hard to track its implementation. The mini budgets, known as supplementary budgets, which are introduced towards the end of the financial years also introduce a new layer of confusion in the budgeting process, making it harder to track what was actually spent by the individual line ministries.

Data from Treasury, the Kenya National Bureau of Statistics and Central Bank are at times in conflict, making Government numbers harder to follow.

Parliament says it is concerned that although appropriations are by programmes, Exchequer issues published in the Kenya Gazette are not by programme.

“This committee is concerned that this House is only informed of large projects during the review of the budget. International practice now demands for a pre-approval of such projects by Parliament before they are tendered for,” the Budget and Appropriations Committee report partly reads.

Rotich is expected to outline how he will raise the trillions to fund next year’s budget, without sinking the country into additional debts.

The Government has indicated that it may introduce Robinhood taxes, which is a policy adopted to take away money from the rich and distribute it to the poor.

Mobile money transfers, bulk bank transfers, big corporations, and wealthy Kenyans are some of those expected to be taxed more to fund the ambitious Big Four agenda.

The taxman is counting on ongoing reforms in tax administration primarily as a result of modernising VAT systems, reducing zero rated products through the Tax Laws (Amendment) Bill, 2018, tax base expansion targeting nil and non-filers; to help boost its tax collections.

Other initiatives include ensuring that all national and county government suppliers are tax compliant.

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