Tax and Big Four: How State missed the target

President Uhuru Kenyatta delivers his Keynote address at a plenary session of the Women Deliver 2019 Conference in Vancouver, Canada. [Standard]

The Government’s 2018 fiscal year is over. In some ways, it was a period of drama: economic growth quickened although analysts doubted, the country’s debt hit a record Sh5.4 trillion and less jobs were created.

It was also the year when Treasury Cabinet Secretary Henry Rotich was grilled for 12 hours by the Directorate of Criminal Investigations (DCI) over the multi-billion-shilling Arror and Kimwarer dams scandal.

The first budget for implementing the Big Four has failed to deliver a pilot universal health system, a single house of the 500,000 promised or even an additional bag of maize as Kenya eyes imports.

Getting these projects rolling was among the biggest thing that Government aimed at achieving this financial year.

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The Big Four Agenda has been on the lips of every civil servant; from the sub-chiefs when presiding over village burials and weddings to Cabinet secretaries attending high profile events and President Uhuru Kenyatta himself when hosting local and foreign dignitaries.

The thematic areas got a special mention in the Budget Statement last year. The plan, according to Mr Rotich, would bring about jobs, transform lives and share prosperity among Kenyans.

The CS told the nation that the Government had made tough choices to deny “low priority areas” funding that would be redirected to the Big Four and their enablers.

The lip service paid to the Big Four is however as much as its rollout has gone, with projects planned for execution under the four thematic areas of affordable housing, food security, universal healthcare and job creation through manufacturing are all struggling to get off the ground.

Questions now abound as to whether Kenya is seeing the unfolding of what could turn out to be white elephant projects of momentous scale, while giving some connected people avenues for mega corruption.

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“Big Four Agenda is a fallacy. All indications are that the country is inching closer to getting into a full-blown campaign mode so the President has only three years to implement these products. They will become white elephants and conduits for corruption,” said Michael Mburugu a tax partner at PKF Kenya.

Run out of steam

He said the promises appear to have run out of steam and are like a mirage.

“There is need to stop and audit the progress and, if necessary, revise the targets. When you are running a marathon, you will at times need to weigh your options and if you need to, slow down. But you do not have to die on the track.”

The wrong footing that the Government has started on in implementing the Big Four Agenda appears not to be the only major miss in the financial year that is coming to a close end of this month. Tax collections appear to be lagging behind despite numerous levies implemented in the course of the year.

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As with other years, growing tax collections was critical for Treasury to rely less on debt to finance the budget. The Government instituted a number of taxes last year that appear not to be bringing about the desired impact of revenues.

These include a new presumptive tax for small traders, value added tax on petroleum products, increased excise duty on money transfer by banks to 20 per cent from 10 per cent, a telephone and Internet data charged 15 per cent duty and an anti-adulteration levy on kerosene of at rate of Sh18 per litre.

Despite the higher taxes, KRA might not meet its targets for the financial year. The taxman had raised Sh1.16 trillion as of April 30, which was about Sh450 billion shy of the collection target for the year to June 2019 where the taxman has a revised target of collecting to Sh1.6 trillion.

It is unlikely to hit the target in just two months of May and June, according to tax experts.

Mr Mburugu said the country’s revenue collections are almost plateauing due to traditional reliance on the same people for taxes and there is need to increase economic activity so that KRA can collect more taxes, as well as tap into the largely untaxed informal sector.

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“KRA might not meet the targets. In the coming year, the difference between tax collection and revenue targets might widen because businesses are not performing,” he said.

“That should inform the Government that polices it implemented over time are not working. Last year, there were many new taxes but there is an extent to which you can milk the cow without feeding it. Treasury is out of tune with the reality and needs to go down to the factories and farms to see the reality.”

The additional taxes were expected to increase tax collections and reduce budget deficit to 5.7 per cent of GDP this financial year from 7.2 per cent in the 2017/18 financial year.

More revenues would mean reduced dependence on loans to finance the budget and bring the debt-to-GDP ratio to below 50 per cent.

At Sh630 billion, the budget deficit is currently nine per cent higher than the Sh578 billion Treasury target while public debt as a share of GDP has crossed the 50 per cent mark and is steadily rising.

Kenya’s public debt stands at over Sh5.4 trillion. Broken down to how much every Kenyan owes lenders, every citizen has about Sh120,000 of debt. This is against an average annual per capita income of Sh180,839.

According to an analysis by the Institute of Economic Affairs (IEA) , the proportion of external debt from the cheap and friendlier multilateral lenders had come down from 63 per cent in 2013 to 34 per cent in June 2018. Borrowing from commercial lenders such as banks as well as tools such as the Eurobond now accounts for 34 per cent of total debt from a low of seven per cent in 2013.

“If the Government continues with this trend, then chances are high that in another five to 10 years, Kenya might default on some of its repayment obligations,” IEA Programme Officer John Mutua programme said at a recent forum.

The economists said the country needs to critically think about financing major projects through public-private partnerships to avoid incurring debt where private sector financing can help in development.

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GovernmentDCIHenry RotichBig FourUhuru Kenyatta