The folly of Kenya’s fiscal policy
The Government has over the years continued to increase its expenditure in what would be called expansionary fiscal policy in its efforts to influence the growth of the economy.
The folly of Rotich’s budgets over the years herein lay an expansionary fiscal policy that works when the government increases spending or reduces taxes.
Rotich’s budgets have increased spending and at the same time added taxes, that in simple terms mean stepping on the accelerator and the brakes at the same time. What you get is a lot of noise but no progress.
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In the latest budget, the government increased both spending and taxes. In 2013, expenditure grew by 15 per cent from 2012. In 2014 expenditure grew by two per cent from 2013.
The trend has continued from 2014 to the latest with expenditure increasing by 33 per cent, 13 per cent, 17 per cent and 14 per cent respectively, all under the theme of ‘austerity’.
In the 2019/2020 budget, the CS has proposed to increase excise duty by the normal annual inflation rate and a 15 per cent increase on wines, spirits, and cigarettes.
Capital gains tax has increased from five per cent to 12.5 per cent, a five per cent withholding tax will be levied on Security, cleaning, catering, transportation, and advertising and an increase on the railway development levy to two per cent from 1.5 per cent.
The CS will table tax measures for digital economy and an income tax bill.
These measures point to a reduction in disposable income by individuals in the economy and hence reduced capital formation and demand.
You, therefore, can’t increase expenditure and taxes at the same time, the resultant effect is nill.
The second folly of this year’s budget is focusing the fiscal policy on output and not aggregate demand.
The main aim of fiscal policy is to stimulate aggregate demand in the economy which will spur output by industry to meet that demand thereby creating more employment and real income leading to better standards of living.
This year’s budget focus on measures to help increase output is noble but it is climbing the tree from the top.
The price mechanism works in such a way that if there is increased demand, there will be a pull effect on the supply, but if supply is constrained then prices go up.
Measures such as allowing a 30 per cent rebate on electricity for manufacturers will reduce the cost of electricity and make the products cheaper.
Nonetheless, this does not address the demand or market side of the same products.
Paying all backlogs and setting up of Uwezo fund, Youth Enterprise Development Fund, and Women Enterprise Development fund are also noble gestures but these funds will go into ventures aimed at output growth, and most end up failing because production does not match demand.
There is a third world illusion that grandeur is equivalent to progress.
Kenya’s government has been spending on big grand projects and ignoring key sectors that would give the fiscal policy the multiplier effect in growing the real economy.
With more than 70 per cent of the population employed in the agricultural sector, direct and indirect national output standing at 50 per cent from the agricultural sector, 99 per cent of exports being agricultural products and 64 per cent of all SMEs being engaged in the agricultural sector, to then only allocate three per cent of Sh3 trillion budget is the height of misprioritisation.
Allocations to the State Department of vocational and technical training dropped from Sh6 billion to Sh15 billion yet the government is trying to make the country an industrialised nation.
The resultant effect is a pool of labour without the skills required to do so.
For instance, Kenya annually sinks money in Konza City but if two or three global technology companies set shop, the country does not have the pool of labor to satisfy the need.
This leads to labor inflation and makes the country less competitive.
Adopting an expansionary fiscal policy normally works in an economy which is not at full employment as there are unemployed people to be hired and industrial under-utilised capacity.
However, the latest Monetary Policy statement says that Kenya’s economy is operating too near full capacity yet the reality is that unemployment stands at around 70 per cent, industries are operating at less than 60 per cent capacity and agricultural production yields are diminishing.
With this background, while an expansionary fiscal policy would work, Kenya’s fiscal policy has not worked for the last six years and to try the same thing the same way and expecting different results is a canning folly.
If the government does not come to the realisation of this folly soon, Kenya will forever remain a poor country living beyond its means trying to look rich.
Why spend Shs 2.6 trillion in 2018 to create less than 100,000 formal sector jobs?
-The writer is the Chief Investment Officer at Amana Capital
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Youth Enterprise Development FundKonza City