Ndung'u walks tight rope in bid to finance Sh3.6 trillion budget

National Treasury Cabinet Secretary Njuguna Ndung'u. [Standard, File]

President William Ruto's top money man will have to walk a tightrope between staying fiscally prudent and public expectations of a wider social security net, while at the same time powering the engines of the economy.

National Treasury Cabinet Secretary Njuguna Ndung'u will tomorrow (Thursday) present Kenya Kwanza's maiden budget at a time when the economy has slowed due to global headwinds with specific sectors needing attention.

The Ruto government is under pressure to provide relief to the poor while ramping up financial incentives for key sectors of the economy.

But all this has to do while staying on the course of the fiscal consolidation path. There are indications that the government is willing to back down on some of the proposals it had made in the Finance Bill 2023 due to public outcry.

However, even as it made what were said to be concessions, it retained many of the measures that are likely to significantly push up the cost of living.

The concessions could further complicate the government's tax revenue-raising plans and see it further depend on debt to finance the Sh3.6 trillion budget.

Pushing for higher taxes could, however, drive Kenyans over the edge.

On Monday, the National Assembly's Committee on Finance and National Planning said it had recommended the removal of certain clauses in the Bill.

The committee wants the proposed housing levy halved to 1.5 per cent, an excise tax on mobile transactions retained at 12 per cent and tax high-income earners at 32 per cent and not the 35 per cent Treasury had proposed.

Analysts noted that the concessions might not have a big impact on the common folk, noting that the tax rates proposed are still unrealistic and that the proposal to increase value-added tax (VAT) on fuel remained untouched, despite the catastrophic impact it might have on the economy.

"Taxation for our economic model and growth stage has been badly misaligned for many years, and increasing desperation for funds by heavily over-indebted governments is now making them draw up increasingly unrealistic tax policies and rates," said economist Deepak Dave of the Nairobi-based Riverside Advisory.

"They cannot possibly go higher, they have to go down, that is the only debate to have." The proposal to tax fuel with a higher VAT of 16 per cent remains. This is up from the current VAT rate of eight per cent.

Analysts warn that this will push up the cost of living, which is already beyond reach for many Kenyans.

Higher fuel costs could be detrimental to the economy.

Businesses and individual Kenyans have already been scaling down consumption of petroleum products, which could be an indicator of an economy that is growing at a much slower pace.

"At 16 per cent, the higher VAT on fuel is coming at a time when fuel is most expensive. We have had a situation where our exchange rate has affected fuel cost, we have seen a gradual increase in fuel costs," said Marshel Nyangor economist at Zimele.

"Putting an additional eight per cent to bring it to 16 per cent will mean that fuel will not be affordable to many people. The other bigger impact is that it has a knock-on effect on all other areas."

"So many companies use diesel in their production. This is even in the production of electricity, where a proportion of it still relies on diesel... all transport areas will be affected...any increase in the price of fuel affects the economy in so many ways."

Oil marketers

According to government data, usage of fuels such as diesel, super petrol and cooking gas dropped by eight per cent on average in 2022.

Diesel, a fuel largely used by industries such as transport and manufacturing, dropped 0.78 per cent.

Budget Plan: President Ruto gives with one hand takes away with the other

The country consumed 2.27 million tonnes of diesel last year, which is slightly lower than the 2.29 million tonnes consumed in 2021.

Oil marketers have in the past warned that the increase in VAT levied on petroleum products could see a litre of petrol retail at well over Sh200.

High fuel prices last year resulted in a 1.1 per cent drop in the consumption of petroleum products, according to data from the Kenya National Bureau of Statistics.

Diesel, the fuel used heavily by industries in their production processes and transportation of materials to plants and products to market, dropped by 3.7 per cent. The increase in the cost of fuel has been in quick succession, with Kenyans having had little time to absorb the increases that followed last year's withdrawal of subsidies across different products. The weak shilling has further dealt a blow to Kenya and seen them pay higher for fuel.

The result is that over the last year, the local pump prices have defied the trend in international crude oil, which has dropped from a high of $122 (Sh16,900 at current exchange rates) per barrel in July last year to $73 (Sh10,000) at the moment.

Locally retail prices have moved up to the current record high of Sh182.7 per litre of super petrol in Nairobi. This is in comparison to Sh159 per litre in Nairobi in July last year.

The government had expected the measures proposed in the Finance Bill 2023 to raise an additional Sh289.3 billion. This is expected to take a hit as the government makes minor concessions and reduces the proposed tax measures.

Treasury expects Kenya Revenue Authority (KRA) to collect Sh2.9 trillion in both tax and non-tax revenues, with tax revenues expected to hit Sh2.57 trillion.

This is expected to fund the Sh3.6 trillion with a deficit of Sh720 billion expected to be bridged through borrowing, of which Sh522 billion will be sourced in the domestic market and another Sh199 billion from the international debt market.

Treasury expects KRA to collect Sh2.57 trillion in tax revenues, 17 per cent higher than this year's tax revenues of Sh2.1 trillion.

The National Assembly's Budget and Appropriations Committee termed both the tax revenue targets and the low budget deficit - which Treasury had in earlier budget documents stated would be Sh663 billion - as highly ambitious.

Collecting Sh2.57 trillion would mean KRA growing tax revenues by 17 per cent per cent from Sh2.1 which it is expected to collect by June 30 this year. The committee, casting doubt as to whether it will be able to meet this target, noted that tax revenue has in the past averaged 10 per cent every year.

It also noted that the Treasury has recently revised downwards the economic growth projection to 5.6 per cent from an earlier projection of 6.1 per cent, which could also mean tax revenues might be affected.

"The ordinary revenue projection for the 2023-24 financial year is Sh2.57 trillion, which represents a 17 per cent increase relative to the expected 2022-23 financial year collection," the committee said.

"The committee notes with concern that this revenue target is quite ambitious, taking into account historically, ordinary revenue has grown at an average of around 10 per cent. Further, the downward revision of GDP growth projection is indicative of a concomitant reduction in revenue collection."

Revenue collection

The committee also expressed reservations about the budget deficit, noting that this was tied to the ambitious revenue collection target.

The deficit for the next financial year of Sh720 billion is in comparison to Sh824 billion (5.7 per cent of GDP) in the current financial year.

"The committee notes, however, that this projected reduction in the deficit is partially attributed to an ambitious projection in tax revenue collection. Should the revenue collection target not materialise, it will necessitate a downward revision in expenditure through a supplementary budget," said the Committee in its report to Parliament on the 2023/24 budget.

The National Assembly's Committee on Finance and Planning recommended the reduction of the controversial housing levy to 1.5 per cent of an employee's gross salary and pushed the commence date to January next year. It has also dropped the requirement that employers should be compelled to match their employees' contributions.

On betting, the committee recommended a reduction of the tax from 20 per cent to 12.5 per cent.

It also wants excise duty on mobile money transfers to remain at 12 per cent, noting that it is used by millions of Kenyans to send and receive money daily. Treasury had proposed to increase this to 15 per cent.

The committee has proposed to increase pay as you earn for employed Kenyans earning between Sh500,000 and 800,000 per month to 32 per cent but raised the tax for people earning more than Sh800,000 to 35 per cent.

Treasury had proposed to raise income tax for anyone earning over Sh500,000 to 35 per cent.