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Budget 2023: When rubber meets the road

President William Ruto signs The Finance Bill to law at State House, Nairobi. [PCS]

It goes without saying that the Kenya Kwanza administration's first budget was expected to offer - to Kenyans, the private sector and markets as well as partners and stakeholders - clear statements of commitment (policy) and action (strategy) on their forward agenda after months of campaign-like sound bites and legacy lamentations.

This was Kenya's first "rubber meets the road" moment. The past month has offered great civic engagement value, especially on the Finance Bill which had the housing contribution or levy cum tax as its showrunner.

The important commentary was well captured by mainstream and social media, even though we mostly reduced the Finance Bill debate to housing, the budget debate to the Finance Bill 2023, and the Kenya Kwanza agenda to this first budget.

At the end of this 2023 budget season, political commentary has focused on the robotic efficiency applied by Kenya Kwanza to push through its tax and spend agenda as well as the apparent incoherence and disorder in the Azimio minority's response, or lack thereof, to this agenda.

Public discontent

Missing is new hope or relief for hard-pressed Kenyans facing new taxes in tough times. Actually, the short story here is that fresh cost of living pain will visit Kenyans from next week. Ironically, this could fan growing embers of public discontent in a way that works favourably for an Azimio opposition struggling to keep up with Kenya Kwanza's highly disciplined populism.

Yet, with President William Ruto's assent to the Finance and Appropriations Bills, Kenya Kwanza's 2023/24 tax and spending programme now has the force of law. It is unclear what any challenges already in court on Parliament's budget process, and the Finance Bill, might mean.

But it is clear that this is a huge stress-relief moment for an administration that has struggled to make sense of, and close, the 2022/23 budget programme inherited from their predecessors. A quick digression on 2022/23 might help here.

As is the case elsewhere, political leadership transitions are never smoothly aligned with the budget calendar. So new leaders often have to navigate budgets prepared by their predecessors before getting their own budgets up and running.

The difference this time around is that the transition from Jubilee to Kenya Kwanza seems to have been particularly messy. You will not see this in the pre-and post-election fiscal and economic updates that the National Treasury published, respectively, in May and November 2022.

But you will see it in the first supplementary estimates for 2022/23 budget passed earlier this year, as well as the second supplementary estimates now before Parliament a few days before the end of the fiscal year.

These estimates contain Article 233 expenditures processed and paid by the National Treasury now presented for retroactive approval by Parliament. That the National Assembly has refused to provide approvals in some instances implies a state of fiscal chaos during this 2022/23 transition.

It is no wonder that the IMF has demanded that the Auditor-General conducts a forensic audit of Article 233 expenditures within the wider framing of effective supplementary budgets. Maybe we need to take those claims, especially by Deputy President Rigathi Gachagua starting at the presidential inauguration, about inheriting "dilapidated government or finances" more seriously!

Wouldn't a proper forensic review of the 2022/23 transition, especially the final days, be the way to pursue claims about wanton looting and grabbing? Indeed, this review could offer a clever segue into the state capture inquiry that was one of Kenya Kwanza's flagship electoral promises.

But we digress. Now that we have the budget laws in place, one of the more interesting things to observe of late has been the dearth of commentary on Kenya Kwanza's 2023/24 budget picture.

This picture is usually painted in billions and trillions of shillings that are unfathomable to the everyday Kenyan. Taking the final numbers presented in the June 15 Budget Statement, and depending on whether or not you believe in (debt) redemption, what does a Sh3.68 trillion, or a Sh4.53 trillion national budget actually tell us, and what will it buy?

That's what we might ask. To be fair, after the Treasury Cabinet Secretary's Budget Statement, the only leader who seems happy to explain the budget is President Ruto himself, though his one-man crusade often harks to those mythical billions and trillions that are beyond the imagination of the hustlers he addresses.

It doesn't help that Kenya Kwanza political honchos are busy crowing over their legislative win on the Finance Bill, now Act, while Cabinet Secretaries look like they are still internalising their jobs.

Can we paint a simpler budget picture? Normally, we do this by relating each budget item to total revenue. But we live beyond our means, so why not relate each item to total spending? Let's translate the Sh4.53 trillion gross budget into an easier Sh1,000 hustler budget equivalent.

Starting from the top, this Sh1,000 budget breaks down into Sh510 for the national government, Sh405 for CFS - consolidated fund services (constitutionally mandated costs) and Sh85 for all 47 county governments (an average of less than Sh2 per county government).

If we assume a 75-25 recurrent-development budget ratio across counties, this Sh1,000 splits as Sh814 recurrent versus Sh186 development across general government (the combined total of the State, including CFS, and county governments). Does this big picture surprise you?

In case you were wondering, the national executive accounts for Sh495 of the Sh510 we call national government; the other Sh15 is split between our Judiciary and bicameral Parliament. If we break the numbers down a little more, that Sh495 for the national executive spreads as Sh132 on the wage bill, Sh164 on development and Sh199 on operations and maintenance or other, mostly representing transfers to cash-guzzling parastatals and Semi-Autonomous Government Agencies (SAGAS), not the actual purchase of goods and services.

If you're looking for graft these days, try the development budget, or agencies, not buying.

We now call it budgeted corruption - you don't steal from the budget; you budget for the stealing!

Before we return to our Sh510 national government, let's take a quick peek at that Sh405 in CFS. Pensions account for Sh42 while other constitutional costs take up Sh5.

These are rounded-up numbers, but we are left with a CFS balance of Sh359 which represents debt service.

That's Sh171 in debt interest (Sh138 domestic, Sh32 foreign) and Sh188 in debt redemption (Sh83 domestic, Sh105 foreign). Lest we forget, debt interest is now the largest single line item in the recurrent budget, above both the wage bill and development and its domestic component exceeds the wage bill. To square the circle for those who view debt redemption as an automatic "below the line" rollover or refinancing item, your Sh3.68 trillion budget would read as Sh812.

Sadly, our public finance management system (IFMIS et al) cannot provide a comprehensive view of the general government (national plus counties) at a sectoral level, as it should. So we lack a quick reference source on the totality of government spending on agriculture or health or water or even trade and industry.

Let's stick with what we have as the sectoral breakdown of the national government's Sh510 (again, lacking data on the Sh595 going to both levels of government).

Human priority areas

Expectedly, education tops at Sh139 (27 per cent of the national government budget), followed by energy, infrastructure and ICT at Sh103 (20 per cent).

At the other end, contemporary human priority areas such as health at Sh31 (six per cent), environment at Sh27 (five per cent), agriculture at Sh19 (four per cent) and social protection at Sh15 (three per cent) are dwarfed by the statist imperatives of public administration at Sh72 (14 per cent), governance, justice, law and order at Sh51 (10 per cent) and national security at Sh42 (eight per cent).

Strikingly, the growth-facilitating economic and commercial affairs sector has the lowest budget share at Sh10 (two per cent).

Several funds or other special purpose arrangements can be found within these sectoral allocations. Again, thinking about an overall budget of Sh1,000 of which the national government accounts for Sh510, consider that the national government CDF budget allocation is Sh12, the equalisation fund has Sh2 and the national government affirmative action fund has Sh1.

The budget for all the nine main social safety nets adds up to Sh8.

These sectoral numbers are pretty generic, but fortunately, Kenya Kwanza had "the plan" which they translated into Bottom-Up Economic Transformation Agenda (BETA).

Let's take a look at BETA to close our analysis of how our Sh1,000 hustler budget is shared.

As the Budget Statement notes, BETA aims for economic turnaround and inclusive growth through interventions to (a) reduce the cost of living (b) increase employment (c) incentivize investment and production (d) achieve more equitable distribution of income (e) enhance social security (f) expand tax base for more revenue and (g) increase foreign exchange earnings.

The five priority sectors from The Plan remain - agriculture, MSMEs, housing, healthcare and digital/creative. From the Budget Statement, we learnt that major interventions across these sectors will total Sh30 (agriculture at Sh11 out of the Sh19 sector, MSMEs at Sh2 out of the Sh10 sector, healthcare at Sh5 out of the Sh31 sector plus housing Sh8 and digital/creative Sh3).

Taking this forward, BETA has identified nine value chains (leather, cotton, dairy, edible oils, tea, rice, blue economy, natural resources (including mining and forestry) and building materials) which will be implemented through five clusters with a total budget allocation of Sh62. The infrastructure (Sh27) and social sector (Sh21) clusters take up the bulk of this allocation. The other clusters and their budget allocations are finance and production (Sh8), environment and natural resources (Sh3) and governance and public administration (Sh 2).

As whole, BETA-specific interventions (excluding broader investments through enabling sectors) are expected to consume Sh92 or 18 per cent of the Sh510 national government budget.

So what does the Sh1,000 hustler budget picture tell us from the spending side? At the macro level, there is an unhealthy recurrent to-development balance, exacerbated by the rapid growth in debt and other CFS costs as recurrent costs. At the meso-level (between the micro and macro levels) beyond education's large recurrent spending base, the balance of allocations appears biased towards "mega-investment" sectors.

However, the new, unanswered question is if BETA and its value chain approach are capable of better leveraging the budget at the micro-level across target industries or sub-sectors in a way that mitigates the broader imbalance that Kenya Kwanza inherits from historical spending practice.

Now that we are done with the allocation side of our Sh1,000 hustler budget, how is it paid for? Remember, we have taken a different "living beyond our means" expenditure perspective here. Keeping it simple, we take out debt redemption (Sh188), which leaves us with Sh812 to pay for.

As our next port of call, taxes will cover Sh536 of this balance (income tax at Sh265, VAT at Sh155, Excise at Sh78 and Import Duty at Sh38). We are Sh276 short, which we reduce to Sh159 with inflows from investment and other income (Sh32), ministerial appropriations in aid (Sh77) and foreign grants (Sh9). That Sh159 is what the technocrats will call the budget deficit.

So how do we cover this deficit? Ignoring the rounding of numbers again, we do this through new borrowing of Sh129 domestically and Sh29 externally. This is where our moneymen get hot under the collar. Domestic borrowing? Crowding out effects on the private sector. External borrowing? Too expensive for an emerging/budding frontier economy facing global markets.

Now, if we return to debt redemption and get behind what rollovers and refinancing actually mean, it's essentially new borrowing as well. So the reality, from our original Sh1,000 hustler budget, is we fall short by Sh346 (effectively we will spend over 50 per cent more than we earn), to be covered by Sh212 in domestic sources and Sh134 in foreign sources.

This brings us to a concluding thought that formed the basis for this different analysis. Spending beyond our means reflects a pattern in which our revenue is forever chasing after expenditure. Others argue that more revenue always finds ways to be spent and over-spent. What does this 2023/24 budget story tell us about if and how Kenya Kwanza might be truly different?

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