State battles to squeeze out every last coin from cash-strapped economy

By JAMES ANYANZWA

Nairobi, Kenya: National Treasury Cabinet Secretary Henry Rotich is walking a tightrope as he seeks to raise revenue to finance devolution as well as halt cash leakage and wastage.

The Government’s expenditure cuts, new tax measures and additional tax administrative measures are expected to seal loopholes in revenue collection and help the country meet its added expenditure obligations.

And as the Treasury announced its intentions to expand austerity measures beyond wage cuts, the Parliamentary Committee on Finance, Planning and Trade last week raised the alarm over issues of accountability in the management of public funds, extravagant spending and wastage in Government circles.

It is estimated that about 30 per cent of the country’s Budget is wasted every year through corruption, seminars, conferences, and domestic and foreign travel by public officers.

The committee, headed by Ainamoi MP Benjamin Langat, added that the imposition of value added tax (VAT) on key sectors such as the airline industry and tourism was lowering the competitiveness of the local economy.

This, the committee said, would lead to the closure of businesses, which would increase the unemployment rate.

Revenue objectives

“This VAT issue is creating serious distortion in the economy,” said Mr Langat.

But appearing before the committee last week, National Treasury Principal Secretary Kamau Thugge remained adamant on the tax law, saying the Government may not achieve its revenue objectives if more goods are exempted from taxation.

“The problem is that once you start amending the VAT law, you set off incentives for other amendments that defeat the whole objective of the Act,” he said.

Dr Thugge said the Government is expected to generate 15 to 30 per cent in additional revenue through an effective   tax administration system.

Currently, the State is collecting about six per cent of the country’s total income in the form of VAT; the plan is to increase this to 10 per cent.

The PS said the Government would create a fund at Central Bank that would hold savings realised from pay cuts and other cost-cutting measures.

The fund, to be dubbed the Transformative Fund, is also expected to enable the Government monitor the performance of its austerity measures.

Mr Rotich also outlined proposals that would ensure landlords pay tax on their rental incomes, and hinted at the possibility of reintroducing capital gains tax (tax on proceeds from the commercial transfer of properties and shares of listed companies) to generate more revenue.

Consumer spending

However, analysts argue that raising general tax rates would not be feasible due to the current economic hardships facing individuals and companies, as well as the likely negative impact on tax compliance and the business climate.

Raising income taxes, Pay As You Earn (PAYE) and VAT has the effect of reducing disposable income, which in turn stifles consumer spending.

This is likely to have a negative impact on output and employment growth, they warn.

Further, an increase in tax impacts negatively on poor households due to their decreased income levels, causing poverty levels to increase.

However, the Government increasing its borrowing from the domestic market to meet its obligations is also being frowned upon as it poses a major risk to public debt sustainability.

Some of the risks to the country’s economic outlook, according to the Treasury, are continued weak growth in advanced economies that will impact negatively on exports and tourism activities, and geopolitical uncertainty in the international oil market.

Public expenditure pressures, especially recurrent expenditure  and in particular wage and interest payments, are also causing concern.