In jurisdictions with low levels of civic awareness or disengaged citizenry like ours, government budgets pass like an annual ritual. But in reality, government budgets have far-reaching implications for the welfare of all citizens.
Public budgets are the primary instruments through which the sovereign will of the people is transmuted into reality. They provide the mechanism to direct resources from private economic units (individuals and business) to the State for the provision of public services. Through the budgets, the powers and privileges of the three arms of government also get to be flexed and their harmonious co-existence tested.
It is for this reason that the Constitution conferred all citizens a primary right to participate in the planning and budgeting process under Article 201. Through the budget, those elected and appointed to govern exercise their authority under the agent-principal relationship. By default, therefore, a potential conflict of interest exists in which those elected to govern can misinterpret their mandate to the detriment of the governed.
In this article, allow me to digress from the hard numbers to connect the 2021/2022 budget to practical implications to our social and economic welfare.
Generally, public budgets serve four primary purposes: planning, economic, political and social. So a good budget can be judged by how it balances these interests. As a planning tool, it defines the agenda of the government of the day both for the coming fiscal year and the medium-term. As an economic tool, a budget helps policymakers to divert resources from private citizens to the government, and then to sectors of interest.
It also allows them the window to propose and implement protectionist policies against external economic aggression. Equally, it offers a leeway to nurture nascent industries and open new frontiers of economic growth both in the medium- and long-term. As a political tool, a budget allows elected leaders to perpetuate their ideology into the economic system and institutionalise their legacy.
As a social document, it allows governments to introduce welfare programmes that confer special benefits to constituencies of interest in the economy. For instance, through budgets, governments are able to protect vulnerable groups like senior citizens, orphans, persons living with disabilities, youth, women and other marginalised groups.
The questions we need to ask are: One, how well did the 2021/2022 budget respond to these primary purposes? Two, what is the socio-economic context of the budget? Three, what is the technical and practical feasibility of the budget? And four, how does it enhance the welfare of ordinary households and firms on the basis of a cost-benefit analysis?
In the preamble of his budget speech, Treasury Cabinet Secretary Ukur Yatani unambiguously defined the primary concerns from folks from a broad-based public participation. They include the need to mitigate the economic impact of Covid-19 and the costs of treatment, cushion citizens from food and nutritional insecurity, provide remedies to high unemployment rates, increasing levels of poverty and inequality and unsustainable debt levels.
On these primary concerns, the budget makes a good attempt by allocating Sh14.3 billion to procure vaccines on top of 2020/21 allocation of Sh7.6 billion. A further Sh8.7 billion has been allocated for the Covid-19 emergency response project. On taxes, related medical supplies and food supplements have been exempted from Value Added Tax (VAT) to reduce costs and make them accessible.
On Covid-19, the budgetary allocation is not sufficient to buy vaccines to immunise enough population to achieve herd immunity. Other notable programmes under health include Sh5.8 billion, Sh4.1 billion, Sh3.9 billion and 1.8 billion for HIV and Aids, free maternal healthcare, other vaccines and immunisations and medical cover for the elderly and severely disabled. This is most likely going to reduce our heavy dependency on development partners for those programmes.
On food and nutritional security, the Sh60 billion allocated under the Big Four agenda is not only negligible but is also thinly spread across several ongoing projects under agriculture, livestock and fisheries. To put this into context, it is instrumental to remember the economy is heavily dependent of farm production at the subsistence level. Cost of farm inputs, lack of value addition and marketing have been the primary challenges in this sector.
In addition, the impact of Covid-19 has exponentially increased the population that is now food insecure. Except for the retention of 25 per cent duty on leather and footwear production, the budget is oddly silent of other farm production interventions. The investments in special economic zones require a long lead time to make an impact on this sector.
On unemployment, the budget remains generally vague on any specific interventions to create opportunities in the formal sector. It seems to allude that a Sh20.5 billion investment for manufacturing will do the magic. First, while the Sh2 billion allocation for Credit Guarantee Scheme for Micro, Small and Medium Enterprises (MSMEs) is welcome, it is likely to make a negligible impact given the magnitude of Covid-19 on MSMEs. Probably incentivising commercial banks would have helped.
Businesses were already struggling long before Covid-19 and Treasury was too quick to lift the stimulus economic packages. The Sh3 billion for Kazi Mtaani project is also likely to have a negligible impact in comparison to the Sh10 billion allocated under the stimulus package that Treasury reports benefited only 100,000 vulnerable people. The other interventions are again scattered in several ongoing projects that raise questions on their ability to create jobs. However, the expansion of taxable benefit claim against companies that offer at least 10 graduates paid internship to include TVET graduates is a welcome relief.
Finally, on the sustainability of public debt, the budget enhances the debt hole. Treasury projects to borrow externally a net of Sh271.2 billion and domestically Sh658.5 billion. The actual nominal borrowing will go beyond the projected Sh929.7 billion deficit since net borrowing excludes amounts borrowed to repay existing loans. On the broad expenditure analysis, interest, pensions and Civil Servant Pension Contributions (CSPC) alone will consume KES718.3 billion. In simple terms, the budget pushes us deeper into the debt hole.
Financing the budget
It is one thing to propose programmes under the budget but quite another thing to finance them. The current regime has done an exemplary job on speaking about intentions but low on crystalising tangible results that connect with ordinary people. To understand the technical feasibility of the budget, we must refer back to the assumptions that underlie the budget. These are clearly articulated in the Budget Policy Statement for 2021/2022 under the risk factors.
These include the continued threat of Covid-19 and its new variants that may necessitate further containment measures, delay in laid-off workers to secure new opportunities, increased business costs due to the pandemic, re-configuration of disrupted global supply chains and cross-border spillovers occasioned by weaker external demand and supply shortfalls. Unfortunately, the budget proposals completely ignore the reality of these threats and presuppose pre-Covid-19 status.
More curiously, it assumes that the basic stimulus economic packages instituted on the outset of the pandemic were adequate to mitigate its impacts on the economy. The budget insinuates that the economy will instantly re-bound to its 2007 state that registered the highest growth in recent history at about 7.1 per cent. If the past trends give us insights into the expected future trends, one wonders how an economy can recover from a 0.6 per cent growth rate to over 6.6 per cent in a single fiscal year in the midst of a pandemic.
This implies that the revenue projections are obviously overstated. It is also instrumental to refer to the highest consumers of the budget. As mentioned earlier, debt and pensions take the lion’s share of the budget. If we factor in the over Sh650 billion for wages and salaries using 2019 as a base from the Economic Survey of 2020, then it implies at least 67 per cent of projected revenues will go to the two expenditure items. Therefore, assuming the target revenue is met, only about 33 per cent is available for other programmes.
The elephant in the room has been and will remain to be cash flow problems. Since all tax revenues cannot be collected at the start of the budget period, Exchequer disbursements significantly hamper implementation and realisation of economic goals.
Policies, winners and losers
If implemented, the budget makes some good policy proposals that can significantly impact the economy. The proposed procurement reforms, including completely digitising the process by December 2021, will not only enhance transparency but also allow local companies to partner with external contractors for big, internationally procured projects.
The proposed decentralisation of procurement of ICT equipment to ministries, departments and agencies will boost local businesses. The transition to contributory pension schemes for civil servants will enhance pension savings and thus local resource mobilisation. The Sh10.7 billion for leasing police motor vehicles will breathe fresh air into the automobile industry.
Overall, the big winners in the budget are the consumers of alcoholic drinks and tobacco products. For the first time in many years, there would be no increases in the sin tax except for the inclusion of nicotine substitutes into the excise duty bracket. Beyond the usual suspects of the “big push” projects in education, defence and energy sectors, advocates of climate change have something to smile about because of the VAT exemption on solar, wind and geothermal energy equipment and supplies. Konza City Technopolies has also won big after being allocated over Sh15 billion.
Some of the big losers are companies that benefited from the tax loopholes on allowable interest expense now capped at 30 per cent. Holders of pending bills have something to worry for no provisions have been made, unlike last year, to clear their dues. Motorcycle riders will have to pay more as well as importers of vegetable products, furniture and leather and footwear. Interestingly, the hospitality sector, the hardest-hit sector by the pandemic, has not been given much attention. Its recovery may be a long way to come.
Finally and more curiously, the budget has made absolutely no allocation for the Building Bridges Initiative unless it is hidden somewhere else as an error. This raises questions as to whether the reggae dance is still on, and if so, how shall it be financed? Or could this be a silent admission that BBI is no longer politically and technically feasible?
The writer is an economist.