Uhuru's dilemma in the face of overburdened Kenyans?

President Uhuru Kenyatta adresses this years Madaraka Day celebration at Kinoru Stadium in Meru. [Photo: Charles Kimani\DPPS]

Kenyans’ collective anger about the new taxes is among the new realities that President Uhuru Kenyatta will deal with after successfully pushing through taxation measures that had earlier been rejected by Parliament.

While he will not be seeking re-election, it will be a tough balancing act for him in the remainder of this term during which his Government has been pushed to the wall and has embraced unpopular proposals.

Life has just got tougher for many, especially the poor, following the introduction of many new taxes that Uhuru has termed “short-term pain for long-term gain”.

A key plank in his re-election pledge was lowering the cost of living for Kenyans, but the new taxes mean the exact opposite.

Economists have warned that raising the tax rates could actually be counterproductive as increased prices for commodities could mean less consumption.

The matter is compounded by the fact that it offers incentive to try to cheat the system and avoid paying up altogether.

“To me higher taxes invariably lead to lower collection as people’s disposable income is reduced and evasion increases,” said Nikhil Hira, a tax expert at Deloitte. 

He adds: “We saw the impact of lowering taxes in the nineties on our revenue collections, which increased significantly as a result.

Tax base

"Focus for the Government should shift from increasing the burden on the existing and diligent taxpayers to widening the tax base.

“… the various tax measures will affect the population as a whole but I think that we need to look at is expanding our tax base in the country,” Mr Hira told The Standard.

The cost of living will jump even further following the raft of new levies as the State seeks to fund the bulk of its historic Sh3 trillion-worth national budget.

Consequently, keeping inflation down will be a nightmare considering the knock-on effect arising from price hikes.

Inflation tracks the cost of living and is a major indicator of the health of any economy, and is a major consideration for investors – whether foreign or domestic.

Investors look for jurisdictions that offer returns that are higher than inflation, meaning that a rise in the cost of living equals battering the economy.

This is how it works. Kenya is a net importer and therefore requires dollars and other foreign currencies (forex) to pay for petroleum, medicines, machinery, and other commodities.

Foreign investments in places such as the stock market are a key source of forex reserves.

But nothing quite captures his desperation in Government at the moment than what Treasury Cabinet Secretary Henry Rotich told the members of the House Budget Committee on Wednesday.

Members who talked about the closed-door meeting said he had a firm message from the President about how failing to pass his proposals would ravage the economy.

Precisely, the country still needed the goodwill of the most important donor, the World Bank (WB), which has tied tough conditions to aid and loans.

“We risk losing out on grants from key donors,” said the legislator who requested that we do not reveal his name as parliamentary rules demand confidentiality in closed sessions.

Single largest

The World Bank is the single largest source of funding for the Ministry of Health through multiple programmes, including those targeting management of HIV.

The bank ties its aid to strict financial discipline among beneficiaries, including running balanced budgets and living within their means – reducing dependency on borrowing.

The International Monetary Fund, associated with WB, has withdrawn a stand-by loan facility that was intended to cushion the Kenyan shilling from volatility, owing to the failure by the Government to meet tough conditions it set.

So which way for Uhuru, who is caught between the need to protect citizens and financial discipline, as demanded by development partners?

 

 

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