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What to expect in this year's budget

By Gideon Rotich | June 10th 2015

In line with Article 201 of the Constitution which requires public participation in the budget-making process, the National Treasury in March 2015 invited the private sector, non-governmental organisations and individuals to make policy submissions for consideration for the 2015-16 National Budget.

National Treasury Cabinet Secretary Henry Rotich is expected to present the 2015-16 National Budget today. Budget proposals are not just about numbers or charts, they have real impact on the economy and in turn, citizens.

So what should we expect?

The policies outlined in the 2014 Budget Policy Statement (BPS) under the five pillar transformation programme include: Creation of a conducive business environment for the private sector, investing in agricultural transformation and food security, investing in infrastructure, investing in quality and accessible healthcare services and quality education.

It also incorporates strengthening of the social safety net, entrenching devolution for better service delivery and enhancing rural economic development.

What changes could be envisaged for the extractive industry?

During his budget speech in 2014, Rotich emphasised the need to simplify tax systems.

 iTax system

The minister submitted the extractive industry taxation proposals which were enacted into law and contained in the Finance Act of 2014.

Sensitisation on the use of the iTax system to simplify tax payments has been ongoing. However, delays in submitting the new excise management bill and the tax procedure bill have made some reforms elusive.

Mr Rotich has indicated intentions to overhaul the current Income Tax Act. We expect the reforms to make the tax system less arduous for the average tax payer.

The VAT Act 2013, provides for a transitional period of three years upon which petroleum oils, motor spirit, kerosene-type jet fuels, among others, will be exempt from VAT. The transitional period ends on September 1, 2016 and thereafter, VAT will be charged on these products at the rate of 16 per cent.

This will be a major policy shift wiping out a significant portion of the relief motorists have been getting at the pump with the fall in crude oil prices and could cause a rise in manufacturing and transport costs as petroleum fuels constitute the main source of commercial energy.

But will Rotich address the expected policy shift in the upcoming budget cycle?

A complete rewrite on the taxation of extractive sector was introduced in 2014 and took effect from January 1 this year. All players in the upstream and midstream oil and gas sub-sectors have been impacted by the revamped schedule to the Income Tax Act (ITA).

What can we expect elsewhere in the budget?

According to a new World Bank Group report, Kenya is reaping the fruits of its transformative devolution programme and increased investment in infrastructure. The IMF’s economic growth projection for Kenya in 2014 is 5.3 per cent, which is projected to grow further to 6.2 per cent in 2015.

But the Government is experiencing budgetary pressures from rising spending on devolution, security, flagship infrastructure projects and the ever increasing public wage bill.

The total envisaged Budget for 2015-16 as outlined in the 2015 BPS is Sh1.88 trillion. The 2014 BPS total projected expenditures for 2014-15 amounted to Sh1.598 billion and revenues including grants of Sh1.240 trillion.

The fiscal deficit was therefore Sh358 billion which would be financed through net external financing of Sh166 billion and net domestic borrowing of Sh190.1 billion.

Overall, the implication of the under-performance of revenues, if it persists to June 2015, is possible revision of Government spending or increased borrowing. The principal dilemmas are how this revenue deficit will be bridged and whether taxpayers will have to dig deeper into their pockets.

Whereas Kenya is considered a middle income economy with bright prospects, increased terror attacks witnessed over the past years pose a significant challenge to the Government. Investors and policy makers contend that insecurity and corruption negatively impact the growth of the economy.

 Additional funding

During the 2014-15 budget, the State allocated Sh66.2 billion for policing services, Kenya Defence Forces Sh71.3 billion and the National Security Intelligence Sh17.4. The question is, have the funds been adequately utilised to curb insecurity to warrant additional funding in the next budget cycle?

Vision 2030 recognises energy, infrastructure and information, communication and technology sectors as key enablers for sustained economic growth, development and poverty reduction.

We should expect more allocation to infrastructure in line with the Government’s policy of developing infrastructure for accelerating sustainable growth. Traditionally, this sector has been receiving the second largest share of resources (about 22 per cent of total expenditure) after education.

Petroleum fuels constitute the main source of commercial energy in Kenya. Kenya is a net importer of petroleum products.

The National Treasury has premised increased production in agriculture as one of the key drivers of growth and further assumes normal weather pattern in 2015 and the medium term.

However, this assumption does not take into account the fact that most agricultural activities are rain-fed. It also overlooks the fact that in the past few years, weather patterns have been erratic.

Also of importance to businesses are proposals by county governments to enhance revenue collections. The imposition of higher levies, charges and duties by many counties has raised concern.

Instead of increasing levies, counties may consider use of alternative tactics to boost their resources, such as sealing revenue leakages and curbing costs, especially those that arise from functions being duplicated at local and national levels.

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