President Ruto must tap into non-tax revenue to fix battered economy

President William Ruto addressed MPs during the opening of the 13th Parliament on September 29, 2022. [Boniface Okendo, Standard]

After impressing the world with his address at the 77th United Nations General Assembly, Kenyans were waiting for some local joy during President William Ruto's speech at the opening of our 13th Parliament. This, of course, coming days after his nomination of Cabinet Secretaries and Cabinet-level advisers earlier in the week. It was a brief address, but there was enough in it to confirm that President Ruto is laser-focused on the economy, and the role of hustlers in its transformation.

It was no surprise, therefore, that he spent a good part of his speech referencing what I refer to as Kenya Kwanza's "Front Five" in "The Plan". We heard about low-cost fertiliser, and the principle around subsidising production rather than consumption. We agreed with his calls on access to credit and efforts to improve credit referencing and reporting. The Sh50 billion Hustler Fund promise remains, with the "new news" being that it will be leveraged on technology.

Mass production of affordable housing will be supported by land provision and, yes, cheap and stable funding. Legislative proposals for housing development via off-take plans to attract and guarantee private sector participation are in the works. We might soon have IWPs - Independent Water Producers - as part of a public-private partnership (PPP) framework for water, as is the case with electricity. Some may ask if we should be privatising water, as we have essentially already done with other Article 43 socio-economic rights in the Constitution such as education and health.

Delivering Universal Health Coverage (UHC) and restructuring the NHIF are big parts of the healthcare agenda, including a social insurance vision that targets chronic diseases not normally covered by insurance. From his remarks, it would appear that, other than the Hustler Fund, the digital agenda is still unfolding, while it was surprising that there was no mention of the creative economy.

He announced plans to enhance our social security infrastructure, including government "top-ups" of hustlers' savings (or does the top-up apply to everyone?). In mentioning ongoing drought relief efforts, Dr Ruto correctly pointed to the urgency of dealing with climate change and its effects. And he did not forget whom he was addressing, offering tacit support to the National Government Constituency Development and Senate Oversight funds. It was a short speech, with lots of giving.

There was also mention of the fiscus, first in a savings context in pointing out that our savings-investment gap is such that government plans to borrow Sh900 billion in the current fiscal year. More worrying was the confirmation, after a decade of obtuse Treasury denials, that this borrowing would finance both recurrent and development expenditure, or in layman's terms "we are borrowing to pay salaries". Sometimes the numbers simply do not lie!

Way forward

Then, in pointing the way forward, President Ruto offered that, in the medium-term (three years), government will seek to contribute to this national savings effort by squeezing recurrent expenditure back into revenues. This is consistent with "The Plan", which aims to anchor the fiscus on revenue, rather than expenditure, growth while keeping revenue projections at a realistic average of the past three years and emphasising budget-neutral spending interventions.

Then came the neutron bomb. Treasury will work with ministries (presumably including departments and agencies) to find savings of Sh300 billion in the current (2022/23) budget. And more in future years. Presumably, this refers to savings in recurrent, not development, expenditure. Across recurrent spending, payroll tends to be fixed, although there are plans - based on SRC recommendations - to eliminate Sh100 billion in allowances available to civil servants.

So the blast site will be operations and maintenance (O&M). Sh300 billion would be more than half of government's O&M budget. In theory, O&M is supposed to represent the goods and services that government people (payroll) apply towards service delivery. In reality, O&M can be thought of in two ways. The first is procurement, and the mix of brokers and shenanigans therein.

That is how goods and services are acquired. The second is the actual goods and services acquired. Here are some of the main budget lines: domestic and foreign travel (and subsistence), printing and advertising, training, hospitality (including office tea), fuel (guzzler) oil and lubricants, office supplies (including newspapers), vehicle maintenance and furniture purchases.

In simpler English, less travel and per diem, or training and benchmarking "jollies" and bring your own food to work. Media will cry about less advert space, but we have to cover that. Then, stick with the furniture you find in office, and the vehicles you are offered. Get a personal online subscription to your daily gazette. Top bureaucrats will weep in their cushy corner offices.

The smarter idea might have been an O&M audit that builds on a functional review of each MDA to surface and then rationalise the services actually offered. Even simpler, can every MDA in government cost the service charter that it bombards us with on its walls? Aren't those the services that should be reflected in O&M budgets? No worries, this is a government in a hurry to deliver.

Government services

Service delivery is a great point at which we may rethink our fiscal conundrum. If all government services were smooth, efficient and seamless, would you willingly pay for them? Of course you would. You wouldn't need to line up in endless queues. You wouldn't need to call on brokers. You would be a willing and active subscriber to the Government Digital Payment Service (GDPS) commonly known as e-citizen, which you would access from anywhere in the world, right?

Welcome to the world of non-tax revenue. In our national obsession with the tax take, which President Ruto described as an illogical order of trade over wealth taxes before describing what could be a new tax policy moment around a hierarchy of wealth, consumption, income and trade taxes (idle capitalists beware!), we pay little attention to sums collected from government service provision. We are in pretty much the same position that banks held in the 1980s when non-interest income was of little interest because all profit had to be milked out of usurious lending rates.

Shouldn't we be thinking about non-tax revenue as a budget balancing measure? After all, it's largely about payment for direct services to us rather than the indirect costs and benefits that taxes are supposed to offer. Take a look at this year's budget. The total revenue target is Sh2.44 trillion. An eighth of that (Sh300 billion) is Appropriations-in-Aid, most of which (outside of donor revenue (i.e. cash) funding) should be non-tax revenue. Are we only collecting Sh300 billion from the hundreds of services that government offers us on a daily basis, and we are willing to pay for?

Actually, it's much less. What is this non-tax revenue? It is only Sh2.5 billion from traffic licences (don't we have more than half a million vehicles in Kenya?), a paltry Sh250 million from licensing our billion-dollar betting, lottery and gaming industry, a little over Sh20 million from mining prospecting and export licences, Sh2 billion in portfolio interest and Sh25 billion in profit and dividends from state-owned (parastatal) and state-interested corporations.

Unexploited cash cow

It is also Sh6 billion from surplus parastatal cash (the same parastatals with Sh449 billion in pending bills!), roughly a billion shillings each in land rent and royalties (only?), Sh2 billion more in other fees under the Traffic Act, a billion more in other land revenue and almost a billion and a half in business registration (don't we have about half a million companies in Kenya?).

Throw in Sh20 billion in identity charges (including Sh8 billion in work permits and almost Sh5 billion in visas and the like), and another Sh2.5 billion from the Judiciary (including fines and penalties). Then add another almost Sh2 billion in "other receipts not classified elsewhere". That's a non-tax revenue total of less than Sh100 billion. In its own totals, Treasury quietly fiddled the revenue book to show a bit more than Sh200 billion (the fiddling is in "sale of goods and services"). Ambitiously, though, we should be looking at non-tax revenue closer to a trillion.

It can be with a fully functioning GDPS. This demands that the "S" for service is prioritised over the "P" in payment. The larger point, however, is that President Ruto has within his means an unexploited cash cow to which he might pay more attention. He doesn't need a task force for this.

It will require the same sort of epiphany that banks experienced in realising that non-interest income is just as important as interest income. It will also need a tougher orientation towards the concept of public service as something much better than the "madharau" language often assigned to it. On the campaign trail, we heard statements around doubling our tax take to Sh4 trillion. Maybe the quicker idea might be to grow non-tax revenue in line with better government service?