President William Ruto and his host Djibouti counterpart Ismail Omar Guelleh at the presidential palace in Djibouti on June 11, 2023. [PSC] All eyes will be on Parliament this Thursday amid growing public anxiety over soaring prices of goods, with President William Ruto set to face his first real leadership test when his government tables the National Budget for the 2023/2024 financial year. This will be the Kenya Kwanza administration's maiden full budget with Ruto as President, which could determine his new government's approval rating for the rest of the year. Ruto, who vowed to make the living cost issue a top priority upon taking office last September, faces an early acid test in delivering on his pledge. His administration has proposed raising taxes and boosting spending in its proposed Sh3.6 trillion annual budget in a test of his prudent policymaking over populism, just months after the closely contested August 2022 presidential elections. President Ruto has argued that his budget is aimed at rejuvenating the battered economy and staving off a possible economic collapse. His cash-strapped government is banking on the controversial Finance Bill, 2023, which seeks to hike taxes on fuel, housing and digital content to mobilise additional revenues in the face of rising debt repayments such as the soon-to-mature Eurobond. But the tax proposals in the Bill have drawn sharp criticism from ordinary Kenyans and various interest groups as well as the Raila Odinga-led opposition coalition, arguing the cost of living is already too high, leaving no room for additional taxes. The clamour to raise taxes comes against the backdrop of concerns over rising costs in an already repressed economy. Opponents of the Bill have warned that raising taxes in the prevailing economic conditions will not only hurt businesses and individuals but also stifle the broader economy in the end. "Taxation for our economic model and growth stage has been badly misaligned for many years. And increasing desperation for funds by heavily over-indebted governments is now making them draw up increasingly unrealistic tax policies and rates," says economist Deepak Dave of Nairobi-based Riverside Advisory. "They cannot possibly go higher. They have to go down, that is the only debate to have." The National Treasury has made proposals to not only raid the thin payslips of about three million salaried Kenyans and significantly reduce their take-home pay but also increase taxes on essential commodities, which is expected to further raise the cost of living. This is even as MPs, whom observers note are supposed to protect citizens from such overzealous plans by the government, have been criticised for going to bed with the Executive and are expected to pass Treasury's proposals. Should they pass the proposals as they are, salaried Kenyans will see deductions on their earnings go up significantly. The proposed three per cent housing levy is set to have the biggest impact on the amount of money they take home every month, although reports indicate that lawmakers had reached a compromise to cut the deduction from the initial three per cent to 1.5 per cent of their gross pay. Other deductions This is even as other deductions such as the new National Social Security Fund (NSSF) and National Hospital Insurance Fund (NHIF) rates kick in. The controversial Finance Bill has proposed a raft of new taxes that the Kenya Kwanza administration has pinned its hopes on to grow tax revenues. Once in place, the new and increased taxes across different products and services are expected to generate an additional Sh289.3 billion in tax revenue. The National Treasury has in the Budget Policy Statement set a tax revenue collection target of Sh3 trillion in the 2023/24 financial year and Sh4 trillion over the medium term. This, it says, will be achieved through a combination of both tax administration and tax policy reforms. The total budget for the next financial year has been set at Sh3.6 trillion. The Kenya Kwanza administration had in the run-up to last year's General Election said it would cut wastage in government and with that, trim the budget. The government has defended the housing levy as a saving, which while reducing the earnings of an individual in the short term, is a gain in the long term. It also says that an individual will be able to opt out of the scheme if they do not qualify for affordable houses after seven years. The last two years have been marked by a period of rapidly rising inflation. The high inflation has hit lower-income households the hardest, mostly because of the sharp increases in food, fuel and electricity prices. Inflation continues to hover outside the government's 2.5 per cent to 7.5 per cent range since breaching the upper limit in June last year. The cost of living measure increased in May to stand at eight per cent from 7.9 per cent in April when it had declined to a 10-month low at the onset of the long rains season. While the housing levy has been the focus of attention perhaps due to the immediate and huge impact it will have especially on the pay of salaried employees, it is not the only proposal that will push up the cost of living further. Treasury has proposed an increase in the Value Added Tax (VAT) on petroleum products to the standard rate of 16 per cent from the current rate of eight per cent. Oil marketers have warned that the increase in VAT levied on petroleum products could see a litre of petrol retail at well over Sh200. The Petroleum Outlets Association of Kenya (Poak) says this would be ill-timed. The Kenyan economy, the lobby noted, heavily relies on petroleum, whose cost is already at historical highs and has pushed up the cost of living. Ruto goes big on tax collection as first Budget set at Sh3.64 trillion "This will cause an immediate rise in the cost of living, which is already very high. It should not be lost on all that the inflation on fuel prices has been the main cause of the rise of the cost of living," said Poak. "An additional tax on petroleum borders on immorality. This proposal would see Kenyans buy petrol at almost Sh200 per litre." Higher fuel costs could be detrimental to the economy. Businesses and individual Kenyans have already been scaling down consumption of petroleum products, which could be an indicator of an economy that is growing at a much slower pace. According to government data, usage of fuels such as diesel, super petrol and cooking gas dropped by eight per cent on average in 2022. Diesel, a fuel largely used by industries such as transport and manufacturing, dropped 0.78 per cent. The country consumed 2.27 million metric tonnes of diesel in 2022, which is slightly lower than the 2.29 million tonnes consumed in 2021. Though the drop in consumption of diesel was marginal, it is a fuel whose usage is considered among key indicators of the health of an economy. During the public participation phase of the Bill, ordinary Kenyans, businesses and their lobbies presented different opinions on the proposals. Local manufacturers have warned that some of the proposals in the Finance Bill, 2023 could force them out of business. They say proposals such as the 10 per cent export and investment promotion levy on imports would hit many industries such as cement, steel and paper hard. Giving their input on the Bill under the aegis of the Kenya Association of Manufacturers (KAM) to the National Assembly's Committee on Finance and Planning recently, they noted that if it is passed in its current state, it would significantly weaken local manufacturing. They warned that the proposed tax measures could also result in an influx of imports from neighbouring countries. "One of the key concerns in the Finance Bill, 2023 for manufacturers is levying imports to support exports. The products that will be subjected to this levy are critical to manufacturing processes," KAM Chief Executive Anthony Mwangi told the Kimani Kuria-led committee. The lobby said the proposed tax measures go against the government's commitment to supporting local manufacturing. Raw materials Mr Mwangi said raising the cost of raw materials would make locally manufactured products more expensive. The Finance Bill seeks to grow tax revenues to fund the Kenya Kwanza administration's first budget of Sh3.6 trillion. Out of the Sh660 billion that the government is expected to borrow to support the implementation of the budget, Sh530 billion will be borrowed locally, which usually carries the risk of banks increasingly lending to the government at the expense of the private sector. The Kenya Kwanza administration recently set an ambitious tax collection target of Sh3 trillion for KRA by June 2024. Tax revenues are expected to further double within the administration's first term in office. Experts say raising taxes might not have the intended impact of increasing tax revenues and instead, the government should grow the tax base. In some instances, tax experts say, the government should consider reducing taxes to boost businesses as well as the spending power of Kenyans, a move they say can help the economy that is reeling from multiple shocks, including the prolonged dry spell, high energy costs, and the Covid-19 aftershocks that have had the impact of increasing the cost of living. "Kenya has some of the highest tax rates in the world. Our income tax brackets have pretty much stayed the same since early 2000. The highest tax rate of 30 per cent is applicable to all income above $250 per month at the current exchange rate. When the tendency is to tax every possible aspect of life, there is hardly any disposable income left for people to spur demand and create growth," Kunal Ajmera, the chief operating officer at Grant Thornton, a consultancy firm said recently.