The true cost of new punitive tax measures on ailing job market

Engineers at Association of Vehicles Assembly (AVA) go through their paces as they locally assemble Kenya's Administration police vehicles at Miritini, January 24, 2018. [File, Standard]

Job creation in Kenya might prove difficult over the coming year as employers move to cushion themselves from new taxes that will see labour costs shoot up by holding off hiring plans.

Some of the factors that will push labour costs up include the housing levy, which is supposed to kick in this month as the government implements the Finance Act, 2023.

The levy, which has generated debate over the last two months, will see employees pay 1.5 per cent of their gross toward the State’s affordable housing plan, which will then be matched by their employers.

The higher tax burden will on the one hand see a reduced take-home and eroded disposable income for employees and on the other hand, increased production costs for companies.

It is the latest in a series of higher levies that have left both employers and employees worse off as the new Kenya Kwanza administration strives to wean the country off expensive debt and fund its ambitious campaign pledges.

The new levy comes months after the State hiked the rates for the National Social Security Fund (NSSF), whose costs are also shared between the employee and employer.

NSSF rates went up to Sh1,080 from Sh200 previously. The contribution is then matched by the employer to bring the total contribution to Sh2,160 per month.

President William Ruto last week said there are plans to raise the National Hospital Insurance Fund (NHIF) to 2.75 per cent of salary that will then be matched by employers at 2.75 per cent. 

NHIF rates are currently on a graduated scale, with those earning Sh100,000 and above paying the highest Sh1,700 per month. It was changed in 2021 when workers and their employers paid a combined Sh700 per month.

The new tax measures, employers have warned, will force them to resort to drastic measures to stay afloat amid a depressed economic environment.

Under the aegis of the Federation of Kenya Employers (FKE), they said they could be forced to put more employees on casual contract terms to avoid costs that would come with having employees permanently.

FKE also expects employees to agitate for increased wages to shield themselves from shrinking payslips, which could lead to standoffs between companies and their staff. The employers’ lobby warned of layoffs by some of its members who may not be able to absorb the new costs.

“The Implementation of the Finance Act will definitely increase business operating costs, which may push businesses to adopt new models such as automation, outsourcing, casualisation and in the worst case lead to massive job losses,” said FKE, responding to queries by Financial Standard.  The Federation noted that the measures could slow down the creation of jobs in the formal sector, an area that the country should be keen on growing.

Of the 19.15 million Kenyans who are employed, only 3.2 million are employed in the formal sector, with the balance (15.96 million) employed in the informal sector, according to data by the Kenya National Bureau of Statistics (KNBS).

The higher cost of doing business has over the years stifled the rapid expansion of the formal sector, including the entry of more firms and transitioning informal sector players to be recognised as formal, where the employees get better terms.

“This may further lead to a shrinking in the formal wage employment opportunities in Kenya,” said FKE, adding that it is engaging the government on the Finance Act, 2023.

Industry players have in the past noted that these costs have made it increasingly expensive to create and sustain jobs in the country and have continuously urged the government to have a predictable taxation policy that allows companies to absorb one tax measure before introducing another one.

Analysts say the larger tax burden might see employers react in different ways, whose end result will be a likely slowdown in employment creation.

“The new housing levy, the hike in NSSF rates and the planned increase for NHIF will affect employers in the private sector negatively. The employers at the beginning of the year did not budget for the increased contributions or taxes that they will pay for their employees. The wage bill for employers will certainly increase because of this,” said Alex Kanyi, a partner in the tax and exchange control practice at Cliffe Dekker Hofmeyr (CDH).

“Employers may consider resizing the number of employees - which could mean layoffs - or delaying decisions to recruit additional staff or changing the terms for some employees so that they are only retained on a consultancy basis.

“The planned changes do not augur well with the government’s plan to create jobs. Employers are hard pressed with the depressed economy and other financial pressures therefore they are likely to look for a way to reduce costs and the victims could be the employees for whom the government is seeking to create jobs.”

The new affordable housing levy could raise at least Sh78 billion in its first year from both the employees and employers or Sh6.5 billion per month starting this July. 

This is based on government data that shows that Kenyan employers - including the government - paid their employees a total of Sh2.61 trillion last year. 

According to KNBS, the private sector wage bill stood at Sh1.82 trillion in 2022, which would mean that private firms and their employees would pay a combined Sh54.6 billion for the affordable housing levy.

“It is going to make employee costs go up so there will be that temptation among companies to do with less, which complicates the job outlook in the sense that it might start creating unemployment at a time when we need to be reducing unemployment,” said Ken Gichinga, chief economist at Mentoria Economics. “Some companies, depending on the strategy, might try to rationalise, but the effects will significantly affect the job market 

He noted that employers will also have to consider the factor that “the cost of labour is becoming more expensive, yet it appears that we are not tapping it to the full.”

Sustained higher labour costs might affect Kenya’s attractiveness as a destination for investors, who may consider other countries in the region.

“This will have medium- and long-term effects, especially for multinationals coming to invest in the country. Does this make us more competitive than the region?” posed Mr Gichinga. The Kenyan economy has in recent years been hit by many shocks, resulting in slowing down employment creation.

These include the Covid-19 pandemic, whose aftershocks are still evident; the three-year drought and global challenges, including the Russia-Ukraine war and the US tightening of its monetary policy that has resulted in the weakening of the shilling as well as a shortage of dollars locally.

The result is a slowdown in employment creation, with the economy generating 816,600 jobs in 2022, a 4.45 per cent jump from the previous year. However, the momentum in employment creation last year slowed down when compared to two years earlier, when jobs grew by 924,900, or 5.31 per cent, between 2020 and 2021 on economic recovery following the drop in Covid-19 numbers.