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The underlying problem in Budget is lack of sound public finance policy

By Kethi D Kilonzo | September 30th 2018 at 12:00:00 GMT +0300

President Kenyatta’s Memorandum dated September 13, to Parliament was well written and argued. He informed Parliament that his government needed the funds from Petroleum VAT to finance its programmes. He advised Parliament that exempting Petroleum from VAT increased the costs of distributors as they could not claim input VAT. He pleaded with Parliament to retain the housing and money transfer levies to finance his Big Four housing agenda. 

Parliament failed. Its failure was not the inability to marshal numbers to defeat the President’s proposals. Parliament failed to grab the rare opportunity, when public attention was fully focused on it, to debate the government’s public finance policy.  Instead, Members of Parliament stage managed the debacle of September 20 to please both the public and the President. 

The underlying problem in Kenya’s 2018/19 Budget is not the Petroleum VAT and the housing and money transfer levies. The underlying problem is the lack of sound public finance policy. President Magufuli’s public finance advisers and Tanzania’s Members of Parliament are doing a much better job. President Kenyatta’s public finance advisers and Kenya’s Parliament should borrow a leaf or two, if not the whole tree, from them.

Tanzania 2018/19 budget is growth oriented. It focuses on agricultural production and productivity, industrial manufacturing, infrastructure and social services. Its biggest expenditure will be development. Thirty seven percent of Tanzania’s budget will be spent on local and foreign development. 

In contrast, Kenya’s budget is focused on spending. Sixty percent of Kenya’s tax revenues will go towards debt repayment. In contrast, only 7 per cent of Tanzania’s budget will be spent on domestic and foreign interest repayments. It is easy to understand why Tanzania is not staring into the debt abyss that Kenya is. For example, Tanzania is constructing a standard gauge railway. However, it is financing the construction differently from the way Kenya is.

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The first phase, that was launched in May 2017, was the 522km from Dar es Salaam to Dodoma. This phase is being constructed by Turkish firms. In August 2018 Tanzania entered into an agreement with the Standard Chartered Bank Group for a concessional loan to construct the 2nd phase of 426km from Morogoro to Makutupora in Dodoma region.

There are at least two advantages in this type of financing. One, Tanzania will not be charged market-based interest rates. Two, because Standard Chartered Bank carries on business in Tanzania, the interest paid by the government will remain in circulation within Tanzania. The government has gone further to encourage and deepen domestic borrowing by exempting all government interest payments from withholding tax. 

President Magufuli’s flagship projects are agriculture, industries, infrastructure and social security. Tanzania, like Kenya, is also investing in social security. However, unlike Kenya, it is not increasing the burden of taxation on ordinary citizens to do so.  Instead, it is encouraging new investments and boosting local business capacity. It has reduced the corporate income tax rates for pharmaceutical and leather industries from 30 per cent to 20 per cent for five years. Though fuel consumption has risen, Tanzania’s government did not increase excise duty on petroleum products. This deliberate policy is meant to lower the costs of agricultural and manufacturing industries. 

In Tanzania, Parliament has approved its government’s policy to reduce taxes to encourage investment, industries and businesses. In Kenya, Parliament has approved the government’s policy to increase taxes to boost government revenues.

President Kenyatta’s big four agenda is well intentioned for the benefit of low-income earners in Kenya. However, the President’s big four agenda is being financed from the same pockets that it is meant to benefit. By imposing housing and money transfer levies to finance affordable housing, universal health care, food and security the President is giving with one hand and taking with the other. In the remaining three financial years of his term the President Kenyatta’s public finance advisers should develop more viable financing models.

- The writer is an Advocate of the High Court of Kenya. [email protected]


Uhuru Kenyatta VAT Fuel Tax Budget
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