What tax collections say about Ruto's management of economy so far

President William Ruto. [Standard]

In a roundabout way, one of this Kenya Kwanza administration’s greater successes has been to upgrade conversations about taxation among Kenyans.  Today, our media points us to the idea that anything that looks, walks and talks like a tax is a tax.  On the flip side, tone-deaf officials point out that borrowing as an alternative is a future tax, a burden shift to future generations. 

What they don’t say is we are in the middle of a debt-inspired, not growth-friendly, tax moment.

Let’s explore these ideas using two recent press stories. The first told us that Kenya Roads Board (KRB) plans to add Sh5 to the current Road Maintenance Levy (RML) of Sh18, which is part of the cost of every litre of fuel we consume. This levy maintains our road network across highways, urban and rural roads.  The information comes from KRB’s 2023/24- 2027/28 Strategic Plan.

To the ordinary Kenyan and your typical business, it doesn’t matter that we are calling this a levy with a specific use.  Any increase is effectively an increase in the cost of government, which means an increase in the cost of doing business and ultimately, the cost of living. So at an individual, household or corporate level, it’s simply another burden being placed on lives and livelihoods.

Now here’s a twist.  The same KRB strategic plan proposes something else, not yet quantified, which they are calling a “road user licence”.  So we pay to maintain roads, and we pay to use them. There’s also a proposal to issue yet another Sh150 billion infrastructure bond (remember, borrowing is future taxes), an amount equivalent to almost two years of current RML collections.

KRB is simply an innocent example here, but you can be sure that every government agency that has the capacity to raise a new levy or licence fee or user charge is probably planning to do it. This includes agencies beyond Kenya Revenue Authority’s ambit - ministerial departments, commercial state corporations, semi-autonomous executive agencies and county governments. 

We don’t call them taxes, but they look, walk and talk like taxes – multiple extractions from tax-paying private citizens and enterprises by the predatory state. Good luck with investors and jobs!

A big disappointment with this administration is its lack of a big, national revenue picture. This picture might better consider, say, trade-offs between user charges/fees for service on one hand, and taxes on the other, across all levels of government. We are not even close to this thinking.

Instead, we have a domestically driven but incomplete national tax policy that should probably be a more comprehensive revenue, or even better, resource mobilisation, policy.  We have an IMF-directed draft medium-term revenue strategy that sets targets for ordinary revenue (taxes plus investment income) but only strategizes for taxes. When it’s this mixed up, then we are all fair game for every MDA that thinks it can squeeze something out of us. It’s simply not sustainable.

Hence our second story on KRA revenue collection for the first quarter (Q1 – July to September) of the 2023/24 fiscal year. Headline data told us Sh586.9 billion was collected compared to Sh541.6 billion in the same quarter in 2022/23 (growth of Sh45.3 billion or 8.4 per cent above previous) but below the Sh665.9 billion target (shortfall Sh79 billion; 11.9 per cent behind target).

Here are two unusual “top-down” headline analytics.  First, 8.4 per cent nominal growth - after VAT on fuel was doubled plus new taxes or higher tax rates – is actually zero growth, if we throw in 7-8 per cent inflation between Q1 2022/23 and Q1 2023/24.  Put simply - keeping all things constant -  this should have been the rate of growth WITHOUT Finance Act 2023.  Put differently, at aggregate level, Finance Act 2023 had zero effect on revenue collections in Q1 (in other words, the net effect of pluses and minuses across all pre and post-Finance Act revenue heads was zero).

Second, and relatedly, KRA was clearly shooting for the moon in expecting to collect Sh124.3 billion more in Q1 this year than last (growth rate of 22.3 per cent).  8.4 per cent growth achieved represents 3/8ths of target. Extrapolated to the full year Sh2.768 trillion target (which itself calls for 27.8 per cent growth on Sh2.166 trillion achieved in 2022/23) at 3/8ths achievement of the growth target produces an actual revenue outturn of 2.385 trillion; Sh383 billion short.  This assumes that Q1 economic/taxpayer climate does not worsen during the year - which takes us back to questions Laffer Curve advocates might raise about Finance Act effects on compliance.

Let’s stick with this second analysis. A Sh383 billion revenue shortfall pushes us towards the fiscal cliff. We are all thinking about the US$2 billion Eurobond One bullet repayment in June next year, but we also have at least another US$2 billion in this year’s big external debt service (Eurobond 1 to 4/5 interest; SGR repayment/interest and syndicated loan repayment/refinancing and interest) to pay in dire exchange rate conditions.

Put it this way.  The 2023/24 budget put the shilling equivalent of these selected items – because this is not the full extent of our external debt - at Sh480 billion when the shilling was at 120 to the dollar.  At 150 to the dollar, that’s Sh600 billion (Sh120 billion more than budget); at say, 180 to the dollar, we are talking Sh720 billion (Sh240 billion more). This is before we consider our high-interest-rate domestic debt and its redemption in an impossible monetary and fiscal space. If we develop this sketch, target revenue collection isn’t enough, and the shortfall that is its reverse takes us into official bailout territory. Unless, we close all counties and part of government.

To repeat, this is a speculative read; an extrapolation of KRA’s QI revenue performance in a wider fiscal context. This is the macro perspective that officials from the Presidency, National Treasury, KRA, Central Bank and others are presumably looking at because markets definitely are. 

Instructively, the Central Bank Governor’s brief to Parliament this week spoke to expected Bretton Woods (IMF/World Bank) support adding up US$1.7 trillion in coming months. A KRA shortfall scenario of Sh383 billion (US$2.5 billion at Sh150) requires more than twice that support.

So let’s go back to the first analytic, which offers a more immediate micro perspective on this QI performance based on KRA’s presser and press snippets from their presentation to the National Assembly’s Finance and Planning Committee.  Why was Q1 off target?  Slow economic growth.  Lower oil imports. Tax exemptions for food imports. PAYE non-remittances, especially by the public sector. Why was Q1 growth slower this year? See above, plus off-target performance on corporate tax instalments, especially in the ICT sector (read, telcos).  It’s a mixed bag of stories.

Because one positive that was harked about was the success of e-TIMs, which pushed up the VAT take.  And withholding taxes (as a proxy for activity) were up on interest (banks?), management fees, dividends, betting and gambling, contractual fees and commissions. Indeed, KRA was constrained to paint a picture for the Committee on Kenya’s economic environment. Banking sector growth is down. Oil and non-oil imports are down.  But what’s happening these days with manufacturing, industry, construction and transport?  We have more questions than answers.

The picture that links micro and macro perspectives is best offered by the domestic and customs performance.  Domestic tax collections grew by 14.9 per cent over the previous year but were 9.7 per cent off target.  Customs and border control revenues declined by 2.7 per cent over the previous and were 16 per cent off target. To repeat from before, after adjusting for inflation, is the Finance Act effect zero, or might it have been negative? Does the data tell us anything about the limits of our tax capacity, particularly in a challenging economic environment? 

We probably do not have all the answers but, to go back to the beginning, we reaffirm three questions. First, where’s the big picture on Kenya’s resource mobilization agenda, beyond taxes?  Second, what does Q1 tell us about the growing depth of Kenya’s fiscal fragility (if overambitious revenue targets are not met) and the increasing likelihood of our first-ever IMF bailout in history?  Third, what does Q1 tell us about the state of the economy? There is also a final question.

In the end, we can argue all day long about tax rates, the tax base and the tax menu, but, at what point do we begin to accept that our tax/revenue/debt distress starts with our spending habits?

Kabaara is a management consultant.