This week, I had the privilege of being a co-guest on Spice FM’s popular morning talk show. The topic of discussion was how to strike a sustainable balance between taxes and public debt.
In monetary economics, there is no distinction between taxation and public borrowing. Public debt essentially amounts to pre-collected taxes. In the end, what the government borrows will inevitably translate into future taxes.
For politicians, public borrowing serves as a way to raise taxes without facing immediate backlash from voters. The expectation is that when the burden of debt becomes evident, they will have left office, leaving their successors to deal with the consequences.
Consider the current debt challenge of the Kenya Kwanza administration. It is true that they cannot be solely blamed for the country’s challenging circumstances, except for their association with the Jubilee government. While President William Ruto held the position of deputy president for a decade, the ultimate responsibility for the toughest decisions of the administration rested with his boss, former President Uhuru Kenyatta.
Based on this assessment, it is the Uhuru administration that should bear the responsibility for the approximately Sh6.8 trillion ‘impotent’ net debt amassed during their tenure. This figure doesn’t even include an estimated additional Sh3.5 trillion hidden in the accounts of semi-autonomous government agencies.
In March 2013, according to Central Bank data, the public debt was around Sh1.8 trillion. However, the Controller of Budget’s annual report for the fiscal year 2022/23 reveals that public debt had reached Sh8.63 trillion by June 2022.
As I have mentioned previously, there is nothing inherently wrong with using debt financing in any business endeavour. In fact, some of the world’s most successful businesses have been built by borrowing money. Economists refer to this as leverage, which essentially means utilising someone else’s funds to generate more wealth.
However, the idea of leverage falls apart when borrowed funds fail to yield the expected benefits. This brings us to the difficult question: Did the money borrowed by the Uhuru administration result in a stronger economy and improved well-being for the people?
Those of us who raised concerns about excessive borrowing were often labeled as either naive or enemies of progress. The prevailing narrative has consistently been that it would take time before we see the benefits of the so-called ‘big push’ legacy projects.
In theory, infrastructure projects typically have a time lag before their effects become evident in the economy. But these delays should have reasonable timeframes within which they manifest in crucial development indicators. In the case of public expenditure projects, it is expected that government spending would result in increased government revenues, higher household incomes, a more favourable business environment, and improved access to basic public services and amenities.
Regarding government revenues, the Kenya Revenue Authority reported a total of Sh2.034 trillion as of June 2022. I have previously shown that taxes increased by approximately 109 percent during the 10-year Jubilee tenure compared to over 300 per cent during President Mwai Kibaki’s era, despite his government having a net debt of Sh1.2 trillion. According to the Controller of Budget’s report, the Ruto administration collected Sh1.961 trillion in taxes during their one year in office, despite aiming for Sh5 trillion over five years.
Now, focusing on the debt burden, the country allocated Sh683 billion for interest expenses and Sh1.15 trillion for debt repayments (including interest and principal) for the 2022/23 fiscal year, according to the Controller of Budget’s report. This translates to about 35 per cent of tax revenue being spent on interest alone. Essentially, this means that while the country carries the debt load, the benefits are not reflected in the government’s tax revenue.
It is a valid point that one could argue the benefits of these projects might be evident in other indicators. However, for the sake of argument, let us examine whether household incomes or employment data significantly changed over the period.
According to the Kenya Institute for Public Policy Research and Analysis (Kippra) 2023 report released on Thursday, 83.4 per cent of the working population is in the informal sector, while only 15.7 per cent are in the formal sector. Out of the estimated 816,600 jobs created in 2022, 73.2 percent were in the informal sector.
Additionally, the data suggests that poor households, which make up the majority, spend at least 60 per cent of their income on food alone. For many of these individuals, their primary safety net against income shocks is financial assistance from family and friends.
The Kippra report highlights that this support is dwindling as households grapple with a food inflation rate estimated at 13.1 per cent in 2022.
Any semblance of such a safety net is likely to disappear as the full impact of Kenya Kwanza’s tax hikes and planned levies, slated to take effect before the end of the year, begin to affect households.
This is especially true for those in formal employment, given the expected layoffs in the private sector as employers adapt to increased operating costs. Taken together, these two indicators suggest that borrowed funds have not translated into improved household incomes and high-quality jobs. The question arises whether we should still wait for the benefits of the debt-driven projects to materialise. Methinks 11 years is a long time to wait.
No reprieve in sight
If the Jubilee administration burdened the nation with reckless debt, one might expect Kenya Kwanza to perform better. Despite their enthusiastic public appearances and frequent international travel, the actual data tells a different story. According to the Controller of Budget’s report, they fell short in terms of tax revenues compared to Jubilee’s last year in office. Additionally, Kenya Kwanza borrowed at least Sh1.62 trillion, exceeding the constitutional limit set by the National Assembly of Sh10 trillion by about Sh25 billion.
This assault on the Constitution was not limited to debt; it also affected development spending. Both the national and county governments allocated only about 16.8 per cent of their budgets to development, well below the constitutional requirement of 30 per cent. Specifically, the national government allocated only 14.8 per cent to development, while the counties allocated 22.7 per cent. Article 201 of the Constitution restricts borrowing to development expenditure only.
The net result is that, as we continue to accumulate more debt, there is minimal investment in the economy. This is akin to taking a huge loan to host a grandiose wedding ceremony. What do you feed your wife once the honeymoon is over and your creditors come demanding repayment? Or is my imagination too fertile?
According to the Controller of Budget’s report, the national government spent at least Sh20.3 billion on travel, Sh6 billion on fuel and motor vehicle maintenance, and Sh9 billion on hospitality. These figures do not include what the 47 county leaders spent on the same items. Furthermore, the wage bill reached Sh732 billion, making debt interest and salaries the largest recipients of our tax contributions.
But, should you choose to refer to the Controller of Budget’s report, do yourself a favour by skipping the table tracking spending for the year under Article 223. The numbers in there may be distressing!