Budget policy statement offers no reprieve after raid on our pockets

Man displays his empty pockets. [Getty Images]

Given, there have been many things competing for public attention this past week. The widely expected cabinet retreat happened at the Lake Naivasha Resort at the start of the week. Buoyed by the refreshing moments in Naivasha, the National Assembly easily passed the Housing Levy bill a day after the retreat. As things stand, it is unlikely the dance will be stopped at the Senate.

But alongside these events, the Budget Policy Statement (BPS) was quietly submitted to the National Assembly on February 15, as expected, by Section 25 of the Public Financial Management Act of 2012. This is the last date set by the Act when the economic plan must be submitted to Parliament as part of the constitutional requirement on public participation in the planning process.

From this date, Parliament has only 14 days to consider the plan and approve it with or without amendments. Effectively therefore, the BPS would be legally approved by close of business on February 29 regardless of whether Parliament debates it or not.

The county governments are expected to align their County Fiscal Strategy Papers (CFSP) with the BPS within these two weeks and submit it to the County Assembly (CA) for approval by February 28. The CAs also have 14 days to consider and approve their plans. In theory, the dates for these economic plans is cast on stone, and the law does not contemplate any other date that any of the two levels of government can legally approve their economic plans.

For those familiar with the public finance management process in the country, the BPS and CFSP are the most consequential policy documents each year. They set out the overall allocation for each sector and department of either government, provide the revenue projection for the medium term and limits what variations the legislature can do later when they consider the budget estimates.

It thus becomes a matter of public interest to educate ourselves on the key proposals in the 2024 BPS.

Key indicators

The National Treasury projects the average growth rate to close the year at 5.5 per cent, up from 4.8 per cent for the fiscal year 2022/23. The drivers of growth in the coming year are projected to be a broad based private sector growth, a robust performance of service sectors, a rebound of agriculture and the Bottom-up Transformation Agenda (BETA) interventions.

Curiously, manufacturing seems to have dropped off from the drivers of growth in the country.

Based on this expectation, one would be curious to establish how the economic plan has allocated resources towards these priority sectors. Technically, policy makers are expected to allocate more resources in sectors they think will contribute the highest growth in the economy. A quick scan on the expenditure projections, education sector takes the lions share, accounting for 26.54 per cent of the total proposed budget allocation for the executive.

Energy, infrastructure and ICT sectors come second with a share of 20.13 per cent of the executive’s budget. Third slot goes to public administration and international relations that takes 14.4 per cent of the estimated Sh2.43 trillion set aside for the national executive arm of government. This is an interesting development that is emerging from the Kenya Kwanza administration where the top executive offices in the land are becoming major cost centres, unlike any other previous administrations.

Parliament and the Judiciary will have to content with Sh41.6 billion and Sh23.7 billion respectively.   

As expected, the BETA agenda appears all over the plan despite the fact that to this date, there is no tangible document that defines what the specific targets are, the indicators and an action plan to actualise the five pillars.

The Medium Term Plan IV remains a work in progress that has never been approved to provide a common direction for the government and mainstream BETA, 18 months into the first term of the administration. That said, it is on the revenue side of the plan that provides hints into what will happen at the pockets of the taxpayer.

Unrealistic ambition

The government proposes to implement the Medium Term Revenue Strategy (MTRS) within the 2024/25 to 2026/27 plan period. This is in addition to the National Tax Policy approved by Parliament in December 2023 and the Finance Act 2023.

These measures are expected to net off at least Sh4 trillion in tax revenue in the medium term. More specifically, these interventions are expected to raise revenue to GDP ratio from 14.3 per cent in fiscal year 2022/23 to 20 per cent by 2026/27. Tax compliance is estimated to improve from 70 per cent to 90 per cent and increase of investments to GDP ration from 19.3 to 25.7 per cent in the plan period.

Despite this ambitious targets, the government missed on their revenue target by Sh98.7 billion in the first five months of the 2023/24 fiscal year. As at November 2023, revenue grew marginally by 13.2 per cent but missed target in main classes of taxes including Income tax, excise and import duties that were off target by Sh76.6 billion, Sh17.5 billion and Sh12.6 billion respectively. Only VAT exceeded target by about Sh2.2 billion.

The BPS anticipates an unpredictable weather, a tight fiscal space due to multiple external shocks, geopolitical fragmentations and weak global demand that limits exports and Foreign Direct Inflows as potential risks that may hamper realisation of this revenue targets.

Misfiring

Based on the facts proposed for the plan period, two questions emerge: one, have the economic realities of the day been factored; and two, has the plan correctly diagnosed the problem facing the country? The tax classes that are off target for the current fiscal year are clear indicators of what is going on in the real economy. Income taxes is about the formal economy in relation to employment and business profits while excise and import duties will lean towards manufacturing and value adds.

VAT exceeds target marginally despite doubling the rate for fuels, the major consumable in the economy. Collectively, going off target for these classes points to significant trouble on consumption, business profits and manufacturing in the real economy.

We can refer to some trends from the previous two regimes. Monthly tax revenue data available at the Central Bank of Kenya indicates that former President Mwai Kibaki collected Sh2.8 trillion in ordinary revenues and borrowed a net of Sh1.165 trillion in his entire time in office. With this revenue, he grew the real GDP by a net of Sh5.34 trillion from Sh1.03 trillion in 2002 to Sh6.37 trillion in 2012.

From the same dataset, former President Uhuru Kenyatta collected Sh8.6 trillion and borrowed a net of Sh6.869 in his term in office. Despite having almost triple the amount of revenues and debt Kibaki had, Uhuru grew the real GDP by only Sh3.48 trillion.

Comparing the three presidents on their first 14 months in office based on key indicators, President William Ruto added net debt by 24.2 times, collected tax revenue 9.7 times, incurred recurrent expenditure 8.7 times and spent on development 10.6 times more compared to Kibaki for the same period.

In due course, we shall see what impact they are making on the real GDP. For now, the hustlers don’t seem to feel Hustler-nomics.