Report: Treasury’s tax targets too ambitious

Over the four years reviewed, real revenue collections grew at a modest 14 per cent, while the Government believed revenues would grow at 23 per cent, invariably contributing to rising fiscal deficits and borrowing.

Ambitious revenue targets tend to fuel more spending requests and can drive an overall deficit. The Government needed to cut spending during the financial year through supplementary budgets, and ramp up domestic borrowing to cater for an earnings deficit.

“There is likelihood of revenue underperformance as the revenue projections are based on a high GDP growth projection. With revenue collections repeatedly falling short of their target for several years since 2010, for example, and with rising spending pressures from wage bills, expenditure allocations to counties, increased spending on infrastructure developments and social sector, debt financing took marked prominence,” the PBO says.

It argues that for KRA to increase its collections at a faster rate than economic growth, there would need to be radical reform measures in revenue administration.

“It is important to point out that the initial ordinary revenue growth for 2015-16 was set at 21.9 per cent. Owing to a slowdown in economic growth, among other variables, the Treasury projects the growth of ordinary revenue to stand at 14.6 per cent by the close of June 2016. The revised growth is broadly in line with the nominal growth of GDP, which is projected to stand at 15.1 per cent,” the report notes.

KRA is already staring at a huge tax deficit this financial year. Revenue statements from the Treasury show the taxman had raised Sh888 billion by the end of April against a target of Sh1.2 trillion.

To meet the target, the taxman will be required to collect more than Sh327 billion in two months. This is a long shot given its collections history.

The PBO said the Government has once again set ambitious revenue targets for the new financial year that starts on July 1.

“The envisaged growth in ordinary revenue in 2016-17 will stand at 16.7 per cent compared to nominal growth in GDP of 12.6 per cent. This implies that revenue is projected to grow faster than the economy,” the report says.

“A careful review of approved Budget revenue estimates and end-of-period actual revenue points to systematic overestimation of revenue.”

Forecast errors

It adds that despite the fact that forecast errors should be lower if the growth of given revenue components is stable (for instance, growth of income tax and import duty are stable and their shares in GDP are predictable using historical information), these revenue components are always overestimated.

In the 2016-17 Budget, the Government targets to increase its revenue collection to Sh1.5 trillion. This represents 21.3 per cent of GDP, and is an increase from this fiscal year’s Sh1.2 trillion, which is 18 per cent of GDP.

From revenue collections, external grants and other borrowings, the Government intends to spend a total of Sh2.27 trillion, up from the current Sh2.09 trillion.

The PBO report is set to give the taxman some support in its argument that the Treasury sets revenue targets that are out of touch with the fundamentals of the economy.

“To achieve credible revenue targets requires reduced Government spending pressures and improved forecasting of revenue. Additionally, certain measures may be implemented in the next financial year and the medium term to improve revenue performance,” the report says.

Tax cheating

The Budget experts say certain administrative efforts could also be implemented, among them a more concerted clamp down on tax cheating.

Recent laws, such as the Excise Duty Act and the VAT Act, outlaw schemes designed to reduce the tax liability of taxpayers. Other measures aimed at improving collections include digitising the tax process, as well as curbing tax erosion from transfer pricing.

The report adds that there are no significant policy adjustments to warrant GDP growth of almost 400 basis points from 5.3 per cent in 2014, 5.6 per cent in 2015 to 6 per cent in 2016.

Thus, it says, the economy is likely to grow by 5.8 per cent this year, with election fever expected to dampen prospects. Historically, election risk remains the greatest challenge in economic growth.