In Jubilee’s first budget, a tyranny of numbers

Courtesy of The People: The budget has been read, but many are still wondering what it really means. Justifiably so because, unlike previous budgets, this one was short of overt tax increases and long on wide-spread levies on businesses and rich guys. Some even went on to suggest it was a poor man’s budget. From a layman’s glance, it looks so much robbing the rich to pay the poor. 

Far from it. The 2013/14 budget wasn’t going to be an easy balance. The government needs more revenues to finance the Sh1.65 trillion budget and the expanded government. Total revenues for the year are estimated at just over Sh1 trillion, 7.5 per cent more than the current fiscal year, representing close to a quarter of the country’s gross domestic product (GDP).

With a deficit of Sh356 billion, the Jubilee government faces a tough time raising finances. First, it has to borrow Sh67.4 billion externally, more than Sh100 billion from the domestic market and raise the rest from various tax measures and planned reforms. This budget is the real tyranny of numbers. But history is harsh on a tax-and spend budget as tax collections rely on external factors beyond Kenya Revenue Authority’s control. If the economy slows, so do tax revenues. By March this year, KRA had collected Sh560 billion for the ending fiscal year, missing its target by Sh27 billion. This can be attributed to the slowdown in business due to the elections. Collections in the second half of 2013 are likely to be higher, based on the ambitious projection of 5.8 per cent growth.

Borrowing more

The tough task will be funding this budget. The tax reforms proposed will take some time before they improve revenue collections. This means we will see the government borrowing more from the local market, which will exert pressure on interest rates upwards. Higher interest rates will slow credit uptake by the private sector and eventually hurt overall economic growth. The end result will be not only less tax collected, but also fewer jobs created and lower revenues for workers. It is always a delicate balancing act when there is such a huge deficit and many priority areas yawning for financing.

If the government can’t borrow more, then it will be forced to delay implementation of some long-term capital intensive projects like the railway line from Mombasa to Kisumu to divert the money to more pressing needs. Taxing imports was a big coup. Kenya is a net importer, so this should bring in substantial revenues. But the downside is the impact it will have on the prices of imports. Life will get costlier, especially for the middle-class and high-end consumers who rely more on foreign-made goods. Low-end consumers will be hit as prices of goods made from imported raw materials rise.

The government is also banking on the passage of the VAT Bill to grow its revenues. The Bill seeks to re-introduce value-added tax on essential products that had been zero-rated. The Bill is as controversial as it radical. If passed, prices of essential foodstuffs like flour, milk, books and sanitary towels will go up by at least 16 per cent and hit poor households who spend up to 70 per cent of their incomes on food. The catch is in the VAT Bill. That’s what will determine the fate of taxpayers. Most of the other tax measures are small blocks that can’t make an impact on their own. The other investments in capital projects and welfare programmes have longterm effects.

Too ambitious

Pouring money in youth and training will pay back in years to come but of immediate concern is to stimulate private sector growth. The Cabinet Secretary for National Treasury Henry Rotich didn’t have much to make business people happier. That makes the 5.8 per cent growth forecast a little too ambitious for a recovering economy that is forced to support a bloated government. MPs are agitating for more pay. Teachers are already protesting. We are going to see more civil service employees pressing for better terms and this will put the budget under pressure. Rotich will have to make hard choices, including, if possible, taxing beer and cigarettes in coming months. Or going heavy on the rich and corporates. But beware, choices have consequences.