Stimulating growth would have created jobs, shored up national revenue

In the fog of politics, a crucial debate passed unnoticed these past two weeks. On one side was the Council of Governors (CoG), and on the other, Treasury and Commission on Revenue Allocation (CRA) mandarins. The issue at hand was how to stimulate the economy, create jobs and increase incomes.

Without significant growth, tax collection will continue to be sluggish and the percentage of revenue going to repay debts will remain high.

Treasury mandarins argued that the solution is fiscal consolidation. CRA supported them, claiming that there is hardly room for more borrowing.

CoG economists preferred stimulating the economy to achieve growth. The Treasury mandarins carried the day and the Intergovernmental Budget and Economic Council held the division of revenue – that is the portion of nationally raised revenues that will go to counties – at Sh370 billion; the same level as last year.

Treasury and their patrons, the International Monetary Fund (IMF) feel Kenya’s national debt is rather high. The debt-to-GDP ratio is 68 per cent, which is, in the wisdom of IMF,  very risky for a low-income country.

This is the result of heavy borrowing by the Jubilee administration to build roads, railways, airports and dams (including a couple of ghosts). The new borrowing works out to around one trillion shillings per year.

Missed revenue targets

As a result, the amount needed to repay these debts has grown astronomically to Sh1.17 trillion for this fiscal year, about a third of the total budget (Sh3.66 trillion). This obviously crowds out services. 

To be sure, there is no clarity on the best level of debt-to-GDP ratio. The ratio is 119.5 per cent for Portugal, 117.3 per cent for Barbados, 109.4 per cent for Singapore and 106.7 per cent for the USA. It is higher for Lebanon (151 per cent), Greece (177 per cent) and Japan (237 per cent). Why Kenya’s 68 per cent should be considered bad remains a mystery.

What is clear though is that 30 per cent of the annual budget is going to service the debt. In addition, the taxman has missed revenue targets. In the year to June 30, 2021, the Kenya Revenue Authority collected Sh1.67 trillion, compared to Sh1.6 trillion the year before. Although this was below the Sh1.8 trillion target, it was still a significant 136 per cent growth from 10 years ago (2011/12) when the figure stood at Sh707 billion.

The mandarins made the counter-intuitive argument that we should hold back expenditure. That is what is meant by the urbane-sounding “fiscal consolidation”. This is a bit self-defeating, because   if the economy is not growing, you would have to raise the level of taxation. Sounds familiar? This is why Treasury raised taxes on fuel, mobile money transactions and so on.

CoG argues for stimulating the economy. And there is no better channel for this than county governments, which instantly create 47 centres of equitable growth. The mandarins carried the day and next year’s expenditure is to be held at the same level as this year. Not even growing the amount to cater for inflation. Talk of growth by standing still. A new kind of economics.

Ndiritu Muriithi is the Governor of Laikipia County. @NdirituMuriithi