High expenditure the Achilles heel of Finance Bill, 2023

Finance Bill 2023

A customer attendant fuels a car at Rubis petroleum station on Koinange Street, Nairobi on April 13, 2023. Increasing VAT on fuel to 16 per cent, up from eight per cent, will increase pump prices by nine shillings per litre for diesel and Sh10 per litre of petrol.

Photo credit: Dennis Onsongo | Nation Media Group

When the budget policy statement (BPS) was tabled in Parliament in mid-February, the financial markets became jittery. The already cautious approach to government bonds became a stampede as investors voted with their feet, forcing the cancellation of a proposed 15-year bond. Kenya Kwanza parliamentarians defended the BPS and quickly adopted it.

What caused the market consternation was that while admitting the high possibility of debt distress on account of the large stock of short-term domestic debt maturing this year, the regime proposed a Sh500 billion budget increase.

To finance it, they would need a very aggressive borrowing and taxation programme. And the regime claimed to be able to do all this while increasing interest rates to contain the cost of living! Investors in treasury bills and bonds held out, extracting ever-rising interest rates from a cash-hungry government.

Then the taxation proposals (Finance Bill 2023) were tabled last week, causing a major uproar. Kenyans are disappointed that the proposals will make life harder. Individual citizens, labour unions, clergy and many experts have all condemned the proposals as uncaring, punitive and a slap in the face of hustlers. 

It is easy to see why. Increasing VAT on fuel to 16 per cent, up from eight per cent, will increase pump prices by nine shillings per litre for diesel and Sh10 per litre of petrol. Introducing taxes on flour while claiming to reduce the cost of food is duplicitous, to say the least.

Increasing the turnover tax to three per cent squeezes the informal sector, which is already hurting from high electricity charges. Turnover tax is both punitive and draconian because you have to pay it whether your micro business is making a profit or not. Instead, the government should support micro and small businesses with technology to help them keep records and generate financial statements. Taxation could then be based on income, as happens with larger companies.

The proposed 15 per cent withholding tax for digital content creators is discriminatory, compared to five per cent for other professional services. It also hits the youth hard and threatens the one bright spot in an economy where productivity has stagnated. In addition, digital assets such as crypto will attract a three per cent tax should the proposals be passed.

Abuse of funds 

The three per cent housing fund is discriminatory, as salaried employees who already own a house will still pay it. The claim that it is saving only muddies the waters. What return will the forced contributions attract for the seven years contributors are locked in? Many worry given the history of abuse of existing funds such as the National Social Security Fund.

The regime has refused to “support consumption”, and removed the short-term fuel subsidies they found in place. They pledged to instead support production, particularly in agriculture. This, they argued, is the real solution to high food prices.

But rising fuel prices will hurt agriculture. The three per cent housing fund will also hurt agricultural workers the most, as their wages are low and employers are likely to pass their contribution on to consumers since this is a direct cost, maintaining pressure on food costs.

All these proposals come at a time when average real wages have declined -1.2 per cent, -3.8 per cent and -3.0 per cent for the last three years, respectively.

Our preferred mode of transacting these declining real earnings is mobile money, where excise tax on transfer is proposed to rise from 12 per cent to 15 per cent. And should the hustlers want to visit a salon after a week of toil, the taxman will be waiting there too, with a five per cent tax on beauty products such as wigs.

So, what could the regime have done instead? As repeatedly promised, reduce expenditure. A good place to start is to eliminate all duplication of devolved functions, particularly in health, water and roads. Some experts estimate that this measure alone could save as much as Sh140 billion.

Even when you account for debt service of about one trillion shillings, recurrent expenditure is a runaway Sh1.46 trillion. A prudent step would have been to reduce recurrent expenditure by about Sh600 billion to the 2021 level of Sh1.81 trillion. This would be achieved in part by reducing domestic debt service.

Inflation is high, which means domestic short-term debt will get worse. Dialling back expenditure would stop this downward spiral.

@NdirituMuriithi is an economist.