Decline in tax revenue started before Covid-19, budget office tells Treasury
During the 2019/20 financial year, tax revenue declined by 14 per cent, while in 2018/19 and 2017/18 the reduction was at par by 15 per cent.
Data from the National Treasury now shows that the country’s declining tax revenue started before the dawn of the Covid-19 pandemic in March last year, with the biggest casualty being income tax and Value Added Tax (VAT).
But, even as this happened, recurrent expenditure has been on an upward trend amid the pandemic the National Treasury blames for declining revenue.
The latest revelations are, however, contrary to claims by mandarins at the National Treasury that the Covid-19 pandemic was the main reason for revenue under-performance in the second half of the 2019/20 financial year.
Data from the National Treasury as captured by the Parliamentary Budget Office (PBO) in its budget options for the 2021/22 and the medium term, shows that tax revenue as a share of the country’s Gross Domestic Product (GDP) has been declining from 17 per cent in 2013/14 to 14 per cent in 2019/20.
“If there is no significant change in the implementation of policy interventions geared towards enhancing revenue collection and reducing non-core spending, then expenditure as a share of GDP is likely to rise and revenue as a share of GDP decline in the medium term,” the PBO document warns.
The World Bank report shows that Kenya’s GDP stood at Sh9.55 trillion in 2019. This is, however, expected to trend around Sh8.5 trillion in 2021 and Sh9.7 trillion by 2022.
During the 2019/20 financial year, tax revenue declined by 14 per cent, while in 2018/19 and 2017/18 the reduction was at par by 15 per cent.
From 2014/15 to 2016/17, the reduction was at 16 per cent as the government approached domestic and external lenders to finance its annual budgets.
Recurrent expenditure as a share of the GDP increased from 14.8 per cent in 2013/14 to 16.3 per cent in 2019/20 with development expenditure declining from 6.2 per cent to 5.9 per cent over the same period.
The increasing recurrent expenditure is attributed to interest payments on domestic and external debts.
“The risk here is that increased spending at a time when revenues are under-performing, interest payments are rising and the economy’s ability to incur more debt is narrowing. This will render the economy vulnerable to fiscal unsustainability,” the budget office says.
Whereas development spending as a share of GDP decreased, other major expenditure categories remained unchanged between 2013/14 and 2019/20 period.
The categories that remained unchanged include expenditure on wages and salaries of national government employees, expenditure on operation and maintenance, pensions and transfers to counties.
This means that debt repayment may be crowding out development expenditure.
To address the issue, the budget office is, therefore, proposing a reduction of the budget deficit to 3 per cent of the GDP and target to balance the budget within the next three financial years.
In the current financial year, the fiscal deficit including grants is Sh841 billion, about 7.5 per cent of the GDP, which is financed through internal and external borrowing.
The deficit is, however, a decline compared to the Sh842.7 billion, about 8.3 per cent of the GDP in the 2019/20 financial year.
“Tough times call for tough decisions. A reduction in the budget will enable the country to live within its means. This will require significant expenditure reduction particularly for noncore recurrent spending,” says the budget office.
The PBO document also notes that interest payment on debt as a share of tax revenue doubled between 2013/14 and 2019/20.
Over this period, interest payment on domestic debt as a share of tax revenue increased from about 14 per cent to 23 per cent.
Interest payment on external debt also increased from about two per cent to nine per cent -- partially driven by higher borrowing costs as Kenya gradually borrowed more commercial external loans during the period.
