President William Ruto has told Kenyans to brace themselves for tougher times even as he directed the National Treasury to slice this year’s recurrent budget by Sh300 billion, citing the country’s difficult financial situation, coupled with limited revenue.
Addressing the inaugural session of the joint sitting of Parliament after the August 9 General Election, the President said the increased borrowing to finance recurrent and development expenditures has aggravated the public debt.
“I have news, and it is not very good news. Our financial situation is not very good,” Dr Ruto told the attentive lawmakers.
“Over the next three years, we must reverse this and go back to the situation where government contributes to the national savings effort by keeping recurrent expenditure below revenue.
“To this end, I have instructed the National Treasury to work with ministries to find savings of Sh300 billion in this year's Budget. Next year, we will bring it further down so that, by the third year, we have a recurrent budget surplus.”
To realise the deep budget cuts, the likely target areas would include hefty government staff allowances, expenditure on hospitality, unnecessary foreign trips by government employees and capital-intensive projects, or those that have no immediate impact to spur economic growth.
Data from the Salaries and Remuneration Commission (SRC) shows civil servants are paid some 247 different allowances, which account for 48 per cent of the total wage bill. In the current financial year, the country has a Sh3.33 trillion Budget against Sh2.1 trillion in direct tax revenue, leaving a deficit of Sh846 billion that must be financed through domestic and foreign borrowing.
Of the Sh3.3 trillion, Sh2.25 trillion will be used for recurrent expenditure.
The reduction of the country’s spending as per the President’s directive will be implemented through the supplementary budget for the 2022/23 financial year to be approved by the National Assembly.
The passage of the supplementary budget will see Sh50 billion allocated to the Hustlers Fund from which micro, small, and medium enterprises can access affordable credit to start and expand their businesses.
The fund to be allocated every year will leverage technology in management and disbursement in line with the Kenya Kwanza manifesto.
Return of NG-CDF
But even as Dr Ruto announced the budget cuts, he assured members of the National Assembly that the National-Government Constituency Development Fund (NG-CDF), which was declared unconstitutional by the Supreme Court, will be reintroduced. He also assured the 47 elected senators that they will soon have a fund of their own to oversee the county governments.
In the current financial year, the NG-CDF kitty was allocated Sh44.3 billion. But this was before the Supreme Court judgment on the fund.
Senate Oversight Fund
“I know the contribution the NG-CDF has made in making life better for our citizens.”
President Ruto served in the National Assembly as Eldoret North MP for 15 years, before and after the establishment of NG-CDF.
“I know the difference it makes is monumental. I believe there is a way NG-CDF can be aligned to the tenets of the Constitution. In this regard, I also hasten to add that both Houses should be adequately resourced for oversight duties,” he said.
“With regard to the Senate and its constitutional mandate, I believe the two Houses should work together to set up the Senate Oversight Fund. This will be used to provide oversight of the millions allocated to counties.”
In 2019, the National Assembly adopted a report of its Committee on Budget and Appropriations quashing the allocation of Sh500 million meant for a Senate county oversight fund, dealing a blow to senators’ quest to monitor the expenditures of regional governments.
The money had been allocated under the Senate Affairs Programme, but a lack of regulations, argued the Budget committee, meant it could not be spent, with only 19 days left before the end of the 2018/19 financial year.
Bring down interest
The government’s insatiable appetite for borrowing instead of spurring economic generation avenues has undermined the business sector contribution to the national savings and investment effort.
If managed well, reduced government borrowing, especially from the local market, will address the problem of government crowding out the private sector from the credit market.
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This will encourage banks to go back to lending to businesses and bring down interest rates so that the private sector can also contribute to reducing the savings-investment deficit.
“For Kenya to grow to an upper middle-income country, we need to invest at least 25 per cent of our GDP. Our current national savings rate is below 10 per cent of our GDP—which translates an investment-savings deficit of 15 per cent of GDP,” he said.
The country has sought to close the deficit gap with public borrowing. This year alone, it expects to borrow up to Sh900 billion to finance both development and recurrent expenditure as per the 2022/23 Budget passed by the National Assembly in June.
The President’s message to the country yesterday was that the government should never borrow to finance recurrent expenditure, noting that “it is not right, prudent or sustainable, it is simply wrong. We must bring ourselves back to sanity.”
But even as he gave the country the not-so-good news, the Head of State said he was committed to ensuring that Kenya’s tax system is responsive to the needs of the economy in terms of revenue generation. The system, he said, must be equitable, efficient and customer-friendly.
“The economic principles of equitable taxation require that the tax burden reflects ability to pay. This is best achieved by a hierarchy that taxes wealth, consumption, income and trade in that order of preference.”
According to the President, Kenya’s tax regime currently falls short of the required standards locally other than over-taxing trade and under-taxing wealth.
“We will be proposing tax measures that begin to move us in the right direction.”
Kenya Revenue Service
The President also proposed to have Kenya Revenue Authority (KRA) renamed Kenya Revenue Service (KRS) to make it a people-friendly and customer-centric organisation.
Retired President Uhuru Kenyatta had also proposed the taxman’s change of name to make it more service-driven. A Bill to actualise this had been drafted and introduced in the National Assembly but was withdrawn by Mr Amos Kimunya, the leader of majority at the time, after he sensed that it was likely to be shot down.
Dr Ruto also promised to overhaul the country’s social security—particularly the pension system, which he said contributes significantly to the national savings—to make it inclusive and encourage those excluded to save.
He noted that the current social security infrastructure, both public—National Social Security Fund (NSSF)—and private ones, only cater for people in formal employment, excluding the vast majority of working Kenyans.
“There is no retired Kenyan today who is living on their NSSF retirement benefits. The meagre current contribution of Sh200 a month adds up to Sh72,000 over 30 years. There is no rate of return on earth that can grow this into an adequate pension.”