When we appeared on a recent evening TV debate, the chair of the finance committee
of the National Assembly indicated that he expects to raise 302 billion shillings from
the measures contained in the finance bill 2024. Of that, 58 billion shillings will come
from the contentious motor vehicle circulation tax. The two of us and our moderator
could agree on only two things. It is not sufficient to discuss taxes in isolation. We must
keep in mind the expenditures that those taxes are supposed to finance. And, you
cannot tax the country to prosperity.
The finance bill 2024 was been tabled at a time when the administration is taking up
their intended expenditure cuts after a false start. The budget policy statement
released in February contained rapid increases of expenditure, taxes and debt. There
was immediate public backlash. Soon thereafter, the National Treasury issued a
circular to state departments and corporations directing that they scale down their
budget estimates by 30%.
It seems nothing this government says can be trusted. If they are cutting expenditures
by 30%, why does the administration need 302 billion shillings from additional taxes?
Never an easy read, the budget books detailing the proposed expenditures for the
national executive for the financial year starting this July 1st, are available in the
National Treasury website. And they should be. It is required by law and practice. The
2010 Constitution expects public input throughout the public finance management
cycle. For that to happen, documents must be published and availed to the citizens.
The Constitution gives the National Assembly immense power to determine the levels
of expenditure, taxes and borrowing. Unfortunately, our elected representatives have
all but surrendered this power to the executive. Most infamously, some MPs admitted
not reading the finance bill 2023 as they passed it last year.
A quick glance at the budget books, also referred to as budget estimates or simply the
printed estimates, shows that reports of budget cuts in the president’s, deputy
presidents and prime cabinet secretary’s offices are greatly exaggerated.
While the proposed 2024/25 recurrent expenditure for Statehouse drops by 591m
shillings from 8.53 billion, that in the Office of the President (OP) increases by 1.2 billion
shillings, compensating the Statehouse drop twice over. The development budget of
Statehouse increases by 249 million shillings, while that of OP goes up by 155 million.
Clearly, the President is not leading from the front in the matter of budget cuts!
I have long argued that this economy needs a reset – at least three years of balanced
budgets – in order to rejuvenate the production sector, and spur growth. We also must
move away from dogmatic application of rules of thump such as tax to GDP ratio.
Rather, we should base policy on a deep understanding of our economy. Third, we
should leverage devolution to reinforce growth. Let us examine idea each briefly.
Away from jargon of medium-term expenditure framework (MTEF) and fiscal
consolidation, no nation can live beyond its means forever. The US likes to think itself
above this rule, curtesy of the dollar being the world’s reserve currency, but this is
under increasing challenge.
Here is the basis of the rule. To finance expenditure, you tax and borrow. When a
government taxes excessively, it stifles the incentive to produce. When it borrows
excessively, it squeezes the production sector out of the credit market, constraining
growth. Banks find it more profitable to lend to government, rather than to factories.
The later end up closing while financial institutions report super profits.
A constrained production sector cannot generate increased taxes. With unchecked
expenditure appetite, government borrows more, worsening the situation. As many
African countries have found out, debt distress is never too far once you are on this
trajectory. What then, are you to do?
Every so often, reset the economy. Government should balance its budget, and get out
of the credit market for two to three years. That allows lowering of domestic interest
rates, making it possible for farmers and factories to afford credit. In this trajectory,
government will find that the resultant increased production yields even more taxes.
This is precisely what President Kibaki did in 2003-5. If government could live within
its means at 300 billion shillings budget, and still increase civil service salaries and build
roads, why not today, at 4.5 trillion shillings?
The current administration has been chest thumping about getting the tax to GDP
ratio to 22 percent. That is misguided. Over the last decade, the GDP of the Republic
has increased in large measure because of debt financed infrastructure. It would have
been nicer if the roads were built to last and not so easily overwhelmed by heavy rains.
But no matter. The infrastructure does not pay taxes. Rather the business that use it
do. It is self-defeating then, to squeeze those very business out of production with
high costs of credit and energy. Rules of thump are a useful guide, but apply with
care!
The national bureaucracy and successive executives have remained largely hostile to
the second devolution in its twelve years of existence. The devolution in the
independence constitution received similar treatment. This phobia is irrational. The
devolved units are not large enough to threaten the center. And, devolution solved a
major problem that threatened to break-up the Republic – marginalization.
Many economic historians now believe that the 2007-8 rapture was in part driven by
pent-up anger, the result of years of unequitable patterns of development. The glaring
disparities were to be resolved by taking resources and decision making about their
use, to the people in their respective counties. This strategy has the added advantage
of spurring 47 centers of growth.
It is a national shame therefore, that we should be arguing over 400 billion shillings
for devolution. As one of my favorite governors said recently, the only devolved
function that the national government not trying to take over, is rabies vaccination.
@NdirituMuriithi is an economist and Managing Partner Ecocapp Capital
