Budget incentives laudable but undertake fiscal prudence

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This year’s Budget Speech had its main focus on the “Big Four Agenda”. Accordingly, a lot of allocations went to health, housing, food security and manufacturing, with other significant portions going to the so-called enabling sectors, such as security and infrastructure.

Government spending has increased five-fold in a span of 10 years, with the latest budget being bigger than those of Tanzania, Uganda and Rwanda combined. For perspective, in the 2007/2008, Government spent Sh693 billion compared to this year’s Sh3.074 trillion. Properly however, what government has at its disposal is Sh2.3 trillion, as Sh800 billion will go towards servicing public debt.

The Budget introduced a number of goodies for would-be investors in the manufacturing sector. Over the years, the manufacturing sector has complained about the ever-increasing electricity costs. In response, CS Rotich proposed to allow manufacturers to deduct an additional 30% of their electricity cost while computing their taxable income. Other incentives include bringing down the cost of electricity to $.09 (Sh8) per kilowatt hour to give the sector a competitive edge over countries, to which we have lost out to in recent years.

The Government intends to boost the sector further by establishing leather parks and textile industries throughout the country, as well as reviving the blue industries, re-establishing the automobile and agro processing industries, and manufacturing of construction materials.

Towards the strengthening of the “Buy-Kenya Build-Kenya” initiative, the CS gave a directive to all government offices to source their requirements locally before opening up the tenders to international suppliers. Government is the biggest spender and this will go a long way in securing a ready market for manufacturers within our borders. Firms that supply manufactured articles, materials or supplies wholly produced or mined in Kenya will enjoy various margins of preference in procurement evaluation.

The CS further announced the shortening of processes to reduce bureaucratic red tape. The Ease of Doing Business indexing done by the World Bank this year placed Kenya at position 80, which is 12 places up from its prior position last year. This places Kenya as third most competitive economy in Africa after Mauritius (25th) and Rwanda (41st). This is the country’s best performance in 15 years and reflects a continuous improvement process that is a good indicator for international investors.

Caving to pressure

Rotich also proposed to scrape the law capping interest rates. This is primarily due to pressure from the International Monetary Fund. It is said that this will improve credit accessibility especially for businesses which in turn will spur on the economy. There were also complaints by most of the banks who claimed that the interest rate cap affected profitability.

However, numbers released by Central Bank’s Monetary Policy Committee for May indicated that policies by CBK, including the interest rate cap, were actually working to stabilise the economy. May saw a 13-year low on inflation numbers despite the poor climatic conditions and the increasing global fuel prices. Financials released by most banks also showed that they remained profitable even despite the prolonged electioneering period that usually results in decreased borrowing for capital projects.

Earlier in the year there was a proposal through the Income Tax Bill 2018 to increase the tax rate from 30% to 35% for entities recording revenues of above KES 500 million. In his speech, the CS said that after receiving feedback on the same from those who took engaged in the public participation round, he would stay the proposal.

It was a wise decision as such an increase would have dealt a blow to measures by the government to attract international investors to the country. There is global trend to reduce taxes to attract investors and increase disposal income which has proven to spur on economies. Our East African counterparts in Rwanda recently introduced a 5-year tax holiday for multinationals who set up headquarters in the country.

On tax, the CS introduced various measures to help plug the perennial revenue shortfalls by the Kenya Revenue Authority. Among these are the Robinhood tax of 0.05% for interbank transactions above Sh500,000, and an increase of excise duty on mobile money transfer fees from 10% to 12%. Kenyans transact over KES 3 trillion per annum through M-pesa, and this will be easy money to collect to help pad deficits.

It has long been suggested that the KRA ought to cast its nets wider rather than going after the same people year in year out. To this end, the CS introduced presumptive tax, at the rate of 15% of the single user business permit targeted at the informal sector. The point of this is to increase visibility of the informal sector by formalising their compliance and encouraging more to register on iTax to begin filing returns. Once registered, it will be easier to track transactions and enforce compliance. Within two years, the KRA will be in a position to collect information on these traders and enforce compliance.

The iTax platform has done well to increase compliance, and growing revenue collections. It is becoming harder to evade taxes and if the government has its way, all formal transactions done through the banks and mobile money operators such as M-pesa will be in KRA’s sight for data collection both within and outside the country.

Counterintuitive

The paper industry in Kenya has had numerous challenges with closure of some of the prominent paper milling companies. To try and spur this industry, the CS to the National Treasury proposed to increase the rate of import duty from 25% to 35% on some paper and paperboard produced in the region. The move is intended to protect local manufacturers against cheap imports. This is tied with new duties on imported timber going up to Sh16,000 per metric tonne.

This move is however counterintuitive to the policy against anti-logging. If you prevent manufacturers from importing cheap paperboard and timber, then they will turn to our forests which the government in the recent past has set out to protect including measures such as relocating thousands of settlers from the gazette forests.

Another move that has borne heavy criticism is the intention to raise excise duty on Kerosene to Sh10.30 per litre. The argument for this is to discourage petroleum dealers from using the cheaper kerosene to adulterate diesel. Kerosene is used both for lighting and cooking by Kenyans who can’t afford the electric and gas options. It is sad to see the government taxing poor households to serve the purpose of what the Energy and Regulatory Commission has failed to do.

The five-year stay in taxes on fuel from the coming into force of the Value Added Tax Act, 2013 comes to an end this September. Many Kenyans anticipated an extension but, starting October VAT on fuel will finally come into force, after which the price of petrol go well above the Sh120 mark. The price of fuel affects all sectors, from mama mboga to big corporates, and goes against the grain of bringing down the costs of production. As well, it is likely to negatively affect inflation rates.

The CS argued that this will bring the country closer to self-sufficiency by increasing tax revenue thus reducing donor funding. In his estimation, the new taxes will result in additional collections of Sh27.5 billion in 2018/2019.

Overall, it was a good budget, with minimal increases in tax and lots of incentives for industrialisation and the achievement of “The Big Four” plan. The country needs to stem the runaway spending on recurrent expenditure.

Although austerity measures have been initiated, old loans borrowed by the government are starting to mature and moratoriums on interest coming to an end. It is important that allocations are channelled where they are meant to go, with a lot more being done to curtail corruption.

Government is heavily taxing citizens and taking expensive loans to fund projects. It must ensure that these monies are expended efficiently and effectively on the projects to grow and support the economy.