SPENDING
Budget leaves Treasury with tight options
National Treasury Cabinet Secretary Henry Rotich presented what appeared to be a populist spending budget by steering clear of increasing income tax and resisting the temptation to increase Value Added Tax (VAT).
But even as the CS moved to appease a disgruntled public weighed down by the increased cost of living and the growing spate of insecurity, tax experts are questioning the financing options for the Jubilee administration’s ambitious budget estimated at Sh1.8 trillion.
The 2014/2015 budget focused more on increased allocations to fund infrastructure and contain the escalating state of insecurity in the country, which has brought the tourism sector, one of the country’s key foreign exchange earner, down to its knees.
Tax experts at consulting firm Deloitte and Touche say the government faces limited funding options for the historic budget amid indications that revenue collections could be hampered by a slowing economy.
“The outlook is not good in terms of revenue collection. Our economy has stagnated in terms of growth and the economic prospects are neither good. If the economy is not growing, then it means consumers are not spending and large taxpayers are not making profit either,” said Nikhil Hira, Head of Tax Practice at Deloitte and Touche East Africa.
“My personal view is that KRA may not achieve the revenue targets for the current financial year. In the first six months, we didn’t meet the targets. If we assume the economy is not picking up, then clearly they won’t have collected that much.”
The wobbling state of economic affairs appears to have been compounded by poor performance of key economic sectors such as agriculture, tourism and manufacturing. As a result, the government faces tight options to fund its ambitious budget with fears that the National Treasury could be tempted to intensify borrowing from the domestic market. “In terms of revenue forecast, I think we have to be very cautious,” said Rotich.
Of the Sh1.18 trillion, ordinary revenues include import duty (Sh77.7 billion), Railway Development Levy (Sh22.9 billion), excise duty (Sh119.8 billion), investment income (Sh17.4 billion), Value Added Tax (Sh267.1 billion), ministerial and departmental fees (appropriation-in-aid, Sh71.2 billion).
It is feared the Kenya Revenue Authority is unlikely to meet its targets for the current financial year (2013/2014) with the economy registering a less than expected growth of 4.7 per cent in 2013 from the previous year’s 4.6 per cent.
The government’s revenue collections underperformed during the first six months (July-December) of the (2013/2014) financial year, falling below target by a total Sh28.6 billion.
“The options are quite limited. The main option to me is to increase the tax net to include the informal sector,” said Mr Hira. “We can’t continue to finance the budget by debt because that is squeezing the private sector out of credit. “
The National Treasury has successfully issued a $2 billion sovereign bond to fund the country’s infrastructural projects and use part of the proceeds to repay a syndicated loan of a two-year $600 million from Citi Bank (London), Standard Bank (South Africa) and Standard Chartered Bank (London).
The 2014/15 budget estimates show that the national government plans to spend a massive Sh1.13 trillion on ministries and departments and Sh226.66 billion on county governments.
A total of Sh19.24 billion and Sh18.54 billion have been set aside for the operations of the Parliamentary Service Commission (PSC) and the Judiciary respectively, while Sh362.5 billion has been allocated for the Consolidated Fund Service (CFS).
In terms of revenues, the government targets collections including appropriations-in-aid of Sh1.18 trillion during the current financial year beginning on July 1, underpinned by the on-going reforms in tax and customs administration.
The overall deficit (including grants) is projected to be about Sh342.6 billion. The budgetary shortfall is to be bridged through next external financing (Sh149.8 billion) and net domestic borrowing (Sh190.8 billion).
The government is betting on improved economic performance and efficient tax collection to finance its budget. But is strong evidence that the country may not grow as fast as was predicted due to rising insecurity with the agricultural sector, another key driver of the economy, also underperforming due to the unpredictable weather patterns and farmers’ apathy caused by spooky markets.
According to analysts at Standard Investment Bank (SIB), the 2014/15 budget statement maintained the status quo on taxation, while focusing mainly on rationalising spending in relevant areas and minimising revenue leakages by employing e-payments and e-procurement.
Gross expenditure was set at Sh 1.76 trillion comprising net expenditure of Sh 1.4 trillion of recurrent, development, county, Parliament and Judiciary allocations. A total of Sh362 billion went to debt repayment, interest payments and government employee pensions.
Ordinary revenue is projected at Sh1.09 trillion, appropriation-in-aid (Sh94.1billion) and grants (Sh57.9billion). When a debt rollover of Sh177.7 billion is factored, a deficit of Sh 342.3 billion is targeted for the 2014/15 financial year.
This is primarily financed by Sh190.7 billion new domestic borrowing and Sh149.6 billion in sovereign bond proceeds.
“We believe the level of domestic borrowing targeted will not have a negative impact on interest rates. We also see revenue estimates as likely to overshoot budget on the back of rigorous tax enforcement,” said SIB.
“For 2014/15 financial year, we are unlikely to have a supplementary budget as has been the case in previous years.”
The Government expects the economy to grow at 5.8 per cent in 2014 compared to 4.7 per cent in 2013.
“While there were no apparent taxation changes in the budget statement, we believe the Finance Bill could have some changes through various legislative proposals slated for the year,” said SIB.
“We see increased convergence in East Africa on taxation, with governments increasingly having to focus on spending rather than frequent and unpredictable tax changes year on year.”
The parliamentary Budget and Appropriations Committee made additional recommendations that left a financing gap of Sh10 billion, which Rotich would be required to consult the Cabinet on how to close.
Development expenditure is expected at 42 per cent of expenditure (excluding Consolidated Fund Services which include interest and debt repayments).