Sh302bn in new taxes: Are budget cuts a mirage?

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 Sh302 billion from the measures contained in the Finance Bill 2024.

Of that, Sh58 billion 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 per cent. 

Proposed expenditures

It seems nothing this government says can be trusted. If they are cutting expenditures by 30 per cent, why does the administration need Sh302 billion 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 1, are available in the National Treasury website.

The 2010 Constitution expects public input throughout the public finance management cycle. 

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 State House drops by Sh591m from 8.53 billion, that in the Office of the President (OP) increases by Sh1.2 billion, compensating the State House drop twice over.

Leverage devolution

The development budget of State House increases by Sh249 million, while that of OP goes up by Sh155 million. 

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 thumb 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 each idea briefly.

Away from jargon of medium-term expenditure framework (MTEF) and fiscal consolidation, no nation can live beyond its means forever. 

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. 

Expenditure appetite

A constrained production sector cannot generate increased taxes. With unchecked expenditure appetite, the 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 Sh300 billion shillings budget, and still increase civil service salaries and build roads, why not today, at Sh4.5 trillion?

The current administration has been chest-thumping about getting the tax to GDP ratio to 22 per cent. 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.

National shame

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 businesses out of production with high costs of credit and energy. Rules of thumb are a useful guide, but apply with care!

The national bureaucracy and successive executives have remained largely hostile to the second devolution in its 12 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 centre. And, devolution solved a major problem that threatened to break-up the Republic – marginalisation. 

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 centres of growth. 

It is a national shame therefore, that we should be arguing over Sh400 billion for devolution.

As one of my favorite governors said recently, the only devolved function that the national government is not trying to take over, is rabies vaccination.

@NdirituMuriithi is an economist