Expenditure cuts to focus on core areas the way to go

The 2012/13 Budget aims at sustaining economic growth by restoring and sustaining macro-economic stability and focusing on economic policies and structural reforms aimed at facilitating private sector expansion, promoting productivity and building the resilience necessary for employment creation and poverty reduction.

To attain the aforementioned targets, the government projects to spend approximately Sh1.46 trillion.

Kenya has to navigate the terrain of unfavourable weather conditions, relatively unstable macro-economic climate laced with double digit inflation and high interest rates, anaemic economic growth, lingering elections and cross the turbulent waters of unstable international market experienced in 2011/12 to realise the fruits of the investment.

Noble idea

Indubitably, the quest to sustain economic growth through expansion of the private sector is a noble idea that resonates with the spirit of the Constitution and the drift of the new economic order.

But of great interest is the level of our increased projected expenditure, the sources of financing and the inclusion of the private sector in Kenya’s development agenda.

Of the projected expenditure, 70 per cent entails non-discretionary expenditures which consist of statutory obligations and salaries for constitutional offices.

The remaining 30 per cent will be directed towards development expenditure expected to be principally sourced through borrowing.

The Budget presents a deficit of Sh279 billion. For Kenya to attain a stable macro-economic climate and realise the Vision 2030 dream, the above trend has to be reversed.

Article 201 of the Constitution which advocates prudence and responsibility in expenditure of public money should be entrenched as one of the guiding principles.

Notwithstanding the cut on unnecessary recurrent expenditure, financing the Budget and fast tracking the development agenda remains imperative for the economy.

The Treasury heavily relies on tax revenue and borrowing for financing which have serious ramifications such as constrained tax base as well as crowding out of investors due to increased domestic borrowing.

Kenya has a complex tax code which defies the international best practices culminating into poor tax collection hence tax reforms are incessantly beckoning.

The tax system ought to be improved by rationalising the existing tax incentives, expanding the tax base and removing irrational tax exemptions.

The minister has made an attempt on this by revoking erstwhile exemptions for the privileged state officers under the Income Tax Act and the Customs and Excise Act.

Despite the tax reforms, the economy needs also to register significant economic growth if the tax revenue is to increase.

The other source of solace is borrowing. A debt sustainability analysis for Kenya in late 2011 based on the International Monetary Fund (IMF) frameworks shows that the economy faces a low risk of external debt distress.

However, the public debt to GDP ratio which currently stands at approximately 51 per cent is not sustainable.