Rotich could burden Kenyans with more taxes to cut deficit

Cabinet secretary Henry Rotich will on Thursday read the Budget against a background of intense pressure to increase taxes.

Although taxes are not politically popular, the government must raise more money to fill the widening gap between its finances and needs.

This year, the size of the Budget deficit — a jargon for the size of the hole in government finances — is at Sh567 billion. This is equivalent to 8.7 per cent of the country’s wealth, also known as the Gross Domestic Product.

With the government already collecting 20.1 per cent of the GDP in revenues and with opportunities for additional taxes narrowing, economic experts are predicting an increase in excise duties.

A proposal to raise excise tax rates for selected products will, therefore, not come as a surprise.

Mr Rotich could make major policy changes on excise duties with implications for prices of several items, including airtime, mineral water, beer, cigarettes, soft drinks, oil products, air travel, imported motor vehicles and other excisable goods and items.

No major changes are expected on the Value Added Tax. However, signs are that the government has been quietly considering abolishing VAT exemptions on oil products.

Expect new and radical measures at improving tax compliance. This year’s Budget is based on optimistic assumptions —  a seven per cent growth of GDP and tax collections amounting to Sh1.2 trillion, mainly from ordinary revenues like income taxes, VAT, customs and excise duties.

Since he was appointed Treasury Cabinet Secretary, Mr Rotich has implemented several measures to broaden the tax base.

A new Capital Gains Tax he introduced and which became effective in January, is expected to yield additional revenue.

As he presents the Budget, Mr Rotich  will be walking  tight rope, forced by circumstances to engage in fiscal consolidation  despite the fact that President Uhuru Kenyatta’s administration is inclined towards an expansionary stance — emphasising  massive spending on big capital projects like the standard gauge railway, irrigation, ports, roads and electricity — and  huge capital outlays for defence, the NIS and the Ministry of Interior.

With such a big deficit, Mr Rotich’s other major challenge will be how to rein in on government domestic borrowing.

In the Budget he will presenting, the domestic borrowing requirement has been set at a massive Sh219 billion — equivalent to 3.4 per cent of the GDP.

If markets read, expect interest rates on  government paper to start trending upwards and pressure interest rates and inflation and increases in inflows of foreign exchange, mainly from  European fund managers who will be coming in to cash in on the high yields.

REDUCED EARNINGS

Budget day is also the day ministers give the public a roadmap and the true economic situation and challenges likely to face the country in the medium term.

Honesty and prudence will compel Mr Rotich not to project a superficial assessment that fails to recognise that things haven’t gone that well in the past year.

Long term performance of the export sector, as measured against GDP, has been less than satisfactory.

Indeed, the economy has witnessed reduced earnings from exports, characterised by lower forex receipts from tea, coffee and tourism.

Once a big performer, horticulture has been facing competitive standards and challenges in accessing  European markets.

Increased demand for dollars, mainly as a result of increased spending on infrastructure, notably imports of steel and payments mainly to Chinese contractors, continue to put pressures on the current account.

And, the economy has registered weal performance relative to regional member states of the East African Community.

Internationally, continued strong performance of the US economy and the strengthening of the dollar is putting pressure on its trading partners’ currencies, especially the Euro

And, the US A is now the third principal source of imports for Kenya.