Law to leave a dent in Kenya’s pocket

Tuesday August 10 2010

File | NATION ‘Yes’ team, including, from left, Deputy Prime Minister and minister for Local Government Musalia Mudavadi, minister for Energy Kiraitu Murungi, minister for Medical Services Anyang’ Nyong’o, Deputy Prime Minister and minister for Finance Uhuru Kenyatta and Foreign Affairs minister Moses Wetang’ula shortly before the referendum results were announced. An economist in the Ministry of Planning and Vision 2030, Prof Michael Chege, has urged caution in implementing the new laws.

File | NATION ‘Yes’ team, including, from left, Deputy Prime Minister and minister for Local Government Musalia Mudavadi, minister for Energy Kiraitu Murungi, minister for Medical Services Anyang’ Nyong’o, Deputy Prime Minister and minister for Finance Uhuru Kenyatta and Foreign Affairs minister Moses Wetang’ula shortly before the referendum results were announced. An economist in the Ministry of Planning and Vision 2030, Prof Michael Chege, has urged caution in implementing the new laws. 

By MICHAEL CHEGE [email protected]

As Kenyans savour deserved national pride, having conducted a free and peaceful referendum, they should now set their sights on the difficult part — breathing life into the national governance and economic management suggested by the document.

Top on the agenda is the implementation of the radical changes in tax collection and its distribution between the three arms of government — the Executive, the Judiciary and the Legislature — and between the central government and the 47 counties.

In addition to the “equitable distribution” of revenue, the new fiscal management system must continue to deliver rapid growth and reduce poverty as Kenya experienced between 2003 and 2007.

Managing transition

Managing the transition will require care and expertise and not the ethnic political rhetoric that has saturated this discussion so far.

If the fiscal transition succeeds, Kenyan nationhood will be even stronger; if it is mismanaged, the ethnic blame game could take us back to our recent dark ages.

Fortunately, the peaceful manner in which the referendum was conducted has inspired confidence that the 2012 election will be equally peaceful, whoever wins, and that Kenyans have learnt full lessons from the criminal folly of 2007.

Such confidence will attract new local and foreign investment. Within days of the poll, the Nairobi Stock Exchange rallied sharply and the Kenya shilling strengthened against the US dollar — exactly the opposite of what happened following the violence in 2008.

Kenya cannot afford to lose this momentum. The better the economy performs, the more revenue the government collects, even if tax rates remain the same.

How taxation and public expenditure changes affect family livelihoods should never be taken lightly anywhere. In the past, revolts have sprung out of it.

As Kenyans (for different reasons) continue to rejoice on the outcome of the referendum, no reason collectively energises them more than the economic and social entitlement of all to good health care, adequate housing, adequate nutrition, clean water and education.

To these gains, promoters and critics of the new constitution alike agreed on the benefits expected from devolution of 15 per cent of all government revenue “closer to the people” in the new counties, without stating whether this would require more taxation and who would pay it.

In the world of real money, you cannot get something for nothing. The hard truth is that all these worthy goals will require additional funding to the central government, counties and the proposed municipalities.

Consider this. If the 15 per cent rule was to be implemented this year, it would call for Sh41 billion, about equal to what was allocated last year to defence, or health, or post-secondary education.

And this assumes that the Constituency Development Fund (CDF) and Local Authorities Transfer Fund (LATF) would be part of the deal, which is by no means settled.

At the very least, new funds will be required by the new Senate, county employees, and facilities. The government, for perfectly valid reasons, was operating at a 19 per cent revenue deficit last year. There is a limit to how far we can stretch that.

Advocates of the 15 per cent rule argue rightly that we could raise the money by stricter anti-corruption measures on procurement and waste reduction, but a lot has already been done through more transparent procurement and electronic-based fiscal management.

Then again, the popular idea that taxation remitted to Kenya Revenue Authority in Nairobi stays there is fundamentally misleading. For example, of the Sh887 billion that the government spent on recurrent items in the 2009/10 financial year, the largest single share or 20 per cent went into education, where the bulk of it was used to pay teachers in all corners of Kenya.

The same applies to health and agriculture. So, the funds do get to the grassroots.

What seems to agitate many Kenyans with a grudge against the existing system is that the decisions are made in Nairobi, in which case the funds and the responsibilities for these (or some of these) functions can be devolved wholesale to the counties.

And herein lies the less painful solution: we could meet (and exceed) the 15 per cent rule simply by devolution of key functions like public health, primary and secondary education to the counties. But except for agriculture, this is not explicitly stated in the document.

There remains a small issue to sort out though: the last thing the teachers and civil servants desire is transfer to the new counties. All this will need to be resolved over the transition phase.

Far and away, the greatest challenge lies in the proposed administrative system of public funds. If one intended to emasculate the country’s Ministry of Finance and its current UK-based system without giving it the benefit of introducing the US budgetary system, one could not have done better than this.

The making of rules governing the allocation of funds between counties and the central government now rests with the Senate. Budget estimates for running the Legislature and the Judiciary go straight to a Parliamentary committee for review and approval, leaving Finance with the responsibility for Executive branch.

Controller of Budget

The new Controller of Budget will be appointed by the President and approved by Parliament. It is decentralisation at its best.

All this assumes that the main function of the Budget is allocation of funds, yet in fact, sound budgeting is best done side by side with revenue turnover in order to avoid deficits that have knock-on effects on inflation and external payments.

In a fast-moving, topsy-turvy global economy, a unified central response is the mode of choice.

So far, Kenya has responded well to economic crises. In our efforts to achieve the goals of Vision 2030, the last thing we want to do is throw out the baby with the bath water. Luckily, the implementation schedules provide enough time to flesh all this out.

Prof Chege is an economist in the Ministry of State for Planning, National Development and Vision 2030