Best option for Rotich is to cut spending — experts

Saturday September 01 2018

The National Treasury will have to cut its coat according to its cloth, by drastically reducing its expenditure in the wake of the changes in the tax measures.

The National Treasury is likely to lose more than Sh100 billion if Kenya Revenue Authority fails to collect the 16 per cent VAT on fuel, the 12 per cent excise duty on money transfer services and 0.05 per cent on transfer of bulk cash in financial institutions.

The extra amount of tax money from mobile money transfers was originally mentioned in the Budget as intended to go into the expansion of universal health coverage. The VAT on fuel was expected to raise Sh71 billion while excise duty on mobile money transfer was to raise a minimum Sh37 billion — making a total of Sh107 billion.


The excise duty would have been applied on the mobile money transfer transactions realised last year.

Analysts and consumers lobbyists said the Treasury had been too liberal with increasing expenditure in every Budget, and also failed to apply alternative measures to raise revenues or fund public spending.


Most of the blame on spending is directed at recurrent expenditure, whose major items are the wage bill and debt servicing. The development budget as a proportion of the total Budget has been falling, currently standing at below 30 per cent.

For the 2018/19 Budget, development expenditure stands at Sh625 billion or 24.5 per cent of the total spending of Sh2.56 trillion. Recurrent spending is set at Sh1.55 trillion or 60.6 per cent of the total expenditure. County governments take the rest of the money.


Mr AlyKhan Satchu, who heads Rich Management, an investment and advisory firm in Nairobi, said the tax-and-spend policy that the Treasury had adopted was not right. The overriding policy initiative was to control expenditure because other issues arising from the current extravagant spending was merely “a symptom of the disease”. “The MPs have called time on this tax-and-spend and tax-and-spend with abandon policy, which is a good thing because it was all going to end in tears like its ending in Lusaka and various other African capitals,” said Mr Satchu.

The long-standing policy is to keep development expenditure at 30 per cent, but the rising wage bill and borrowing has pushed recurrent spending to higher proportions than was the case in the past.

Mr Stephen Mutoro, chairman of the Consumer Federation of Kenya, said that innovation in financing projects had been lacking with the failure, for example, to partner with the private sector for some of the undertakings.


“The alternative to removing the tax (fuel) is to relook at the viability of the projects that we have planned. When Uhuru (now president) was the minister for Finance, he introduced austerity. We can do with austerity now. Let’s just cut the number of projects,” said Mr Mutoro.

A well-placed source in the government recently told Saturday Nation that the failure of the private-public partnership model was one of the key problems that had contributed to the Treasury’s failure to manage its spending.

The application of indirect taxes — such as VAT on fuel and excise duty on airtime or money transfers — has for long been widely seen by economists and tax experts as the way to go because it applies pressure on the consumer to only buy those goods and services on which they can afford to pay the required tax. Thus consumption taxes are regarded as progressive. Indirect taxes are contrasted with direct taxes that are applied on income. However, experts say direct taxes are regressive.


“I actually prefer consumption based taxation. However, increasing taxes is merely the band aid with which we are trying to treat the disease. The disease is our expenditure and a very poor return on investment for that recurrent expenditure,” said Mr Satchu.

Mr Churchill Ogutu, a research analyst with Genghis Capital, said that the imposition of the taxes would raise prices of goods and services across the board, more so on food, because of the transport cost escalation.

On fuel prices, Mr Gerald Muriuki, also of Genghis Capital, said that the corporate sector would not be affected because they would have been able to pass the costs to consumers.

At the end of the day, the analysts were agreed that the major victims of the new tax measures would have been the consumer, with a possible negative impact on the economy.