Can Treasury afford the tax breaks?

In light of the recent negative shock on the economy caused by the Covid-19 global pandemic, several countries have executed economic stimulus packages aimed at boosting economic activity.

Highlights of the economic stimulus packages include the US' reduction of interest rates to almost nil and releasing funds to support states, cities and territories and for individual cash transfers and provision of a buffer for struggling businesses.

Australia announced a stimulus package of A$189 billion, the equivalent of 9.7 per cent of its GDP, for cash subsidies, reduced payrolls, income, property and business taxes, while International Monetary Fund indicates that Germany has responded in the form of grants for small businesses and self-employed individuals and an allocation of billions of euros to increase and improve access to public loan guarantees by companies.

A Bloomberg publication on African interest rate decisions reports that Mozambique lowered reserve requirements on March 23, 2020 to boost liquidity, while Nigeria declared a moratorium on principal debt repayments.

Ghana has set aside $100 million to counter the health crisis.

REDUCED REVENUE

On March 25, 2020, President Uhuru Kenyatta announced a series of strategies in response to the Covid-19 pandemic.

They include 100 per cent tax relief for individuals earning a gross salary of below Sh28,000, reduction of PAYE and corporation tax from 30 to 25 per cent, lowering turnover tax from three to one per cent, and a decrease in VAT from 16 to 14 per cent.

From the stimulus package, the fiscal policy adjustments could result in reduced tax revenue in the final quarter of 2019/2020 by approximately Sh70 billion, according to Treasury Cabinet Secretary Ukur Yatani.

The actions by governments are designed to enhance economic activity. On the monetary side, central banks have mostly intervened by lowering interest rates to foster borrowing by firms and individuals and thus encourage spending.

However, the nature of the Covid-19 epidemic calls for self-quarantine and social distancing, and therefore it is unlikely the economic stimulus packages will drive the desired economic spending.

BUDGET DEFICIT

A study of Kenya’s budget deficit as a percentage of GDP shows varying levels, with an average of 7.6 per cent between 2013 and 2019.

According to the Budget Policy Statement for the fiscal year 2019/2020, the East African Monetary Union's recommended threshold is three per cent budget deficit as a ratio of GDP.

However, Kenya’s fiscal balance (deficit) has been widening, owing to snowballing public expenditure with no matched growth in tax revenue.

For instance, tax revenue as a percentage of real GDP was 19.9 in 2013 and 18.2 in 2018. This translates to a decline in revenue by 1.7 percentage points between both periods

Kenya’s draft Budget Policy Statement for 2020/21 indicates that the State seeks to reduce the budget deficit to 4.9 per cent of GDP to ensure macroeconomic stability.

FISCAL DISCIPLINE

Eventually, by the 2023/24 financial year, the State intends to attain a steady reduction in the budget deficit of up to 3.3 per cent of GDP.

Bearing in mind the current budget deficit figures, it is expedient for relevant stakeholders to critically assess and execute the economic stimulus packages with caution as the economic aftermath of the pandemic unfolds.

Also, in spite of the anticipated supplementary income from multilateral lenders, the State will need to strictly enforce fiscal discipline in all ministries and departments.

Ms Nguyu is an economist; [email protected]