In seeking to reduce the VAT on petroleum products from the 16 per cent proposed by the National Treasury to eight per cent, President Uhuru Kenyatta’s instincts were in the right place.
High taxes are just a foil for a lack of ideas about how to grow the economy. As we all know, VAT is a regressive tax that hits the poor harder than it does the rich. Worse, a higher VAT rate poses a negative impact on the cost of production across the board — from the price of electricity to transport costs.
The poor rural folk who depend on kerosene for cooking and lighting are left exposed and vulnerable to increases in this regressive form of taxation.
Coming ahead of the season for national examinations in October and November, the proposed 16 per cent VAT would hurt preparations for candidates in the rural areas.
However, the President should have been bold enough to vouch for an overhaul of this particular tax.
When we started engaging the International Monetary Fund (IMF) on VAT in 2013, the discussion was not about raising taxes. The centrepiece of the proposed reform was to remove the plethora of VAT rates, exemptions, zero-rates and remissions that were tying money in unpaid tax refunds.
We planned to improve and reduce the cost of compliance to this complex tax by minimising the distortions, which the many exemptions and the multiplicity of VAT rates caused across the value chain by gradually moving to a uniform rate across the board.
With his proposal, the President has introduced yet another distortion in the system, taking us back to where we were before we started reforming the system. He should have been bold enough to move the rate to as low as possible and propose a uniform rate.
Indeed, the correct path for us right now should be working to standardise the system with a view to eliminating all exemptions, and zero-rated items.
The priority of the moment is starting to discuss with Tanzania, Uganda and Rwanda how to harmonise VAT and other tax rates across the East African Customs Union.
Granted, the government must raise money for the substantial investments it intends to make in health, security and infrastructure.
It must seek to achieve fiscal consolidation by reducing the budget deficit, revising the domestic borrowing requirement and negotiate some of the expensive commercial loan on our external debt register.
THE WRONG WAY
Our big problem is that we have approached fiscal consolidation the wrong way by seeking to increase taxes and increasing spending when we all know the economic conventional wisdom today is that fiscal consolidation is better achieved by cutting expenditure and reducing taxation rates.
When we blame the IMF for the fuel levy and higher taxes, we are merely engaged in scapegoating.
The sickness at the heart of our economy is the spiralling public debt. Yet when you listen to our leaders, you don’t see the willingness to face up to the serious situation and admit that things have gone wrong.
Indeed, the only time President Kenyatta came close to admitting that public finances were not looking good is when he issued the famous ‘no new projects’ directive to the parastatal heads and principal secretaries. Truth be told, this economy is hardly in glowing health.
BLUE CHIP COMPANIES
Private sector investment is stagnant, uptake of credit by companies is at its lowest, and corporates’ profits, even by blue-chip companies, are below where they were in 2014. Further, electricity consumption by industrial users has stagnated while retrenchment and profit warnings by listed companies have become just too common.
I don’t think that the austerity package and spending cuts proposed by the President in his address on Saturday go far and deep enough in dealing with the root causes of the parlous state of our public finances.
You can’t make any meaningful impact if all you plan to do is to merely tinker with the budgets of insignificant items such as travel and hospitality.
Methinks as Parliament sits this week to consider the proposals by the President, they should push the Executive to comply with best practice on fiscal consolidation by insisting on deep spending cuts and wide-ranging reductions of taxation rates.
We want to see projects that are not urgent being postponed and major budget reallocations in votes of ministries.
My parting shot is to the National Treasury.
Even as you continue to squeeze whatever you can from sectors of this economy that still work and produce, remember that milk is not obtained by drying the milch cow.