Treasury in revenue targets shifting game

The Government has over the last six years spent Sh10.2 trillion and in return raised just Sh6 trillion through taxes.

Kenya’s inability to live within its means has been driven by the availability of cheap credit in the post-2008 global financial crisis and relatively low-interest rates.

The spending binge has seen the Treasury draft expensive budgets while setting ambitious targets when it comes to how much the country can collect in taxes.

In the 2018-19 financial year, for instance, the Treasury had set out to raise about Sh1.7 trillion.

However, in the five months from July to December, the Kenya Revenue Authority (KRA), the tax-collecting agency, only raised Sh681 billion. This is just one-third of the target set.

This means that assuming the average of Sh92 billion monthly is kept up to June this year, KRA can project to only collect Sh1.1 trillion.

KRA Commissioner General John Njiraini blamed the shortfall on dashed hopes that the economy would rebound after the 2017 elections.

Additionally, he said, “We had a couple of issues that negatively impacted those indicators, for example, banking, which is a very critical player in tax performance, did not do well.” He was speaking at the recent launch of KRA’s seventh corporate plan in Nairobi.

The gap

One way the Treasury gets around this quagmire is to set quite high targets during the reading of the Budget so that the deficit, or the gap between revenues and expenses, is not too large.

In recent years, the Treasury has been known to later lower targets so that when it comes to taking stock of the taxman’s numbers, not too much fuss is raised on the huge discrepancy.

For instance, in December, Treasury silently cut revenue targets for this fiscal year by five per cent to Sh1.61 trillion. KRA had initially sought to raise Sh1.69 trillion in the year to June 2019, Treasury Cabinet Secretary Henry Rotich said through a notice in the Kenya Gazette.

The previous year, the Treasury had said the taxman would collect Sh1.499 trillion.

However, CS Rotich later cut expectations to size, lowering targets to Sh1.439 trillion, accounting for lost revenues due to tax subsidies on food products.

And then for a second time, the target was reduced to Sh1.415 trillion. Yet, KRA only managed to collect Sh1.37 trillion.

This has raised questions over the watchdog role of Parliament’s oversight committees. Eyebrows were also recently raised when the Treasury gave the public only a day to comment on the Budget Review and Outlook Paper (BROP), a key document in public financial management.

In a notice dated September 19 but released just a day earlier, Treasury Principal Secretary Kamau Thugge issued a timeline of one day for the public to give its input in the Budget-making process.

“The purpose of this press release is to invite comments on the 2018 Draft Budget Review and Outlook Paper by September 21, 2018, to enable finalisation of the document,” he said.

The document guides how the Treasury forecasts revenue growth to plan for the next Budget so as not to overestimate and create the huge Budget gaps currently dogging the Government. 

The BROP is prepared in accordance with Section 26 of the Public Finance Management Act, 2012 that requires its submission to Cabinet for approval by September 30 of each financial year.

According to the paper, KRA failed to raise Sh124 billion, an indication that the tax targets that were actually revised downwards twice were still too ambitious.

Taxes paid by formal employees dropped by Sh29 billion in a tough year where workers were fired and employment slumped.

Value-added tax on local goods, on the other hand, went down by Sh12 billion.

The Treasury is hoping that the controversial eight per cent tax on petroleum products will address this shortfall.

Despite the Government’s continued highlighting of its commitment to austerity, the Treasury sees the gap between the Budget and projected revenues hitting Sh623.8 billion.

If Kenya receives grants on time, then the overall fiscal deficit is projected to reduce to Sh572.2 billion, which will force the Treasury to opt for more debt.

“The fiscal deficit in the financial year 2019-20 will be financed by net external financing of Sh306.5 billion (2.7 per cent of GDP), Sh271.4 billion (2.4 per cent of GDP) net domestic borrowing and other net domestic receipts of Sh5.7 billion,” said Rotich.

Treasury says its consolidation will rely on new tax measures and improved tax administration by KRA.

However, in reality, Treasury mandarins’ proposal to net higher revenue by taxing Kenyans more seems to always hit a brick wall.

This could be a pointer to the fact that the economy has no more money to be taxed, according to analysts.

According to an International Monetary Fund (IMF) report, “revenue collections were significantly lower than budgeted and 0.4 percentage points of the GDP lower than the previous fiscal year despite adjusting value-added tax to inflation and imposing new taxes on petrol, mobile data, money transfer, and housing.”

Deepak Dave, the founder of Nairobi-based Riverside Capital Advisory, noted: “Factors such as bleak corporate earnings and job cuts collectively mean the overall economic activity gets cut, thus net collections are projected downward.

“This is an indication that collections may not be lower because of enforcement, but because there is no demand generated by consumption to be taxed or incomes are falling.” 

Economist Robert Shaw said there is a clear indication that the Treasury had been inflating revenue figures and basing expensive budgets on unattainable revenues, thus creating the need to keep borrowing. “The Government tends to inflate projections with revenues. We are not collecting the sort of money needed for the Budget,” said Shaw.

Mr Dave, however, pointed out that the problem could lie in the projection model, where the Treasury could be putting the cart before the horse.

Stanbic East African Regional Economist Jibran Qureishi, meanwhile, said the IMF team will have to assess the Treasury’s model under a new standby facility that was kick-started in December.

“I think the negotiations will centre on improving the credibility of revenue estimates and consolidation,” he said.

Some analysts note that the Treasury figures could be a result of illegal activities, including fake VAT receipts that inflated activity in the market, and that the taxman could be chasing ghosts.

Mr Qureishi said it is time the Treasury reduced expenditure, and instead of its obsession with spending on infrastructure, it focused on high-impact social spendings, such as health and education.

Prioritise allocation

KRA recently said the silver bullet lies in ring-fencing allocation meant for the taxman, proposing a total spend of Sh103.69 billion to net Sh6.1 trillion by 2021.

“The Government has got ambitious plans to invest in other areas, so naturally we are competing for resources. We may not get to a level of where we want, but we have reached a level of understanding on how we should prioritise allocation to KRA and look for a way that funding can be ring-fenced because we are at the beginning of the process, so if things do not work here, they do not work for the country,” said Njiraini.

“It is important that resourcing for us is properly handled.” 

The World Bank, in its 16th edition of the Kenya Economic Update, noted that even though more goods and services have been traded, very little of these economic activities have been taxed, even with KRA enhancing compliance.

“Although (revenues) grew by 13.3 per cent in nominal terms in 2016-17, tax revenues expanded by less than nominal GDP 14.9 per cent, hence the tax-to-GDP ratio fell to 16.9 per cent of GDP — its lowest level in a decade,” said the World Bank.

KRA said it could reverse the trend from the current 18.3 per cent in 2017-18 to 19.2 per cent in 2020-21 from Exchequer revenues, Road Maintenance Levy Fund, and Railway Development Levy. 

This will also be helped along by doubling the number of Kenyans who pay taxes from 3.94 million to seven million by implementing a segmented approach to deal with the identified sectors.

But CS Rotich, in a recent speech read by Treasury’s Chief Administrative Secretary Nelson Gaichuhie, complained that despite the investment in KRA, it was still unable to hit the targets set by his Ministry, forcing the Government to borrow to bridge deficits.