Austerity myth as pension and debt gulp taxes

If you spent some time flipping through the financial pages and channels just after Cabinet Secretary Henry Rotich and his National Treasury Principal Secretary Kamau Thugge were hounded out of office, you would be forgiven if you thought the job description for the new Treasury mandarins was anchored on one key term: Austerity.

Internal memos of how tea and snacks were removed from office menus have been doing rounds in social media, with the new Treasury team promising a lean budget. Those impromptu training sessions that come with hefty per diems would be far in between, acting National Treasury CS Ukur Yattani insisted.

For yet another budget calendar, all new development projects would be frozen save for those related to President Uhuru Kenyatta’s Big Four Agenda.

State corporations would give up all their surplus funds by liquidating their Treasury Bills and immediately stop dealing in the short-term government papers. A cash-strapped government wanted to spend so little but raise a lot of money.

But it appears things are veering off the tangent. At least in the first five months of 2019/20 financial year, the government has continued to live beyond its means, borrowing heavily to settle massive bills to pensioners and creditors.

It appears that the Exchequer has been dancing to a different tune from the soothing belt-tightening music that it has been playing to the public.

Official data shows that between July and November, the government’s success in raising more revenue has been blighted by an even bigger increase in expenditure, despite tea, refreshments and other snacks being off the menu.   

While it is true that such spending- known as recurrent expenditure, and which also includes payment of salaries - has grown at a slower rate than taxes collected, overall spending during this period has grown much faster.

To Treasury’s relief, the wage bill has grown by a mere 3.6 per cent, with the Government paying an additional Sh5.3 billion to its employees between July and October, according to data from the Central Bank of Kenya.

Sharpest spike

But that has not been the case with spending on pension and debt repayments - principal and interest - which have grown by more than a third in the first five months of the current financial year compared to the same period in the last financial year.

For pension, interest on both domestic and foreign debt, Treasury has until October forked out an additional Sh33.8 billion, according to CBK data. This represents a jump of 34 per cent.

Until the end of October, the government’s recurrent spending on debt payment, wages, pensions and other administrative costs was Sh503 billion compared to Sh445 billion in the same period in 2018.

Expenditure on pension recorded the sharpest spike at 59 per cent, with Treasury paying Sh29.1 billion in the first four months of the current financial year compared to Sh18.3 billion in the same period last year.

Payment of interest on foreign debt and interest on domestic debt increased by 25 per cent and 18 per cent respectively during this period with the Exchequer forking out Sh8.1 billion and Sh14.9 billion to foreign and domestic creditors.

President Uhuru Kenyatta’s government has pumped a big chunk of the country’s income to creditors, denying critical public services such as healthcare very little money.

A recent analysis by Sunday Standard showed that since he came to power in 2013, President Kenyatta has spent Sh13.4 trillion with repayment of debt taking up Sh3.2 trillion following a borrowing spree that has seen the country’s debt levels rise to record levels.

For every Shilling that has gone to creditors has meant less Shilling for critical public services such as healthcare and education. That, in turn, compromises the country’s long term productivity as citizens become less efficient.

Investment in health and education, experts reckon, goes a long way in reducing poverty levels. National Treasury will be keen to see the country’s public financing take a different trajectory in the next half of the year.

Kenya Revenue Authority has been given a target of Sh1.7 trillion and is expected to collect at least Sh1 trillion in the next financial year.

For an economy that is struggling to produce goods and services with jobs being shed with every crack of the dawn, it will not be easy for KRA to average Sh154.6 billion in a month. So far, an aggressive taxman has managed to collect an average of Sh125 billion from July to November.

Should the taxman fail to meet its target, Treasury will have to rationalise its budget by either cutting its expenditure or borrowing more.

With Treasury having already trimmed some non-discretionary spending items such as training, conferences, travelling by almost half, it looks like tightening is off the table. It is technically impossible for Treasury to cut spending on pension and wages.

Debts have to be paid as a first charge, with interest on debt payment being paid from taxes. For principal payments, Treasury has the option of refinancing them. One major principal payment that will mature in the first half of next year is Sh35 billion for the Standard Gauge Railway (SGR).  

The option that the Yattani-led Treasury remains with is cutting development spending, a fiscal measure that has already been widely criticised by the World Bank and the International Monetary Fund (IMF).

Moreover, the government finds itself in a tricky position if it was to slash development spending given that a big chunk of it is part of the Big Four Agenda. Under the Big Four Agenda, the Government wants to build at least half a million houses, revamp manufacturing to create jobs, ensure all Kenyans have access to enough and nutritious food as well as critical healthcare services.

Fiscal deficit

President Kenyatta has two years to actualise this project. He might not want it delayed by slashing the budget to some of its projects. If anything, he might prefer even more borrowing to see through his legacy project by the time he moves from the House on the Hill by 2022.

Attempts by the National Treasury to narrow the budget deficit- the difference between a country’s expenditure and tax revenues- were not that successful.

Known as the fiscal deficit, it was estimated at Sh721.1 billion- equivalent to 7.7 per cent of Gross Domestic Product (GDP)- against a targeted deficit of Sh650.5 billion, 6.8 per cent of GDP. Treasury has determined to go back to the fiscal consolidation path in the current financial year.

The government has projected to borrow Sh640.2 billion to plug this financial year’s budget hole. This is 6.2 per cent of GDP.

Of the Sh640.2 billion, the government expects to borrow Sh331.3 billion from external investors, preferably from multilateral creditors such as the World Bank and African Development Bank. However, Treasury might also issue a sovereign bond in the international capital markets, or borrow from commercial banks.

From local creditors, Treasury estimates to borrow Sh305.7 billion by issuing short-term and long-term securities known as Treasury Bills and Treasury Bonds respectively.

The government believes that the austerity measures introduced in the current financial year will help it live within its budget.

According to one of its documents, Treasury is banking on, among other things, recovery in revenue collection as the economic environment improves as well as better tax policy and revenue administration measures that have been put in place.