Don't raise the debt ceiling, trash it!

The National Treasury wants Parliament to more than double its current Sh1.2 trillion nominal foreign debt ceiling.

The Budget and Appropriations Committee of the National Assembly and The Parliamentary Budget Office (BPO); the office that advises MPs on economic and fiscal policies, aren't buying it.

The debate so far is about whether we should raise the ceiling or not and if we do, by how much. Surprisingly, neither side in this debate is questioning whether we need a debt ceiling in the first place.

We are one of only three countries in the world with a nominal debt ceiling. The US and Denmark are the other two.

The rest of the world is doing fine without one. And even in the case of the US, the debt ceiling has little to do with economic management and everything to do with politics.

The rational argument for a debt ceiling in the US is generally about the minority party using it to extract policy concessions from the majority party. It is meant to turn political deal-making into a game of chicken every time the ceiling needs lifting.

The truth is that we don't need a foreign debt ceiling. And there are a number of reasons why we shouldn't have one.

First, the foreign debt ceiling is an accountability mechanism from the days when Parliament didn't much involve itself in the budgeting process and the Executive through Treasury ran the show.

It is an artifact of a time when it was useful for reining in the powerful Executive. Before the enactment of the 2010 Constitution, Parliament had a limited role in the budgeting process, and the Executive had much more freedom over spending.

Today, the National Assembly exerts full control over the budgeting process. Even if the current foreign debt ceiling is raised to Sh10 trillion, Cabinet Secretary Henry Rotich's spending will still be determined by the budget set by the National Assembly, not by the amount of borrowing left below the debt ceiling.

Second, there's no foreign debt limit set in our Constitution. If Parliament really wants to hold down Government debt, it already has a way to do so; namely, the annual budgeting process.

The debt ceiling is implicitly contained in the Budget Statement. Furthermore, the only reason the National Treasury is asking Parliament to lift the debt ceiling today, is to pay for spending on projects that have already been approved by Parliament.

So why do we need to raise some ceiling just to allow for spending that was already agreed to by Parliament? Are the Standard Gauge Railway, Lapsset, energy infrastructure, construction of oil pipeline and irrigation schemes not projects already approved?

It makes no sense for the members of the National Assembly to vote for spending on national projects only for its Budget Committee to turn around and tell the National Treasury it is not permitted to borrow to cover the deficits. In such a case, having a debt limit will not be imposing accountability on the Executive anymore, but it will be calling into question whether Parliament will pay the bills for projects it has already chosen to undertake.

Third, removing this limit wouldn't change the rules of Government spending or taxes neither does it enlarge the Government's financial commitments. It only allows the Government to fund obligations for projects already planned.

Ideally, the decision to spend money should coincide with the decision to finance that spending. When we pass the Budget, we should also pass the authority to borrow in order to finance that Budget. We cannot approve our spending and financing separately. The splitting of these two processes leads to needless wrangling and politicises that should otherwise be simple standard Treasury operations.

Finally, the debt ceiling is a poor policy that it is not even measuring the right thing. No one can tell you the basis of the current Sh1.2 trillion ceiling. It is just another number. It is nothing, but an artificial construct that is set in nominal terms.

It does not reflect ratios of debt to GDP neither does it tie economic growth to the level of deficit that would ensure we do not lower our overall borrowings relative to the size of our economy. We need to use debt as a tool to manage the economy for the maximum benefit of Kenyans, rather than treating it as just a mere number; an end in itself.

The best course of action for Mr Rotich and parliament and one that should be supported by other stakeholders, is not to increase the national debt ceiling, but to legislate for its removal. It adds nothing in the way of fiscal discipline and is redundant once Parliament makes spending and tax decisions.

Our economic debate should focus on fiscal discipline and accountability as defined by budget outcomes, not the ability to operate within an arbitrary and, more importantly, a nominal limit that ties the hands of economic policy designers.

There are more risks in maintaining this limit than in abolishing it. Just trash it!