President Uhuru’s election offer ... but where’s the cash?

President Uhuru Kenyatta’s re-election bid in the August polls promises to be a costly affair for ordinary citizens through the record-breaking Sh900 billion hole in the budget.

He plans to spend this money in the next financial year starting July 1, on among other items lavishing civil servants with improved salaries and wages within weeks to the August 8 General Elections. A decision to improve salaries flies in the face of Kenyatta’s previous position that the country could not afford any more pay, best illustrated by the tough negotiations with striking doctors who have been away from work for over two months.

In any case, the original budget drafted by the National Treasury and which has been discussed by a committee of Parliament did not factor in the improved compensation terms for workers. It would also be an about-turn for the President who firmly dealt with teachers who stayed away from class for weeks, only to resume work empty-handed after he vowed never to pay a single coin more – as there was no money.

“I can’t pay: I won’t pay,” he said in September 2015, days before the Kenya National Union of Teachers (Knut) called off the strike. But with elections within weeks of the start of the next financial year, Sh100 billion has been found and will be spent on improving salaries.

Raising taxes

Kenyatta’s Cabinet on Thursday approved a Sh2.6 trillion national budget with the Kenya Revenue Authority, which has often missed its tax collection targets, expected to raise Sh1.7 trillion, hence the gaping financing hole. That deficit is huge for every ordinary Kenyan, considering that it is equal to Kenyatta’s entire national budget in 2010, then as Deputy Prime Minister and Finance Minister.

It is not all doom and gloom though, albeit for the short term, since other sectors would also reap big from spillovers of the expenditure, whether on infrastructure or a better remuneration package for public workers.

In monetary terms, each of the 45 million Kenyans would inadvertently have put in Sh20,000 to help the Jubilee administration deliver on its promises. Options of raising the money, which the Jubilee government plans to spend but does not have, are limited to either raising taxes or borrowing – both with devastating impact, immediately or later.

Taxes will have a spiraling effect on prices of commodities translating in to instant pain, while loans must be repaid at some point in time. Economists are worried that the spending spree of money that we do not have, could have major implications for the economy and the people.

KRA has been directed to raise Sh1.7 trillion for the 2017/18 financial year, meaning the tax agency must go hard to collect every possible coin. This may be a tough call for the taxman at a time when it is struggling to meet its current targets. The targeted amount is Sh200 billion more than this year’s target of Sh1.5 trillion. A likely result of this measure is heavier taxation amid an already struggling population to finance the ballooning government spending.

“I think these targets are going to be difficult to meet. KRA has not met targets for several years now and there is no reason to suppose that the next 12 months will be any different,” said Nikhil Hira, a tax expert at Deloitte East Africa. “Given that we are also in an election year when economic activity slows down, collection of tax revenue is going to be even more difficult.”

National Treasury financials printed in the Kenya Gazette in December showed that KRA had collected Sh473 billion in total taxes up to November, only a third of its target, in five months. This means that the Finance Bill this year may come with harsh tax measures slapped on already overburdened taxpayers. “It is possible that we could see an increase in taxes but this does not necessarily mean that it will translate to higher collections,” Mr Hira told Weekend Business.

The tax expert says that often when taxes are raised it becomes even more difficult for KRA to collect enough revenue to meet its targets. “This actually happened in Kenya in the early 90s. I also feel that increasing taxes will increase the cost of living for the mwananchi and this is not something the Government will want,” he said.

Hira’s sentiments echoes fear on the ability of Kenyans to shoulder an inflated budget, especially in a year of massive job losses, stagnant economy and a credit squeeze. Already, several institutions have fired thousands of employees in a difficult business operating environment. Could it be that Mr Kenyatta plans to borrow the Sh900 billion, more than three times the size of the controversial Euro bond issued in 2014?

Economists are alarmed by the size of the budget deficit, which is nearly double the size Sh522 billion in the current financial year. State House quoted Sh2.5 trillion (almost the size of the budget and impossible to absorb) in secured loans and grants to finance the budget although specifics of the mix was not provided.

However, with The Treasury estimates of Sh51.9 billion in grants from Kenya’s development partners next year means most of the financing will likely come from both domestic and international loans. “Donor commitments have been firmed up and disbursements are expected to hit Sh2.56 trillion in both grants and loans,” State House Spokesperson Manoah Esipisu said on Thursday.

The Government is going against advice from the World Bank and The International Monetary Fund that have insisted that Kenya should keep expenditure in check to reduce pressures of borrowing to enhance foreign exchange stability.

“My concern is that we may head toward more borrowing which could lead to long-term problems. While the current level of borrowings is not necessarily at alarming levels, increased borrowing could change this very fast. If we are to use foreign currency borrowing then it is important that the shilling remains stable,” Mr Hira said.

The Government, however, defends the budget as key in delivering pro-poor growth and sustainable development, with a focus on infrastructure spending to spur economic activity and enable ordinary folk access to markets for their produce.