Of not so accurate GDP figures and high taxes ahead

Chairman of Senate Committee Billow Kerrow [Moses Omusula, Standard]

President Uhuru Kenyatta told Kenyans on Madaraka Day that our Gross Domestic Product (GDP), the total value of goods and services produced in Kenya, doubled from Sh5 trillion to Sh10 trillion.

He asserted that the wazungus plus all former presidents in their 128 years only achieved Sh5 trillion. Meaning, we made more wealth in the last 8 years than in all the years this nation has been in existence.

His GDP figures are based on nominal prices, meaning market value of goods and services today. The price a kilo of sugar in 1963 and today cannot be compared, nor can a hundred shilling note today be compared to a similar amount in 1978 in terms of its value.

Consequently, the comparison of nominal GDP values in 2021 with that in 1963 or 2013 is deceptive. The nominal GDP has to be adjusted for inflation, and is called real GDP values.  According to CBK reports, our real GDP in 2003 when President Kibaki took over was Sh1.055 trillion, and had increased to Sh3.5 trillion in 2013. He more than trebled it.

Under Uhuru, our real GDP only increased by 30 per cent to Sh5 trillion in 2020, even after our GDP formula was tweaked/rebased in 2014 by his administration, thereby increasing its size by 25 per cent. What President Uhuru did not mention in his speech is perhaps more significant.

In his 8 years, he raised our public debt from Sh1.8 trillion to nearly Sh9 trillion, five times more than what all his predecessors combined had taken. Does the GDP growth reflect the massive borrowing? If all this money has been invested in capital investment, the returns are certainly not visible.

According to World Bank reports, two thirds of our GDP growth is driven by private consumption, not government investments. Misplaced priorities in public spending have led to poor outcomes. Between 1985 and 1996, the tax revenues to GDP ratio was 21.3 per cent. According to 2021/22 Budget Policy Statement (BPS), the ratio is now 18per cent, a significant decline despite significant reforms in tax administration.

The expenditure to GDP has however increased to 25.6per cent according to the BPS, reflecting the huge spending binge by this administration.  The economy was characterised by job cuts, stagnant incomes, reduced savings, high cost of living, business shutdowns or relocations, and declining tax revenues.

According to a 2019 IMF report, Kenya recorded its lowest pace ever in formal jobs creation. The respected Legatum Prosperity Index reported in 2020 that the country’s economic quality worsened in the past decade, painting a grim picture of our fiscal sustainability amid the massive debt and the systemic corruption.  

The government has been living beyond its means past eight years, with budget deficits of above eight per cent per annum, leading to the huge borrowing. In 2019, Kenyans lamented on social media that they were broke. The president then reportedly wondered aloud why, after all the impressive growth and mega infrastructural projects.

Kenyans fumed, citing the rising taxes, unemployment, collapse of SMEs, public debt as reasons why they didn’t have money in their pockets. Not much has changed since. Ordinary Kenyans today decry the high cost of living, rising poverty, unemployment and collapsed businesses, highlighting a clear disconnect between fairy-tale performance the president alluded to on Madaraka Day and the reality on the ground. 

With the increasing pressure to raise revenues to service rising public debt, the government has thrown policy to the wind and focused on regulation to achieve its strategies.

The 2021/22 Finance Bill reveals that Treasury is leaving no stone unturned to raise more revenues to finance growing expenditure demands driven by legacy projects. In the February BPS, 2021/22 expenditure was set at Sh3 trillion. When the budget estimates were tabled last month, figure was raised to Sh3.6 trillion, making nonsense of the BPS.

The Finance Bill attempts to change VAT Act to give Treasury Cabinet Secretary powers to vary tax rates through regulation. It proposes to remove the provision that required the Cabinet Secretary to seek parliamentary approval prior to issuing any regulation in respect to VAT, effectively removing parliament’s constitutional right for the approval, a clear case of unconstitutionality.

The Bill also gives the CS discretionary powers to exempt businesses from payment of IDF and RDL to the value of 5 billion shillings, either in the public interest, or to promote investment. Export of taxable services have now been categorised as ‘exempt’, which will raise the cost of such services, thereby reducing our competitiveness.

According to Westminster Consultants, “many countries like Singapore, UAE and a number of emerging nations had substantial economic growth by virtue of exporting taxable services. The Nairobi Financial Services Act was one in which the government intended to bring in services and make Nairobi a financial hub. This move erodes any benefit that will have accrued to setting up such a hub." 

Similarly, VAT on off-grid solar power will be moved from zero to exempt, raising costs of this popular green energy source. Treasury also proposes to introduce 16 per cent VAT on bread and milk products that will impact very adversely on the ordinary Kenyans. An excise duty of 15 per cent on bodabodas will also add more misery to ordinary folks. 

The Bill also seeks to tighten transactions between related entities by expanding its definition to ensure transactions are conducted at arm’s length and are not influenced by the relationship to the detriment of the taxman. The Bill limits deductibility of interest expenses in instances where businesses are highly geared or are thinly capitalized which is likely to constrain expansion of investments by businesses.