New plan to wean counties off Treasury funding

The National Treasury and Planning CS Ukur Yattani with Treasury officials at Treasury building on June 10, 2021. [Jonah Onyango, Standard]

The Commission on Revenue Allocation (CRA) has suggested a constitutional amendment that will give counties more powers to collect revenue to bridge the annual Sh300 billion gap in the Budget.

According to CRA, many of the devolved units have the potential to be self-reliant if they are given the legal backing to expand their revenue bases.

According to CRA, in its latest analysis on revenue sharing between the national and county governments for the financial year 2022/2023, Nairobi has the potential to fund its budget by 236 per cent, which is more than three times what is budgeted.

Currently, the county collects 136 per cent of its spending plan.

This makes Nairobi the leading county in terms of the potential to generate own-source revenue - it can sufficiently fund itself without the central government’s help.

Other counties that can fund a significant portion of their budgets include Kiambu (76.2 per cent), Kajiado (74.7 per cent), Mombasa (70 per cent), Kisumu (69.2 per cent), Machakos (52.8 per cent), and Nakuru (47 per cent).

The rest can only manage up to 29.1 per cent, with Wajir ranking the lowest at 2.3 per cent.

“A total of 34 other county governments can only finance up to 20 per cent, with 15 counties capable of financing less than 10 per cent of their budgets,” says CRA in its report.

“In effect, financing devolution in Kenya will continue to rely on nationally raised revenues unless a constitutional amendment assigns more taxing powers to county governments.”

Counties own revenue is collected from mainly property and entertainment taxes, fees and charges.

Over time, CRA says, revenue collection by the devolved units has not only remained below target but also unstable.

Data from the Controller of Budget shows the annual missed revenue target has averaged Sh20 billion since the 2013/14 financial year.

The highest gap in this period is Sh28 billion recorded in the financial year 2013/14.

In the last financial year (2020/21), the counties missed their targets by Sh20 billion to collect Sh34 billion.

“It is a source of concern that counties are not collecting what they should, and that again can compromise service delivery at the local level and in our view could be potentially the source of pending bills by counties,” said CRA Chairperson Jane Kiringai.

The CRA document also shows that since devolution kicked off in 2013, the gap between targeted and actual ordinary revenue collected by the National Government has expanded to triple digits.

The amount allocated to counties also increased from Sh20 billion in 2013/14 when devolution came into place to Sh251 billion in the 2021/22 financial year.

The highest gap in this period was Sh303 billion recorded in the 2019/20 financial year.

The tabulation shows the budgetary allocation to counties increases on average at the same amount as the revenue they (counties) miss to collect, which ranged from Sh37 billion in the 2013/14 and 2014/15 financial year to Sh3 billion in 2019/20.

“Though county actual revenue collection remains unstable, available data on their own-source revenue potential reveals that a number of counties can collect higher revenues,” reads the CRA report.

The report adds that Nairobi has the potential to collect Sh79 billion, yet it only manages Sh10 billion.

During the 2022/23 financial year, CRA has maintained allocations to counties at Sh370 billion, same as in the current financial year, citing slow economic growth as the country recovers from the Covid-19 pandemic, the upcoming 2022 elections, constrained fiscal options and lack of more headroom to borrow.

The Council of Governors has opposed this allocation, demanding it is reviewed upwards.

“The government finances itself from two options: borrow more or tax more. From the numbers we see, and the Council of Governors demand for an additional Sh381 billion, probably we need an answer, do we borrow the additional Sh381 billion or should we tax Kenyans more?” posed Dr Kiringai.

She said none of these options is prudent considering the current economic situation in the country.

She broke down the numbers, saying if the Sh2.1 trillion revenue projection by the National Treasury is considered, with the National Government getting Sh1.7 trillion, once you deduct interest payment to loans the government has taken, it is then left with just about Sh1.2 trillion.

Interest payment on loans, according to the CRA report, stands at 31.6 per cent of ordinary revenues.

This means from the Sh2.1 trillion KRA expects to collect this financial year, and after counties have been given their allocation of Sh370 billion as per the CRA recommendation, the National Government will be left with a paltry Sh1.7 trillion.