Wage bill a debate about broader fiscal reform

By Henry Rotich

How do we use our limited funds to foster growth and relieve poverty? Answers to that question raise some of the most heated debates in economics.

Commentators reacted differently to the government’s move to rationalise its public sector wage bill. A review of the discussion shows the debate has been taken out of context, in part because the wider fiscal reforms within which it is framed were not taken seriously enough.  But in the background to the debate on the public wage bill initiated by the Government, there lies a broader fiscal reform agenda. High and unsustainable spending on public wages crowds our resources and poses serious risks to our macroeconomic stability and the sustainability of our debt. There are more productive uses of taxpayers’ money, which would achieve the sustainable and inclusive growth we need for shared prosperity. We have a choice: we can protect the employment and wages of a few public sector employees, or we can invest in economic opportunity for the broader public good. The government envisioned a debate about this choice.

We all want shared prosperity. Even without an education in finance or economics, we know the only reliable path to prosperity is creating savings, and using them to tackle the development challenges we face. Our agricultural productivity is in decline; we are not yet food secure; our transport and logistics are weak; and our energy costs too much.

The reform agenda on which the debate was based had a single core item: we intended to reorient public expenditure towards addressing our development challenges. This is part of the Government’s fiscal policy strategy, which focuses on maintaining a strong stream of revenue and containing the growth of total expenditure, while shifting our spending from recurrent to capital costs. The debate on the public sector wage bill must, therefore, be understood under three main heads.

First, is the rationalisation of spending because our recurrent expenditure now stands at over 70 per cent of our total budget. That recurrent spending is driven mainly by our high and unsustainable wage bill, which takes Sh521 billion, or 54 per cent of ordinary revenue – equivalent to 12.5 per cent of GDP.

A wage bill of this size severely hinders the economic growth and development. When we remember the costs of servicing our debts, and paying for our pensions and other obligations, it becomes clear that the current wage bill presents a serious fiscal risk for the future. Action to lower the wage bill is now a matter of urgency. Our target should be the levels suggested by best international practice: wages should take no more than 40 per cent share of ordinary revenue, and 7 per cent of GDP.

This is the only way to release the additional resources we need to pay for the economic and employment opportunities we all want. As part of this process, the public service will be rationalised. There will be retrenchment to remove redundancies arising from duplication and overlap of functions, especially after devolution. Government will also be reorganised, and new agencies will take up the functions that were previously performed by state departments.

Second, it is helpful to remember that merely spending more money on development is no guarantee of success. Development demands that we make our spending more efficient, and our government programmes more effective. That is why a number of policies were prioritised. Government chose to lease, rather than buy, assets. It made fully operational the integrated financial management system platform, to handle the range of its transactions. The Procure-to-Pay module, and the Government Payment Gateway were also brought in.

These efforts will be complemented by the enforcement of cost benchmarks for all projects and consumables; by the enforcement of a project implementation performance benchmark of at least 80 per cent; and by expenditure tracking and value-for-money audits to ensure efficiency and effectiveness in the use of resources at both levels of Government. Third, this debate is not simply about the high wage bill, or inefficient and wasteful spending of public money. It is also about bringing into the tax net as many Kenyans as we can, so that there is stronger accountability in the use of public resources. We aim to strengthen our revenue collection efforts to ensure all potential taxpayers make their contribution towards Kenya’s development agenda.

A number of measures have been chosen to that end. First, there is a need to expand our tax net to the informal sector. Equally, we must rationalise our tax incentives and exemptions to ensure equity in our tax system. None of this can be done without first reorganising and modernising tax system to conform to the needs of a different generation of Kenyans.

It is clear from the foregoing that our debate about the public sector wage bill is indeed a debate about a broader fiscal reform agenda covering expenditure rationalisation, expenditure efficiency and effectiveness and enhanced revenue effort. Any resources raised through the implementation of these reform measures will be channeled into a Transformative Fund. That fund will be applied only to priority projects chosen through consultation.