Tough balancing act as Yatani set to present election year Budget

While all eyes will be on Cabinet Secretary Ukur Yatani as he reads his Sh3.31 trillion Budget speech tomorrow, the real drama will unfold when Members of Parliament (MPs) begin debating its contents.

The Budget is likely to put President Uhuru Kenyatta’s and former Prime Minister Raila Odinga’s troops in the National Assembly in an awkward position should Mr Yatani announce far-reaching tax measures.

Mr Yatani will be the man of the moment when he lays bare the plans of government from July, coming in an environment of rising cost of living, aftershocks from the Covid-19 pandemic, the State’s need to manage debt and an election in the horizon.

Lawmakers seeking re-election will find it tricky for them to approve a Budget that pushes up the cost of living further.  

This being President Kenyatta’s last Budget, however, he will need to raise enough revenue to complete his legacy projects while maneuvering the minefield of high debt levels and high taxation that have characterised his time in office in the last 10 years.

If taxpayers’ wishes could be granted, then the financial year starting July should deliver tax cuts on food and fuel, for the government to spend less on loans while spending more on development projects.

But that wish, once described by the International Monetary Fund (IMF) as a ‘trilemma’ for developing countries, is looking elusive for now. Prices of commodities such as cooking oil, cooking gas, milk, sukuma wiki and bread continue to rise, cutting the value of money for workers and their households.

From paying the price of far off events such as invasion of Ukraine by Russia to natural events such as poor and delayed rainfall locally, not to mention high taxation on products such as fuel, Kenyans will be hoping that Mr Yatani will not demand more from them.

This being a political season, all eyes will be on lawmakers who would like to endear themselves to both the electorate and their party leaders. They will be walking a tightrope.

However, Mr Billow Kerrow, the former Mandera Senator, does not think that even the President would like to have tax as the main issue of debate inside and outside Parliament.

“It (tax issue) will be hidden in one way or the other,” said Mr Kerrow, adding that most MPs, who would like to be closer to their party leaders will be unlikely to oppose proposals from the Head of State, who yesterday signed the Division of Revenue Bill into law, thereby clearing the way for Mr Yatani to table Budget estimates tomorrow. The Bill stipulates how national and county governments should share tax revenue. It had to be passed before the Budget estimates could be tabled.

Critics note that while the Treasury is in a delicate situation where it needs to either raise taxes or re-organise the government by reducing spending, it will still take the route of increasing both taxes and expenditure.

This will put it at loggerheads with the IMF, which expects the government to run a lean budget if it is to avoid increasing its debt, now in excess of Sh8 trillion.

In May, IMF is expected to complete the third review of a Sh256 billion credit facility it has with Kenya, and will be looking at the country’s performance in the six months to December, 2021.

The Treasury projects to increase the tax collection by nearly a fifth to Sh2.14 trillion in the next financial year, with a big chunk of the taxes coming from valued added tax (VAT), the 16 per cent sales tax that is levied on nearly all goods and service sold in the country, including school books.

In the current financial year ending June, the Kenya Revenue Authority (KRA) is projected to collect Sh1.8 trillion in taxes and other levies. In the next year, starting July, it is expected to collect an additional Sh341.6 billion that will come from, among others, new tax measures.

The new tax measures the government will be relying on to finance its Budget is contained in the Finance Bill that might be tabled in the National Assembly either today or tomorrow.

VAT collection is expected to increase by more than a fifth to Sh584.7 billion in the coming financial year, compared to a projected collection of Sh477.1 billion to be collected in the current period.

Another tax head that the government will rely on in the next Budget, which will largely be implemented by President Kenyatta’s successor, is income tax from profits made by companies and salaries paid to workers.

Income tax, the largest tax head, is estimated at Sh997.3 billion, an increase of 21.9 per cent, compared to Sh817.9 billion in the current financial year.

Excise duty - popularly known as sin tax as it is levied largely on luxury products like alcohol and cigarettes - is estimated at Sh297.2 billion.

KRA also expects to collect Sh144.9 billion in import duty which is charged on goods and services that come outside of the country.

As part of its medium term plan, which is contained in the Budget Policy Statement 2022, the government is keen to expand the tax base by going after the hard-to-tax informal sector which includes mama mbogas and Jua Kali workers and small-scale businesses.

But coming at a time when the country is in the middle of a campaign and with many Kenyans grappling with a high cost of living, this might turn into a dicey situation for vote-hunting lawmakers.

Deputy President William Ruto’s side has already dissociated itself from the current government and has been quick to blame it for high cost of basic commodities including fuel, wheat, cooking oil and milk.

Budget proposals

Going by the Supplementary Budget Estimates, both sides of the political divide will try to align their budget proposals with their own interests.

“It will require some creativity from the Treasury to come up with proposals because most of them may face push back from the public,” said Mr Churchill Ogutu, an economist at IC Group. “We are looking at about Sh300 billion in additional tax revenue in the next financial year and that means there is no way we can dodge the Finance Bill bullet.”

Mr Yatani will also face the pressure to meet the public demand to go slow on borrowing.

Cutting dependency on debts would be through bringing more people and businesses under taxation and scrapping some tax incentives.

The first will hurt the poor. The second will hit the rich. Such as move, which has been the push by the IMF, would set up citizens across board for increased taxation and could also push up consumer prices, further hurting their spending power.

One of the low hanging fruits for increased tax revenues is an additional eight per cent VAT on fuel should the prices of crude oil decline