Ruto tax-led growth economics not going according to script

An illustration of taxation burden. [Getty Images]

President William Ruto is a man with a dream and plan. He has a crystal clear dream of building a million homes in five years on the backs of Kenyan workers.

For a salary cut of 1.5 per cent and a matching contribution by employers, he reckons he can build 200,000 homes across the country every year. That will create a million jobs and spur on an economy limping under the weight of debts. It is a lofty dream if everything goes according to script.

However, the script has had to be amended already. Activists have gone to court to challenge the Housing Tax wrongly named a levy. Workers forced to carry the burden of Dr Ruto's dream are especially unhappy about it.

This year, workers face a payroll haircut of nearly 4 per cent when the new Social Health Insurance Fund is added. That's on top of increased taxation elsewhere including inflation driven by higher taxes on fuel. If the economy is limping, the worker is crawling. It is evident Ruto's tax-led growth economics are not going according to script.

The International Monetary Fund expressed concern that the Kenya Revenue Authority failed to hit its revenue target in the first half of the year. Higher taxation doesn't always lead to higher collections. The political talk of collecting hundreds of billions more due to strict enforcement and higher rates has faced heavy headwinds.

The economy is a strange animal. It does not feed on good intentions. It does not react to stimuli on face value. The overriding factor driving market reactions is the weakening shilling. The shilling recovered to trade at Sh144 to the dollar after touching Sh167 last recently.

Word is the Central Bank intervened in the interbank market injecting Sh5 billion worth of liquidity. Earlier forecasts by President Ruto that the shilling would trade at Sh120 to the dollar in the wake of the Government-to-Government oil importation deal were cast away by the market.

The market is not a respecter of people. It goes where it wants. The prudent thing to do has been to hold onto the dollars. Even a shock rise in the Central Bank Rate has only kept inflation at the higher bounds of the target at 6.9 per cent against a limit of 7 per cent. The market has a mind of its own.

Against this background, Ruto wants to create one million jobs. Elsewhere in the market, enterprises are cutting costs including payroll totals. The Federation of Kenya Employers reported a loss of 70,000 jobs.

The data from the informal sector is not yet in but the outlook is gloomy. With the growth of internet and mobile telephony, micro and small enterprises are retreating from the physical space into homes to cut costs. Jobs will fall along with the retreat.

Several enterprises listed on the stock exchange issued profit warnings for the year 2023. The Stock Exchange itself is roiling under bearish chains, recording the lowest ratings in years. Blue chip companies are selling for a song on the bourse.

The market outlook is negative but Ruto hopes to create a million jobs out of the gloom. The Housing Project is actually another stimulus programme dressed up as a social intervention. Previous stimulus programmes aimed at interventions in the market by the government have fallen on the hard reality.

We have not yet forgotten how a multibillion scheme to import vegetable oil to force down prices in the market failed to scratch the surface. Markets built under previous stimulus schemes remain underutilised to date. Fish ponds excavated by the government might dry with no fish.

Almost always government intervention works when it follows the market. Freeing up liquidity by cutting government borrowing almost always leads to higher lending by the banks spurring growth.

Former President Mwai Kibaki famously told a delegation from Nyeri baying for government goodies to borrow from the banks and invest. Those were the only goodies he had to offer.

We have heard the story before - the government will invest in industry or infrastructure to bring development. Not very long ago at the height of the four-year drought, Kenyans lambasted the government for high food prices.

Government operatives countered; they invested in roads of prosperity. The refrain was - we don't eat roads. Yet we all want good roads in our areas. It is evident intervention in one direction does not spur all sectors. The best way to spur growth is to inject dynamism in the system encouraging higher productivity and innovation.

While developing housing is a noble goal with multiple benefits, the government has a poor record of allocating resources efficiently.

Given a push of Sh70 billion per year, would the real estate market allocate resources in the places the government has? While it is good to develop houses in rural areas, the market would put a premium on the urban areas where demand is high and prospects for value are good. Has any market research been done when allocating projects to rural counties?

It seems Ruto is jumping the market in his haste to build the Kenyan Nirvana. The banks that manage trillions running the economy are cut out of the chain.

We are being asked to believe that politicians and government mandarins acting without the inhibition of the banks or other market players are best suited to deliver Nirvana.

The Writer is a senior lecturer at Technical University of Mombasa