Impact of Finance Bill withdrawal hits State revenues

The withdrawal of the Finance Bill, 2024 has had major repercussions on the functioning of the government, with the biggest casualty being development projects, which have gotten off to a slow implementation.

The withdrawal of the Bill, which happened towards the end of the financial year, forced the government to draw up a new budget for the 2024-25 financial year.

The process also affected the pace at which the National Treasury released funds for different projects, resulting in projects falling behind schedule.

It has also affected revenue collection, not only the higher tax revenues that the Kenya Revenue Authority (KRA) was expected to rake in from additional tax measures but also other revenues such as the Ministerial Appropriation in Aid.

The Bill sparked countrywide protests that were led by Gen Zs over concerns about the impact that the proposals in the spending plan would have on the cost of living.

Kenyans, in rejecting the proposals - which included higher taxes on bread, mobile money and sanitary pads - noted that it would further increase the cost of essentials that were already beyond the reach of many.

President William Ruto would later yield to the demands of Kenyans and withdraw the Bill by declining to sign it into law despite having been passed by Parliament. 

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To cater for the shortfall in revenue following the rejection of these proposals, the National Treasury had to draw up the Supplementary Budget that became law on August 5, more than a month after the commencement of the financial year on July 1. 

This affected budget implementation for the 2024-25 financial year and also meant the scaling down of spending on projects. 

Over the first quarter to September 30, different national government agencies registered a development expenditure of Sh106.39 billion, which translated to an absorption rate of 17 per cent against a target of 25 per cent for the first three months, according to a new report by the Controller of Budget (COB).

“The low absorption of development and recurrent budget is attributed to low receipt of Appropriations-in-Aid (AIA), affecting budgeted activities to be funded via A.I.A, delayed budget implementation at the beginning of the financial year due to revision of the budget through Supplementary I that was necessitated by the withdrawal of the Finance Bill 2024 and delays in the release of the exchequer by the National Treasury,” said the National Government Budget Implementation Review Report by COB.

“The delay in releasing the exchequer issues is attributed to low revenue collection in the period under review.”

The withdrawal of the Finance Bill, 2024 has also seen the government fall behind in raising revenues. Without the measures it had proposed in the controversial bill, the revenue shortfall would be in the region of Sh344.3 billion.

According to COB, receipts into the Consolidated Fund over the first quarter stood at Sh776.89 billion, which was 18 per cent of the annual target of Sh4.21 trillion.

To be able to hit the annual target, the receipts into the Consolidated Fund – which is the account into which all money raised or received by the national government is paid – should average 25 per cent every quarter.

“Total receipts into the Consolidated Fund were Sh776.89 billion, representing 18 per cent of the revised annual target. The Controller of Budget approved the withdrawal of Sh771.71 billion from the Consolidated Fund, representing 18 per cent of the revised net estimates, implying seven per cent of targeted activities were not funded based on the target of 25 per cent in the first three months,” said COB. 

Following the withdrawal of the Finance Bill, the government drew up a Supplementary Budget in which it cut overall spending as well as increased fiscal deficit, which means it will have to borrow more than it had expected.

In the Supplementary Budget, Treasury reduced the overall budget to Sh3.87 trillion from Sh3.99 trillion, a 3.1 per cent reduction.

The biggest change has been the reduction of development expenditure by Sh122 billion, which is expected to hurt new and ongoing development projects. The fiscal deficit has also increased to Sh761 billion (4.2 per cent of GDP) from Sh597 billion (3.3 per cent of GDP). This will largely affect domestic borrowing which Treasury expects to increase to Sh404.6 billion from an earlier Sh263.2 billion. The government expects to borrow the balance of Sh356.4 billion from foreign lenders.

“The Finance Bill for 2024 was withdrawn at the beginning of FY 2024/25. Consequently, some revenue-raising measures could not be implemented, which forced the Government to rationalise expenditure for the MDAs through Supplementary Budget I, which was approved on August 5, 2024,” said COB.

“The revisions affected recurrent and development expenditure estimates and were meant to accommodate the likely revenue shortfall based on the withdrawn bill. The budget rationalisation will likely affect the implementation of the planned activities, especially the development activities for FY 2024-25.”