Why state's Sh300 billion tax dream may never happen

The controversy around the oppressive government revenue-raising measures continue in the corridors of justice as the battle over the Finance Act 2023 proceeds at the apex court. The Act remains as the only viable legislative document left for the government to ring-fence existing taxes with the death of the Finance Bill, 2024. The new Cabinet Secretary for the National Treasury, John Mbadi, has said as much in his public appearances.

As the debate rages on, it will be good for us to refer to the actual evidence that is emerging from official government reports. In their wisdom, the drafters of the Constitution established strategic institutions to defuse executive power and redistribute it to the people. The Controller of Budget (CoB) is one such independent constitutional office that works for the people directly.

The big numbers

The Constitution obligates the CoB to prepare a Budget Implementation report each quarter and report to the people directly through their elected representatives in Parliament for the national government, and County Assemblies for the county governments.

As of June 30, 2024, the government revenues totalled Sh3.8 trillion. This constitutes Sh2.16 trillion in tax revenue, Sh1.5 trillion in public borrowing, non-tax revenue Sh129.3 billion and other domestic sources accounting for Sh3.54 billion.

From this revenue breakdown, the net tax revenue added for the year would be about Sh127 billion despite all the fanfare and taxes proposed last year.

That effectively means the dream of netting an extra Sh300 billion in taxes is largely a hoax not supported by the existing economic order.

On the centralisation of government payment through the e-citizen number 222222, it does not seem to suggest there was a dramatic change in Appropriation-in-Aid (fees and levies charged for various government services) either.

Despite the centralisation of all government payment systems, non-tax and other domestic financing netted an extra Sh34 billion only. While we may not know exactly how much was being collected by State agencies when they managed separate pay bill numbers, this figure does not sound convincing that there was a massive leak from these agencies.

It is the information on the government spending side where we can find traces of the real problem in the country.

Based on this report, debt consumed a whopping Sh1.76 trillion, accounting for 45 per cent of the total government expenditure. Pension and gratuities were Sh148 billion while employee compensation for the National government only was Sh598 billion.

The employee compensation excludes another Sh20.8 billion charged directly from the Consolidated Fund. This is salaries for the President, Deputy President and other Constitutional State officers whose salaries are charged directly into the Consolidated Fund.

Actual development expenditure was Sh516 billion, of which Sh351 billion were transfers to Semi-Autonomous Government Agencies (SAGAs). That would mean that part of this went to recurrent spending once transferred to the SAGAs. The actual reported amount that went to construction and civil works was a paltry Sh37.9 billion and specialized plant, equipment and machines Sh20.2 billion.

Despite Kenya Kwanza’s claim of anti-subsidisation interventions, the government spend Sh141.3 billion on subsidies in the year. Was this money spent only on the fertiliser subsidy programme or are there other subsidies provided under cover by the administration?

The national government's recurrent expenditure includes Sh27.3 billion on travel. Of this, domestic travel accounted for Sh18.2 billion while foreign travel consumed Sh9.2 billion. While this analysis does not unpack individual agency spending, it is very easy to infer that the President’s tours locally and abroad, together with other senior public officials are coming at a huge price tag for taxpayers. These figures would be astounding if we are to escalate this analysis to the Sh354.6 billion shareable revenue transferred to the counties in the fiscal year.

The funny thing is that despite this recurring evidence of the bulk of taxes going into a consumption hole, and very little on investment into the economy, the party continues unabated. Other than the rhetoric during official functions and public rallies, the core of government spending, waste and misplaced priorities remains intact. One then is left wondering how will we ever restart the economy if the response to the evolving crisis is an official denial of the magnitude of the underlying macroeconomic woes.

It does not help when the President seems to appropriate all the operational powers to himself as witnessed with the now common town hall forums. For those who understand the complexity of government bureaucracy, one cannot fail to wonder what state officers do in their offices, if it is the president who prosecutes operational issues in public without the company of the relevant Cabinet Secretaries. The only rational conclusion that we can infer from these events is that the entire government is one big theatre of a one-man show. If this is true then, it would be very easy to project that we are in for a long bumpy ride ahead, the broad-based government notwithstanding.

The options

As indicated before in this column, the revenue collection data confirms that there would be no mortal threat to government revenues without Finance Bill 2024.

The government will still collect over Sh2.4 trillion in ordinary revenues under the existing legal frameworks. The only real threat to this revenue base is the negative economic impacts that are inevitable when the Social Health Insurance Fund levy becomes effective next month, in addition to a very unpredictable tax environment.

This not only makes it very difficult for businesses to plan their operations, but it leaves them with no option besides downsizing. Individual consumers will have to tighten their belts one more time as their disposable incomes shrink further.

The resultant outcome of this can only be diminished consumption and the consequent loss of government revenues.

While this cannot be by any means a popular opinion among the political and Kenya Kwanza bureaucratic elites, it is still my considered view that Treasury CS Mbadi must focus on designing a comprehensive stimulus economic package to inject money into consumers’ pockets.

The government must also, as a matter of priority clear all the existing pending bills to unlock working capital for businesses held by the government.

This way, it will be possible to inspire confidence among businesses and consumers to resume employment and spending respectively.