World Bank faults Ruto tax plans, says tax targets unrealistic, unpredictable

The Ruto government isn't collecting as much revenue as planned, making fiscal consolidation harder, the World Bank has warned.

This is compounded by unrealistic revenue forecasting or overly optimistic revenue projections which can lead to unrealistic spending plans, the World Bank added.

At the same time, if revenue projections are consistently missed, the government may spend more than it collects. The World Bank announced this in its latest Kenya Economic Update.

“The fiscal outturn in the first nine months of FY2023/24 shows the government’s continued efforts to remain on a fiscal consolidation path. Steady revenue growth driven by the implementation of tax administration and policy measures in the Finance Act 2023 and government’s efforts to contain growth in primary expenditures resulted in an increased primary surplus,” said Treasury.

“Despite increased primary surplus and reduced primary expenditure, achieving fiscal consolidation targets requires realistic revenue forecasting. Revenue mobilization has consistently been below targets, undermining the credibility of the budget process. This can lead to unjustifiably large expenditure allocations and without adequate revenues can lead to accumulation of pending bills.”

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Unpredictable tax changes create uncertainty for businesses, making it difficult to plan for the future and assess potential returns on investment.

At the same time, the World Bank says frequent tax shifts by the government can signal a lack of commitment to long-term economic stability, which discourages foreign investors who seek reliable and predictable environments.

It says businesses need a stable tax environment to make sound investment decisions. Frequent changes make it difficult to develop long-term strategies and can lead to missed opportunities, warned the World Bank.

According to the World Bank, unexpected tax changes can disrupt business operations and directly affect the cost of doing business, especially for import/export companies dealing with complex international tax regulations.

“The low predictability of tax rates, affecting the import and export sector, seems to be challenging FDI inflows. Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust and hinder strategic planning,” says the World Bank.

“Such unpredictability, exemplified by abrupt tax rate changes or the introduction of new taxes, directly impacts the cost structures of businesses, especially those in the import-export sector. This instability not only discourages investment but also complicates tax compliance, which could lead to decreased government revenue.”

The announcement comes as Kenyans are bracing for tax increases as the William Ruto government seeks to bridge its budget deficit.

However, the proposals are stirring concerns about the underlying consequences, raising questions about the effectiveness of such measures.

Proponents of higher taxes in the Kenya Kwanza regime argue that increased revenue is essential to fund vital government services like infrastructure and social programmes.

However, critics warn that excessive taxation could kill already struggling businesses, while pushing others to the informal sector, ultimately harming the economy.

As tax rates under the Ruto administration go higher, traders and individuals are devising ways to evade.

This hidden marketplace, where transactions happen in cash and receipts vanish, threatens to rob the government coffers and distort the very economic picture it tries to tax, experts warned earlier.

With the Finance Bill, 2024, proposing taxes on critical services like mobile money, some businesses are dumping formal payment systems.