Public finance must remain healthy

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By CPA Justin Mulwa

Discussions on How to Raise Enough Revenue to Finance Kenya’s Three Trillion Budget Have Been Raging Lately

Public finance revolves around the management of a country’s revenue, expenditures, and debts. Governments the world over have the desire to socially, economically, politically, and environmentally develop. However, the greatest hindrance to this development is usually the limited finance available for pursuing economic, social, and political development. Public finance is characterized by tax collection, national debt, public expenditures, deficit or surplus, and national budget. Government works through budgetary allocations to achieve its development goals. However, this budget has to be financed by the public except in instances where the public revenue through taxation is insufficient then governments may finance their budget through debt and deficit financing. This article is, however, interested in underscoring the importance of tax collection being a major source of public finance. 

According to the European Union, public finance must remain healthy because it contributes to macroeconomic stability and supports monetary policies which are critical for both micro and macroeconomic environments. These are required to enable the economy to operate within the realms of market forces and dictates. To improve healthy public finance, attention must be focused on how taxation (tax systems, and tax administration) is designed to ensure optimal and efficient collection. Expenditures should be focused, targeted, and prioritized for productive investments by the government. Effective and efficient public finance can improve fiscal governance which is a recipe for policies that enhance economic growth and development of a nation. Managing public finance thus is critical to the country and must be pursued within the confines of international laws, conventions, and agreements. Beyond that, in-country laws must also be formulated in a manner that supports effective management of public finance if the associated benefits are to be gained.   

Taxes and Public Finance

The majority of governments around the world depend on taxation to finance its expenditure. Various tax systems are used for this purpose based on variations found within its socio-economic environment. Tax systems used by a country, for instance, Kenya, affect the government’s ability to raise sufficient revenue to meet its budgetary needs. Taxes have broader economic and societal ramifications. There is a need for Kenya to bring itself into participatory engagement with all its potential and current taxpayers to holistically deliberate on how best the country can sufficiently mobilize revenue to meet its development needs. Since taxes can do more than just fund public services, it is important to consider taxes as support structures for economic growth, employment investment, economic competitiveness, and social justice. Therefore, should be a prerogative of every Kenyan. 

Discussions on how to raise enough revenue to finance Kenya’s three trillion budget have been raging lately. Many proposals and discussions have centered on increasing the tax base, mapping and tapping all potential taxpayers in informal employment, increasing tax education, and engagement of taxpayers within the government strategies to improve revenue collection. However according to the Kenya Revenue Authority’s revenue performance report for the fiscal year 2021/2022, most of the taxes collected came from sales of goods and services, followed by individual income taxes. This position was further corroborated by Statista which indicated that taxes on goods and services contributed to 29%; personal income to 26%; and VAT at 23% of the total Kenya Shillings 2.03 trillion collected. Data on corporate income tax showed an 11% contribution with social security contributions tailing at 4%. Comparing this data with developed countries, particularly the OECD, the analysis reveals that in as much as the leading contributor to revenue is social security contributions (26%), followed by personal income (23%), and closed in by VAT at 20% the ratios are closely distributed leading to more tax revenue. 

It suffices to say that Kenya, is on the right track to developing its taxation systems and regimes for various applicable taxes, the difference is in the number of potential and compliant taxpayers, and the level of income by these individuals warranting more payment of personal income taxes. According to Kenya Revenue Authority, a total of about 7 million Kenyans are registered as taxpayers (possessing a KRA PIN) in 2023 with a projection of about 8.3 million by the end of 2023. Currently, this figure shows that only 32% of the potential 22+ million taxpayers are declaring and possibly paying their fair share of the tax burden. If this figure was to double to about 14 million taxpayers, the government might be able to overcome the challenge of financing its budget and ensuring that more economic growth and development is experienced across the country. 

Several other studies and reports indicate that goods and services, and individual income contribute more revenue in Kenya and anywhere else around the world. It is therefore important that the focus should be on how to increase the exchange of goods and services, within the local market. The government should identify those factors that hinder trade and business operations within the Kenyan economy, and work towards solving those challenges. It is also important to review what tax regimes are being applied to the importation and exportation of goods in and out of Kenya. The review should also cut across the various tax systems used in Kenya to levy taxes on the importation of goods and services into Kenya. Generally, data shows that encouraging business activities would lead to the government collecting more taxes than if it were to concentrate on other contributors to tax revenue generation. 

Data has also shown that personal income tax is among the highest contributors to tax revenue in both developed and developing economies. The government thus must identify the mechanisms that are critical to either expanding the tax base or bringing many of the potential but untaxed individuals into the taxation bracket in Kenya. Even though various organizations and tax experts have vouched for the expansion of the tax base, the hurdle of operationalizing these decisions remains a challenge still.  This is much so since taxation is a matter of legislation, and a process that is always laced with political interests and muscle flexing. Alternatively, the country can look inwards and evaluate its existing tax regimes and tax systems to identify weaknesses and loopholes that can be strengthened and tightened to net all valid taxpayers and channel them into actual payment of taxes. 

Currently, fewer individuals are bearing the tax burden that should be shared and spread across the many eligible but unregistered, and non-compliant. It is also important to ask and understand the role that accountants and their professional bodies play in improving tax revenue collection in Kenya. As many accountants may want to aid their clients bear less tax burden legally, it is also prudent to mind the urgency and the need of the government to raise more revenue. Accountants must also stand in the gap between revenue pilferage and loss by abiding by acceptable accounting standards and principles while discharging their professional mandates. Since accountants are in the nexus of taxation, their responsibility is to ensure proper and prudent management of public finance.  


The need to mobilize sufficient revenue to meet the budgetary requirement cannot be over-emphasized. There are so many socioeconomic developments needs that every single amount that can be collected in revenue counts. However, the government must strive to use data and accept the findings thereon to formulate laws, policies, and regulations that not only maximize revenue collection but are progressive and economic growth-oriented. Data has shown that an increase in tax rates does not necessarily lead to an increase in tax revenue. Borrowing from the Theory of the Laffer Curve, the government should desist from the temptations of incessant increase of tax rates with every year’s finance bills. Instead, the relevant authorities including the Kenya Revenue Authority, and the various line ministries should work in tandem to harmonize the existing tax regimes and tax systems to seamlessly integrate (ingrate) with the economic conditions. These efforts may yield more taxpayers, leading to more revenue, and lesser voluntary tax avoidance and evasion from the public. Efficiency in the administration of tax systems and tax regimes in Kenya should take center stage in the discourse on tax revenue collection as a critical source of public finance.   

CPA Mulwa is the Finance Manager at TCV Corporation, a Japanese online car marketplace company based in Nairobi, Kenya.


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