By CPA Francis K. Langat
It Is a Crucial Legislative Document that Outlines the Government’s Fiscal Policies
Each financial year, the Cabinet Secretary National Treasury (CS, NT) shall, with the approval of the Cabinet, make a public pronouncement of the budget policy highlights and revenue-raising measures for the national government in a Budget Policy Statement (BPS). The BPS must be presented to parliament by 15 February every year, and in 2024, it was presented to the National Assembly by the CS, NT Prof. Njuguna Ndungu CBS, on 15 February 2024.
The 2024 BPS, the second under the Kenya Kwanza Administration, focused on supporting the Bottom-Up Economic Transformation Agenda (BETA) and was aligned with Kenya’s Vision 2030’s Fourth Medium-Term Plan. The BPS theme is “Sustaining Bottom-Up Economic Transformation Agenda for Economic Recovery and Improved Livelihoods.”
On the same day as submitting the BPS, the CS and NT submitted the Finance Bill to Parliament. This bill set out the revenue-raising measures for the national government and included a policy statement expounding on those measures in line with the requirements ofPFM Act section 40.
The Kenya Kwanza government, in an effort to sustain growth in the medium term, focused on fiscal consolidation by cutting back or rationalizing non-priority expenditures while protecting essential social welfare and development budgets. It also focused on attaining the domestic resource mobilization target of 20% of Gross Domestic Product (GDP) by the Financial Year 2026/2027 and applying those resources to development projects.
The BPS contained, amongst others, (a) the financial outlook with respect to Government revenue, expenditures and borrowing for the next financial year and over the medium term and (b) a Statement of Specific Fiscal Risks, amongst which was tighter external financing conditions.
Legal Environment
The CoK 2010, Chapter Twelve on Public Finance under Article 209 (1) (a)- (d) gives the National government powers to impose taxes and levies. The same Constitution under Article 118 and Article 196 obligates parliament and county assemblies to conduct their business by involving the public through public participation, also stipulated in Article 201.
The Public Finance Management (PFM) Act 2012 provides an unequivocal roadmap to the National government budget process. This includes the Finance Bill, which is a money bill and is dealt with as provided under the Constitution of Kenya 2010 (CoK, 2010), Article 114, and the PFM Act 2012, Sections 40 and 41.
The relevant instrument for national government resource mobilization is the Finance Bill, a crucial legislative document that outlines the government’s fiscal policies, including taxation and public expenditure. The national assembly of Kenya passed the Finance Bill on 25th June 2024 with amendments to various contentious sections, including dropping off VAT on bread at the standard rate of 16%, motor vehicle tax of 2.5%, eco levy on imported diapers of Kes 150 per kg; increased excise duty on telephone and internet data services and fees charged for money transfer services by cellular phone service providers all from 15%– 20%, excise duty of 25% on imported cooking oil among others.
The bill was in line with the Budget Statement for Financial Year 2024/2025 that had been read to Parliament on 13th June 2024 and whose theme was, “Sustaining Bottom-Up Economic Transformation Agenda, Fiscal Consolidation and Investing in Climate Change Mitigation and Adaptation for Improved Livelihoods.” The said budget included the revenue raising measures as provided in the Finance Bill (FB) 2024 that was yet to be passed.
Broad objectives of the Finance Bill 2024
The FB 2024 was structured to achieve the following broad objectives;
1. Enhanced ordinary revenue generation to sustain economic transformation.
2. Decreased fiscal deficit from 5.7% of GDP in FY 2023/2024 to 3.3% in the FY 2024/2025, and hence reduced borrowing.
3. Reduced Public Debt.
4. Fiscal plan of tax to GDP ratio from 14% to 20% in the medium term.
Dropping the Kenyan Finance Bill 2024 would have significant implications across various sectors. Below is an evaluation of the potential effects:
Expected effects of dropping the Finance Bill 2024
a. Stagnated Revenue
There shall be a shortfall in government ordinary Revenue vis a vis budgeted expenditure.The FB from its provisions on the income tax (Corporation and PAYE), VAT, excise duty and miscellaneous fees and levies tax changes was not only intended in revenue-raising measuresthat was expected to raise in excess of Kes 220 billion but also targeted to expand the tax base. The government projected ordinary revenue target was Kes 2.917 trillion inclusive revenue from a raft of new tax measures. This therefore may not be realised considering there shall be no new measures and ordinary revenue performance of Kes 2.407 trillion, achieved in the FY 2024/2024 being 95.5% of the revised target of Kes 2.517 trillion.
b. Unrealistic fiscal strategy
The government anticipated to reduce the budget deficit from 5,7% of GDP in FY 2023/2024 to 3.3% in the current FY 2024/2025. This may be realised considering the financing of the said budget is impacted negatively by the dropping of the FB.
c. Government credit rating and dented donor confidence
Performance of government in terms of ordinary revenues collections and Ministerial Appropriation-in-Aid and policies towards the same which include finance bills and the general fiscal strategy, has a direct bearing on the Kenya credit rating. Coming hot on the heels of FB 2024 dropping, Moody’s Investors Service downgraded Kenya’s sovereign credit rating on July 8, 2024, to Caa1 from B3, while maintaining a ‘negative’ outlook. This implies that for Kenya to secure foreign debt, the conditions shall be stringent as and the cost of that line of credit shall be high further compounding our debt position, hence risk of default.
Development partners often consider the passing of fiscal legislation as a sign of a country’s economic health and governance. Dropping the finance bill will affect donor confidence and funding.
d. Reduced Spending and enhanced supplementary budgets
The government as a first resort, must implement austerity measures by shedding off non-key budgetary allocations. In the absence of new fiscal measures as had been provided in the FB 2024, the government has to live within its means and eliminate any kind of wastage of public resources. There will likely be a heightened budgetary reallocation through supplementary budgets with a risk to service delivery.
e. Non-implementation of some infrastructure projects
Large-scale infrastructure projects that rely on funding from new revenue allocations might be delayed or halted, affecting economic growth and job creation a critical component of BETA that is keen on adopting policies that will spur manufacturing, value addition and agro-processing as a contributor to job creation for a ballooning young educated population.
f. Negative effect on critical public services
Critical public services such as health-caree and education with reduced anticipated ordinary revenue could mean less funding impacting service delivery, quality of such services and increased societal economic disparities that government is expected to alleviate. Further, Social welfare (cash transfers) programs targeting vulnerable segments of our populations might face delays in their disbursements.
g. Delay and/or reduced disbursement of county equitable share
The FY 2024/2025 budget as read to parliament, allocated Kes 400.1 billion to the 47 Counties as Equitable Share of revenue and a further 44.4 billion as conditional grants. The equitable share and conditional grants which is largely issued subject to counterpart funding may be negatively affected and therefore will slow down implementation of programmes at counties and possible delays in also meeting recurrent expenditure budgetary needs that includes salaries.
h. Possible ballooning further of pending bills
The CS NT expressed himself on the matter of pending bills in his Budget Statement. He indicated that an established Pending Bills verification Committee in November 2023 had received 994,997 pending bills claims valued at 662.3 billion. However, despite the proposals on how to address the matter, it is likely that both national and county governments may accumulate further pending bills and thus impacting negatively the sustainability of small and medium enterprises, who may have had dealings with both levels of governments.
Possible measures to remedy the Finance Bill question
The government in meeting its obligations may resort to the following measures.
• Strategic fiscal consolidation measures to ensure there is no further accumulation of the burden of both domestic and foreign debt.
• Cutting back on non-priority expenditure.
• Focus on strengthening Kenya Revenue Authority, to enhance its capacity and systems to efficiently and effectively collect revenue.
• Constantly and deliberately communicate to Kenyans the efforts of government to maintain fiscal stability and for donors to appreciate the robust and positive policies for economic stability.
• Enhanced and a well-structured all- inclusive public participation process.
Conclusion
Dropping the Kenyan Finance Bill 2024 would have far-reaching consequences across the socio-economic, political-legal environment, and global dimensions. The government would need to swiftly address the resulting gaps and uncertainties to mitigate potential adverse effects through solid stakeholder engagement and communication while maintaining fiscal stability.
The writer is the Director, Internal Audit KALRO fklangat@gmail.com
