Inside Treasury's bold plan to avoid fresh Gen Z tax revolt

President William Ruto is walking a tightrope as he faces immense pressure to meet the stringent conditions of the recent Sh78 billion International Monetary Fund (IMF) loan, which includes significant tax reforms without triggering fresh social tensions.  

Any new taxes risk sparking public outrage and potentially undermining his political support, experts and the IMF have admitted. 

This has consequently seen the Kenya Kwanza administration craft a new bold plan to assuage hard-pressed Kenyans and avoid a repeat of the June deadly protests that were led predominantly by Gen Z. 

The Kenya Kwanza’s government’s new strategy, as outlined in its correspondence with the IMF, is a delicate balancing act, Financial Standard has learnt.  

“Going forward, we remain committed to our revenue-led fiscal adjustment strategy through renewed efforts to widen the tax base and improve compliance, and to streamline recurrent spending,” the new plan reveals.  

This approach, the government reckons, will help it raise more finances in a tough economy without triggering the wrath of Gen Z, focusing on broadening the tax base rather than imposing new taxes on an already overburdened populace. 

One of the core strategies of the reorganised Kenya Kwanza government to include opposition figures is to expand the tax net to rope in more individuals and businesses that have historically evaded taxation, according to the National Treasury’s brief to the IMF. 

“We are actively engaging a broad spectrum of stakeholders that will inform our tax reforms to ensure that they are socially and politically acceptable,” Treasury officials told the IMF.

As part of the plan, the Treasury docket led by newly appointed Treasury Cabinet Secretary John Mbadi recently rolled out a press campaign explaining the need for new taxes after publishing a new bill that reintroduces fresh taxation measures.  

Additionally, the new plan involves digitising tax systems, improving tax compliance, and strengthening enforcement to make it harder to avoid taxes. 

In addition to tax reforms, according to the correspondence between Treasury and IMF, the government is committed to streamlining spending.  

“We will also continue to contain recurrent expenditure-to-GDP ratio by limiting the growth in the wage bill and transfers to public companies,” the government explained, emphasising the importance of eliminating wasteful spending to free up resources for essential public services and development projects.

This includes plans to extend the current hiring freeze to the 2025-26 financial year and implement a unified payroll system. 

The government noted that is acutely aware of the social and political implications of any tax reforms.  

To mitigate public discontent, it, therefore, says it plans to engage with various stakeholders, including businesses, civil society organisations, and labour unions.

“This consultative approach will help ensure that any tax reforms are socially acceptable and politically feasible,” noted Treasury. 

While the government’s strategy is sound in theory, its implementation will be a significant challenge, experts say. 

Expanding the tax base requires robust administrative capacity and political will while streamlining government spending can be politically difficult, especially three years before the elections and amid a cost of living crisis.  

“Guided by the MTRS (Medium-Term Revenue Strategy) implementation matrix, the MTRS Steering Committee will assess and adopt a comprehensive reform plan for the major taxes,” the government stated, aiming for necessary legislative changes by February 2025. 

Any misstep could, however, lead to public backlash and economic instability, experts say. 

On the flip side, if successful, the President William Ruto government’s new strategy could provide a sustainable path to fiscal sustainability and economic growth, the IMF insists. 

The plan will be aligned with existing roadmaps and informed by economic impact assessments, the government concluded. 

“The Ruto government is betting on a delicate balance between fiscal responsibility and social equity,” said independent analyst, Ian Nyoro. 

“The stakes are high, and the eyes of the nation are on the government to deliver on its promises while navigating the complexities of tax reform and public sentiment.” 

The new plan comes amid IMF studies that showed that the recent protests in Kenya led by young Kenyans popularly known as Generation Z against similar IMF-backed tax measures prompted a significant reassessment of the conditionalities imposed by one of the oldest Bretton Woods institutions.  

As discontent swelled among young Kenyans regarding the perceived inequities of the proposed reforms, IMF insiders miles away in Washington DC felt that better communication from Kenyan policymakers would have mitigated the unrest and avoided loss of life. 

This emerged recently from extensive conversations with IMF insiders by Financial Standard. 

The protests highlighted a growing resistance to policies that many young Kenyans viewed as detrimental to their economic future.  

Kenya, through its recent protests against an IMF-backed Finance Bill, 2024, has become a cautionary tale among global leaders and IMF watchers in this regard.  

The unrest among Generation Z revealed how inadequate communication and a lack of understanding about the reforms can lead to widespread resistance and undermine policy objectives, IMF insiders said. 

The reflection by IMF insiders was also captured in a new IMF paper titled Understanding the Social Acceptability of Structural Reforms. 

The research published in Washington last month, where global leaders gathered for the annual meetings of the IMF and the World Bank, underscored the need for effective communication strategies to foster public support for such reforms.  

The paper argued that miscommunication and misinformation often derail policy acceptance, emphasising the importance of addressing behavioural factors that influence public perception. 

This case study highlighted the risks of imposing conditionalities “without fostering trust and consensus,” demonstrating that without addressing the behavioural aspects of public perception, even well-intentioned reforms can falter, ultimately complicating the economic landscape they aim to improve. 

“Effective strategies must be backed by strong institutional frameworks that foster trust and a two-way dialogue among stakeholders and the public,” it says.  

“Expanding policymaking toolkits to incorporate citizens’ views can lead to greater social acceptance and successful implementation of reforms.” 

Historically, passing structural reforms has been a challenging endeavour for governments history has shown. 

The IMF’s recent findings indicate that the pace of reform efforts has more than halved since the global financial crisis of 2008-09. 

Notably, nearly 20 per cent of policies aimed at increasing competition in sectors like electricity have failed to be implemented, often due to public resistance. The report suggests that effective communication and stakeholder engagement are critical to successful implementation. 

The IMF research highlights that beliefs and perceptions significantly shape attitudes toward reforms, with socio-economic factors accounting for only a small fraction of public support.  

In surveys conducted for the study, perceptions about policies and their implications were found to account for roughly 80 per cent of the support for reforms. Misunderstandings about how policies work can create substantial barriers to acceptance. 

Experts argue that strategies to build consensus, such as participatory budgeting and crowdsourcing, can enhance public trust and cooperation in the reform process. 

The IMF report suggests that fostering a two-way dialogue with stakeholders is essential for creating an environment conducive to reform implementation. 

While the IMF’s findings provide a roadmap for improving public acceptability of reforms, they also caution against viewing social acceptability as an end goal in itself.

Policies that lack sound design or that fail to address the genuine concerns of the populace may encounter resistance regardless of public support. 

As Kenya navigates this turbulent political landscape, the IMF’s reflections on the current situation serve as a crucial lesson for other nations grappling with similar challenges.  

The need for transparency, trust, and effective communication has never been more imperative as policymakers strive to balance economic goals with the demands of an increasingly vocal and engaged populace, the IMF paper says.