Why Mbadi's budget review is all about lowering expectations

Today, September 23, 2024, is the final day for our public input into the 2024 Budget Review and Outlook Paper (BROP).  Friday, 4 October 2024 is the final day for our public inputs into Treasury CS Mbadi’s innovatively proactive call through press notice to include Kenyans in the legislative reforms needed to collectively fix our budget, and seemingly, our economy as well.

The first call is embedded in our budget calendar for 2025/26, the penultimate fiscal year to our 2027 election because the 2027/28 budget two years later will be transitional, as was 2022/23.

The second call seeks inputs in four areas of legislative reform.  First, measures to prevent cash crises and service delivery slippages in counties when revenue allocation laws are not passed in time.  Add measures to prevent the above even after laws have been passed.

Second, reforms to improve the wellbeing of Kenyans given our current debt situation and the need for debt sustainability without burdening the same Kenyans.  Basically, how do we improve the lot of Kenyans without imposing new taxes and over-borrowing while offering government services.  These two questions are really about the cost of government, including corruption. 

Third, legislation to ensure equity and fairness in taxation, provide justifiable tax amnesties and rationalize tax expenditures (exemptions, waivers, earmarks, deductibles).  Fourth, reforms to enhance tax administration and compliance so that we all pay our rightful share of tax.  Hello? Where is our National Tax Policy?  Are we overhauling the Medium-Term Revenue Strategy?  

Our fixation with laws notwithstanding, these are useful questions for the forthcoming budget.  Are they better tackled through inclusive public forums (physical and virtual) to rebuild trust?

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Food for thought, but let’s go back to 2024 BROP.  Despite the limited attention it gets, BROP sets out our medium-term budget framework - a backward and forward-looking view on the fiscus and economy. Simply, it connects previous and forthcoming Budget Policy Statements (BPS).

Ideally, it would be a three-part document beginning with an economic and then a fiscal review before moving to the economic and fiscal outlook, with a connecting chapter in between on the big assumptions and parameters that take us from review to outlook.  But we don’t like to be logical, so we have a different three-part document that does a fiscal review, moves to (macro-)economic developments and outlook before closing with a (fiscal policy and) resource allocation framework.

Let’s work through these three parts and surface a couple of observations going forward.

Starting with the fiscal review, the headline tells us total revenue of Sh2.703 trillion (16.8 per cent of GDP) in 2023/24 fell short of the target by Sh205 billion (1.2 per cent of GDP) but above 2022/23 performance of Sh2.307 trillion (year on year growth of 14.5 per cent, almost Sh400 billion). 

The actual tax take was Sh2.147 trillion (13.3 per cent of GDP), up from 1.943 trillion in 2022/23 (13.4 per cent of GDP) by Sh204 billion but off target by Sh97 billion.  Given that Finance Act 2023 (now in court) aimed to raise Sh211 billion, and taking inflation into account, doesn’t this mean we went backwards in a growing economy, as suggested by the falling GDP extraction rate?

The revenue total also includes A-in-A which rose from Sh319 billion to Sh414 billion but was off target by Sh33 billion.  Basically from Sh1.25 billion to Sh1.65 billion a day assuming only 250 working days.  Accounting rules on revenue recognition notwithstanding, why were we recently told e-citizen revenue has grown from a daily Sh1.45 billion in 2022 to Sh10.9 billion in 2024?

Looking at spending, recurrent grew 19.2 per cent from Sh2.247 trillion in 2022/23 to Sh2.678 trillion in 2023/24 (the target was Sh2.777 trillion!).  So, first, all recurrent spending (interest, operations and maintenance, pensions) except wages is growing faster than revenue.  Second, we now have an unsustainable position where recurrent spending consistently exceeds the tax take. 

In fact, because interest (Sh840 billion) is a first call on the Exchequer, the post-interest tax takes (Sh1.306 trillion) was insufficient to cover the national government’s ordinary running costs of Sh1.659 trillion (wages - Sh575 billion; operations and maintenance - Sh1.084 trillion).  That’s before we get to counties, that received Sh43 billion less in 2023/24 than in 2022/23. 

Further, development spending – at 25 per cent of total spending against a minimum threshold of 30 per cent – actually fell by 17 per cent from Sh655 billion to Sh546 billion (the target was Sh669 billion).  For the record, only 46 per cent of government borrowing went into development projects.  Now throw in national government pending bills at Sh516 billion (with another Sh181 billion stuck in counties) and Sh218 billion in carryovers (outstanding (i.e. unfunded) exchequer (spending) requests) and you quickly realize that the 2024 BROP offers many stories but nothing that nuances this incredulous tale of fiscal distress.  This was how we ended fiscal 2023/24.

We are about to close the first quarter of fiscal 2024/25 under the first of what are likely to be three supplementary budgets this year.  Exchequer reports from the first two months show sub-par revenue performance, with zero allocations to counties to date.  The pain of Finance Bill 2024 protests persists, but the government insists on restoring most of it on a piecemeal basis.

The short story in our macro-economic developments and outlook is we will continue to hover around our “KANU growth rate” of 5 per cent.  The interesting nuance here is that protest-free Q1 GDP growth in 2024 was lower than protest-ridden Q1 GDP growth in 2023.  It isn’t yet the time to think about insolvency rather than illiquidity, but it is tempting to surmise that we have a deeper economic malaise than we realize, and we think taxes and fiscal consolidation are the fix.

This brings us to the shortest part of BROP, the fiscal outlook.  2025/26 total revenue is projected at Sh3.415 trillion (Sh3.06 trillion in 2024/25, Sh2.703 trillion actuals in 2023/24) or 17.1 per cent of GDP (16.9 per cent in 2024/25, 16.8 per cent actual in 2023/24).  Spending is set out at Sh4.158 trillion (Sh3.881 trillion in 2024/25, Sh3.605 actuals in 2023/24).  Both of these reflect downward revisions from the 2024 BPS, notwithstanding zero-based budgeting as our latest fetish.

Again, the projected 2025/26 tax take of Sh2.714 trillion fails to cover national recurrent costs of Sh3.057 trillion (including interest of Sh1.081 trillion), before we get to counties at Sh432 billion (of which equitable share is Sh400 billion) and provide Sh11 billion and Sh5 billion for the equalization and contingencies funds.  Another Sh685 billion is needed for development. So, to balance the books, we are reliant on Sh190 billion in non-tax revenue, Sh414 billion in A-in-A and, yes, more borrowing (after grants of Sh53 billion) of Sh689 billion.  It’s all pie-in-the-sky data.

Hence a couple of points to ponder. The danger of revenue over-ambition ultimately hurts growth when development spending is cut due to shortfalls.  The structural illogic, debt treadmill notwithstanding, in borrowing to cover running costs because we are unwilling to cut national government.  Will our fiscal tail eventually wag our economic dog to death?

If this is what the 2024 BROP tells us, we should answer that 4^th October Treasury call.

Kabaara is a management consultant