Tougher times loom as State cuts spending plan by Sh46b

National Treasury has cut budget allocations for the current financial year by Sh46.2 billion or 2.1 per cent, from Sh2.8 trillion to Sh2.7 billion as austerity measures begin to bite.

A draft 2019 Budget Review and Outlook Paper said enhancement of public spending and budget cuts will create fiscal space for the implementation of the “Big Four” agenda. The new projections follows Acting National Treasury Cabinet Secretary Ukur Yatani’s call for strict spending cuts aimed at non-essential items, such as foreign travel by officials and hiring of staff.

Speaking in Parliament last week, the CS had hinted at reduction of tax targets as unease in the corporate sector saw a dip in corporate tax collections amid layoffs which has reduced pay-as-you-earn (PAYE) tax.

The report says contributions of crucial sectors such as manufacturing and financial insurance to both revenue and gross domestic product (GDP) has been on a downward trend in the last three years. 

“This partly explains the shortfall in revenues for the financial year 2018/19”,” it adds. Projections for financial year 2019/20 has been revised to a lower projection base mainly due to underperformance in both revenue collection and expenditure. 

This is on account of a Sh123.5 billion shortfall in financial year 2018/19, revenue performance by end of last month, and the amendments to the Finance Bill 2019 which brought drastic changes to various sectors of the economy.

Total cumulative revenue collection was Sh1.67 trillion which is Sh123.5 billion below the target of Sh1.79 trillion. The shortfall was mainly attributable to under-performance in both ordinary revenues and the ministerial appropriations-in-aid (A-I-A). The new changes are expected to accommodate the weak revenue performance through trade-offs and reallocation of existing budgetary provisions, and to ensure Kenya’s debt is sustainable.

“This has resulted to a reduction of the original budget by Sh46.2 billion or 2.1 percent of the original budget,” says the budgetary review report which is banking largely on austerity measures.

Treasury had frozen hiring for next three years to reduce the country’s wage bill, as agencies head for budget cuts of monumental proportions following its tough conditions for approving funding requests presented by ministries and State departments. Also targeted in the cuts are allocations for consumable goods, staff upgrade, ICT equipment and funding for parastatal.

Ordinary revenues

Following these changes, Treasury now projects revenues at Sh2.07 trillion or 19.2 per cent of GDP with ordinary revenues set at Sh1.83 trillion or 17 per cent of GDP.

On the other hand, expenditures are projected at 2.83 trillion or 26.3 per cent of GDP with recurrent expenditures projected at Sh1.74 trillion while development expenditures are projected at Sh710 billion.

Transfer to county governments is projected to increase to Sh378.4 billion or 3.5 per cent of GDP.

From the foregoing, the budget deficit is therefore projected at Sh640.2 billion. Excluding costs associated with the mega Standard Gauge Railway (SGR) project, the deficit amounts to Sh602 billion or 5.6 per cent of GDP.

“The fiscal deficit in financial year 2019/20 will be financed by net external financing of Sh331.3 billion, Sh305.7 billion from net domestic borrowing and other net domestic receipts of Sh3.2 billion,” the report reads in part.

Speaking to Business Hub Michael Mburugu, partner at PKF Consulting said he expected even bigger cuts and incisive short-term strategies to support the economy.

He said Treasury will very soon be in the market for loans as has traditionally been the case despite reducing tax revenue targets. “There seems to be no strategy for growth hence a catch-22 for an economy that is doing badly. We can not meet tax revenues and we are slowing down on spending,” he said.

Mburugu said the good thing is that Kenya has started axing spending but much effort should be put towards resuscitating the economy.

“We need to cushion the economy. Even the US is doing it. It is preparing for a global economic recession,” he added.