Highlights of Budget 2017/18 Analysis. John Mutua PFM-Program

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1 Highlights of Budget 2017/18 Analysis John Mutua PFM-Program

2 Outline of Presentation Overview of the budget Expenditure side Revenue side Taxation proposals 2

3 Deficit after grants Commercial financing % Project Loans % Programme support % Foreign Payments % Domestic Financing other than Borrowing % Domestic Borrowing % Others?? Total Financing % Overview of Budget 2017/18 Revised 2016/17 Estimates 2017/18 % change Revenue Total Revenue 1,515 1,705 12% Ordinary Revenue (incl. RDL) 1,372 1, % Grants % Total Revenue & Grants 1,567 1,763 13% Expenditure Total Discretionary expenditure National Executive 1,646 1,578-4% Parliamentary Service Commission % Judiciary % County Governments % Equalization Fund % Contingency Fund 5 5 0% Non-Discretionary expenditure Consolidated Fund Service (CFS) % Total GoK Budget 2, , %

4 Source: PBB 2017/18 Distribution of GOK Budget 2017/18 (Ksh 2.64 Trillion)

5 Expenditure analysis Fiscal policy goal is to support rapid and inclusive economic growth and continued fiscal discipline -- emphasis on efficiency and effectiveness of public spending (contain growth of total expenditure). What is the total overall expenditure?? Is it Ksh 2.64 Trillion or the reported Ksh 2.29 Trillion. Is the government serious with efforts to contain expenditure?

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7 Fiscal deficit as a % of GDP / / / Revenue Expenditure Fiscal deficit

8 Questions about containing expenditure Rise in expenditure especially in the post devolution period from 23.8% in 2012/13 to 28.3% in 2014/15. Government budget to GDP ratio in 2015/16 was 32.9% dropped to 31% in 2016/17 (Incl. Ksh billion approx 6.1% of GDP) but expected to rise marginally to 31.9% in 2017/18. Some hint to contain expenditure but budget to GDP ratio is expected to go up and cases of using the supplementary budgets to seek additional funds

9 Trends in Consolidated Fund Services (CFS)- Ksh Bn Item 2013/ / / / /20 18 % age Public Debt Pensions Salaries & Allowances Miscellaneous Service Subscriptions to Int l Orgs Guaranteed Debt Total % Total Public Spending Public debt payments and pensions are the drivers of CFS, take up >98% Size of debt rollover and increasing deficits imply future payments from CFS will be large This calls for prudent debt management in order to improve budget flexibility

10 Public debt as % of GDP Public debt to GDP (net) External debt Domestic debt

11 Emerging issues Policy concerns - intergenerational debt burden and questions regarding debt sustainability (debt to GDP ratio increased from 36.6% in 2006/07 to 46.5% in 2015/16 ). Interest payment has been rising and risks getting out of line Increasing trend of domestic interest payment short term commercial debt and its effect on destabilizing interest rates Lack of fiscal discipline (risk of increased borrowing) may push up interest rates, crowd out private sector and end up affecting macro stability.

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13 Public wage trends Public wage bill has been on an upward trend between 2006 and Average annual growth in the period ( ) was 12% compared to a nominal GDP growth of 5.5% and population growth of 2.7%. Upward trend partly driven by rise in recruitment of public officers from 662,100 in 2012 to 718,400 in 2015 (8.5% growth) and increase in average wage earnings per public sector workers. Surprisingly public wage bill as ratio of GDP has been on a decline, it is below 7% global average. This is the same for wage bill to domestic revenue and total expenditure ratios

14 Policy implications There is need to adopt and implement two reports intended to inform audit and rationalization of civil service Capacity Assessment and Rationalization of Public Service (CARPs) Rationalization of parastatals/soes Freeze creation of parastatals and wean commercially viable ones off transfers SRC should streamline allowances against abuse through consolidation, caps or phasing out where possible.

15 What are the priorities areas/sectors in the budget?

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18 Key messages Low uptake of infrastructure projects remains a challenge, under 66% on average against 80% benchmark. There is an increasing shift in focus towards Public Admin and Internal Relations (PAIR) sector (21% change) and Education (10.4%)in 2017/18. Need to address causes of low absorption such as delay in release of funds especially donor component, lengthy procurement process and so on.

19 Where is the money coming from Total revenue for 2017/18 is estimated at Ksh 1705 bn, representing 12 % increase from Ksh 1,515 bn the revised figure for 2016/17. Revenue as % of GDP stable but not able to match expenditure. Half year 2015/16 performed relatively poorer (88.5%) than same period in 2014/15 (91.7%) with significant shortfall from both PAYE (11%) and VAT imports (13%).

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21 Policy issues Strong positive link between economic growth and revenue performance Average growth rate in the last 3 years 5.5%..what does drop in GDP growth mean to revenue Expected subdued economic growth during election year (see sector GDP growth graph). Other factors such as low credit, fuel prices on the up, inflation in March 2017 (10.3%), etc With tax effort of 20%, and tax revenue performance of > 95%, we may be reaching limit of domestic resource mobilization?? What does this mean??

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23 Taxation Proposals

24 Income tax/1 Proposed Amendments to the ITA to initiate: Expansion of PAYE tax bands by 10% and increase in personal relief by the same rate Reduction of corporate tax from 30% to 15% for new vehicle assemblers for the 1 st five years Exempt dividends payable to non residents by Special Economic Zones (SEZs) enterprises from withholding tax currently charged at 10% Reduce withholding tax on interest payable to non residents by SEZ enterprises from 15% to 5% Provide SEZ enterprises with investment deduction at 100% on buildings and machinery in the first year of utilization

25 Old Tax Band New Tax Band Tax rate Income groups # wage employees % 0-9,999 22, , ,298 10% 10,000-14,999 43, ,180-21,714 12,298-23,885 15% 15,000-19, , ,714-32,248 23,885-35,472 20% 20,000-24, , ,248-42,781 35,472-47,059 25% 25,000-29, , Over 42, 781 Over 47,059 30% 30,000-49, , Personal relief up by 10% (pm & pa) 50,000-99, , ,280 1, , , ,360 16,896 2,477,955 As commendable as the review of tax bracket is, less than 2% of 2.48 mn salaried Kenyans will enjoy this benefit labour force (15-64 years approx mn vs 2.48 mn) Disposable income will however be eroded by the inflation on average about 7% in 2016

26 Income tax/2 Foreign income earned by taxpayers will enjoy tax amnesty so long these taxpayers submit their returns and accounts for the year 2016 by 30th June 2018 using guidelines effected on 1st January 2017 Overhaul of the current Income Tax Act (ITA) 1974 intended to simplify administration and cost of compliance as well as expand the tax base. Furthermore the proposed new legislation will review an array of taxation issues from extractive industries, capital gains, cross border transactions, etc.

27 Value Added Tax (VAT) Exempt VAT on all inputs used in local manufacture of pesticides Exempt locally assembled tourist vehicles from VAT Extend VAT exemption to medical equipment and apparatus for use in specialized hospitals along already exempted taxable goods used in the constructions of these hospitals Exempt VAT on packaging materials and other inputs intended for primary, secondary and ancillary marine fisheries and fish processing. Exempt from VAT the transactions related to transfer of assets in Real Estate Investment Trusts (REITS) and Asset Backed Securities (ABS) by amending VAT Act. Zero rate bread and maize flour

28 Excise and Import Duty Maize Old New 25% Import duty free for 4 months Dates 25% ksh 2,500 per Cigarettes without a filter mille Import duty free during Ramadhan period Ksh 1,800 per mille Spirits Ksh 175 per litre Sksh 200 per litre Beer manufactured from local raw materials Illuminating Kerosene for use in the manufacture of paints and resins Ksh 100 per litre Ksh 7,205 per C 80% remission of excise duty of Ksh 100 per litre Refund of excise duty of Ksh 7,205 per 20 0 C

29 Key messages Undoubtedly exemptions and zero ratings is one way of dealing with regressivity of VAT (Disproportionate burden to low income groups). As a country we seem to be going back (policy reversal) to the regime of expanding exemptions defeating the earlier (around 2013/14) period intention of reviewing these exemptions---leads to distortions Do exemptions benefit the taxpayers (consumer) as prices are increased by manufacturers to compensate for VAT cost on raw materials Alternatives?? One standard VAT rate (exemption for essential goods) Vs graduated approach for simplicity and ease in administration Expenditure on safety nets (eg transfers for the elderly) Overhaul of ITA should factor the need to net informal sector into the tax bracket (heavy burden on 2.48 mn people). How does delays in revenue legislation impact on targeted revenue for 2017/18