Over the last few years, the country’s national accounts have come into sharp focus as Kenyans become more aware about the country’s financial position. This awareness has developed into concern, a situation worsened by the recent economic downturn caused by the Covid-19 pandemic.
It appears that the bigger concern for the government is how to increase its revenues to reduce the mismatch with its expenditures. The sharp decline in government revenues as a result of the negative impact of the pandemic on economic activity and tax cuts, particularly on individual taxpayers means that we should expect a wider fiscal deficit for as long as the current economic conditions persist. That is, unless there is a significant reduction in government expenditure, an unlikely scenario given that the government has to dig deeper into its pockets to manage the developing health and economic crisis.
Three-fold expenditure rise
Government expenditure is categorised as either recurrent or development. The former includes salaries and wages, pensions, interest payments as well as expenses for general maintenance and operations while the latter includes spending on infrastructure projects.
Data from the Central Bank of Kenya (CBK) shows a more than threefold increase in total government expenditure over the last 10 years from Sh791.8 billion in the 2009/10 fiscal year to Sh2.38 trillion in the 2018/19 fiscal year. Government expenditure for the 2019/20 is projected at Sh2.39 trillion, slightly more than the one for the coming 2020/21 fiscal year at Sh1.8 trillion compared to Sh584.9 billion for development.
The recurrent expenditure as a proportion of total government expenditure has increased over the last decade leaving little funding for development. It accounted for 78 percent of total government expenditure in the 2018/19 fiscal year, an increase from 68 percent in the 2009/10 fiscal year and is estimated to account for 80 percent in the current and the 2020/21 fiscal years.
One would ask why has recurrent expenditure been on a steep upward trajectory in recent years? One answer is that Kenya has an expensive system of governance. With the devolved system of government came numerous political and non-political functions and positions that resulted in a sharp increase in public employee related costs.
The public wage bill has almost tripled in the last 10 years from Sh173.5 billion in 2009/10 financial year to Sh483.5 billion in the ending 2019/20 fiscal year. To put it in context, in the 2009/10 fiscal year the public wage bill accounted for 32.3 percent and 29.6 percent of total recurrent expenditure and government revenues respectively. According to 2019/20 fiscal year estimates the public wage bill will account for 27.5 percent and 23.2 percent of total recurrent expenditure and government revenues respectively.
The second would be debt service. Debt service is estimated to account for 25.1 percent of total recurrent expenditure and 21.2 percent of total government revenues for the 2019/20 fiscal year. Heavy debt funded capital intensive infrastructure projects have resulted in a spike in public debt levels. In addition, changes in the debt funding mix where external debt (commercial and sovereign) has increased faster than domestic debt thus increasing servicing costs. This is expected to increase further to about 27 percent of total recurrent expenditure and 30 percent of total revenue in the 2020/21 fiscal year as the government intensifies borrowing to bridge a widening fiscal deficit and revenue collection continues to fall below projections.
Further analysis of the data from the CBK shows a decline in development expenditure beginning with the 2014/15 fiscal year. Faced with budget constraints the government has over the years chosen to cut development funding as the simpler option. This is the case with the 2020/21 fiscal budget where it has earmarked just Sh351.6 billion, equivalent of 15 percent of total expenditure, for development. This is a decline from Sh477.5 billion in the current financial year.
Development SPEND threshold
The gradual development budget share cut is problematic. According to the Public Finance Management Act 2015, the threshold for development spending should be a minimum of 30 percent of total expenditure. The minimum threshold should be enforced to avoid spending all revenue and debt on recurrent expenditure, which does not yield significant economic returns besides creating jobs.
Kenya’s recurrent expenditure is unsustainable. It has limited the impact on overall economic output. Reducing it is vital because it has a significant bearing on the country’s public debt position, which stands at 61 percent of its Gross Domestic Product (GDP). In the medium term, all debt should be channelled towards development expenditure not recurrent expenditure.
It is often argued that corruption and mismanagement of public funds have compromised the ability of the National Treasury to make adequate budget appropriations and execute its development projects. This has left the country with huge debt funded budget deficits. Furthermore, a fast-growing population and problems associated with rapid urbanisation has increased pressure on the government to increase its expenditure.
Initiatives that encourage accountability should be put in place to curb corruption. Such may include service provider’s contractual obligations, for instance road repair works should have quality guarantees breach of which the burden falls on the contractor and not the government. In addition, there should be limited and declared conflicts of interest between civil servants and service providers for transparency.
Compared to its neighbours, recurrent expenditure trends with Kenya’s neighbours also supports this view. Recurrent expenditure accounted for 50.8 percent and 63 percent of the total 2018/19 fiscal year expenditures in Uganda and Tanzania respectively. This means that a larger proportion of available resources in those countries is directed towards development projects.
Development projects help spur economic growth as well as create jobs and the pressure on development budget could subdue this growth. Reducing recurrent expenditure at this point in time is easier said than done and it appears that the government has found its self between a rock and a hard place considering that its wage bill and debt service account for a bulk of recurrent expenditure.
The International Monetary Fund recommends: “Reforming public administration to contain the public wage bill while facilitating a competitive public salaries scale.”
According to the Public Finance Management Act 2015, national government’s expenditure on the compensation of employees (including benefits and allowances) shall not exceed 35 percent of the national government’s equitable share of the revenue raised nationally plus other revenues generated by the national government.
With regards to debt service, focus for the government should not be on treating the symptoms but rather dealing with the cause which is the country’s growing deficit and public debt. Focus should be on increasing revenue and ensuring debt is directed to areas that have a direct impact on economic growth and overall wealth creation.
This calls for the government to create an enabling operating environment such as good physical infrastructure and supportive economic policies to support job creation and employment opportunities. Through this, the government can gradually reduce its budget deficit and debt levels.
Analysis by Sterling Capital Research
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