EDITORIAL: Raising public debt cap now is bad economics

The Treasury is apparently whetting its appetite for public debt again. Just when every other observer has prescribed taming of public spending to keep the fiscal deficit in check, the acting Treasury Cabinet Secretary has hinted at changing the law to increase Kenya’s debt limit to Sh9 trillion.

The change will effectively allow the government – which has already raised public debt to 55 percent of gross domestic product (GDP), up from 42 percent in 2013 – to borrow even more in the year starting July 2023. That will only mean one thing; that Kenya will spend a higher proportion of its taxes to repay debts. This is likely to affect service delivery across the board and make the tax burden even higher for citizens.

Despite these fears, the Treasury wants the Public Finance Management Regulations 2015 amended by removing a requirement that has restricted public debt to not more than 50 percent of GDP in net present value terms.

While we cannot begrudge the Treasury’s case for increased investment in infrastructure and other flagship projects, this country cannot continue on its expansionist path when that means living beyond its means.

The Treasury, and by extension Parliament, must make a holistic assessment of the country’s annual spending plans and weed out non-priority areas. Otherwise, at a debt level of Sh5.81 trillion by June 2019, the public spending distortion is already noticeable. Kenya spent Sh826.20 billion on debt repayments or 55.4 percent of the Sh1.49 trillion tax collected in the period to June. By comparison, the country spent Sh306.52 billion on projects or 14.20 percent of the Sh2.16 trillion total national government expenditure.

In other words, what this rapid rate of debt accumulation means is that children born in Kenya today are being set up to inherit more loansders. It also means that they will get much less in corresponding public assets.

Most of these commitments are long-tenor loans with grace periods of up to eight years and repayment terms of more than 20 years.

And since the bulk of public debt is long- rather than short-term, the net effect is that the repayment burden falls disproportionately higher on the shoulders of the future generation. In short, economic managers are presiding over bad economics.

Let us keep our public debt at sustainable levels.