Why cash transfer is unlikely to work

Now, there is a floating proposal that Kenya should adopt a basic income programme of giving every household a Sh5,000 stipend to cushion them from adverse economic impact of Covid-19. This bad economics seems to be coming from finance professionals who always watch the economy.

The media need to understand that finance professional (accountants/bankers/investment analysts) who watch the economy are not economists, just as political analysts are not politicians nor are all medical professionals doctors.

As a rule, economists do not advocate for occupation licensing to rein in on low quality practitioners and assure quality within its field. This is because economics hold that quality is assured by removing barriers and not erecting them.

So, the right name for finance professionals who have no training in economics but watch and provide economic commentaries is economic analysts, not economists.

Those who propose the idea of a basic income need to understand that it is different from cash transfer.

Basic income is periodic cash payment provided by government unconditionally to all individuals as an entitlement. On the other hand, cash transfer is a welfare programme that targets the vulnerable like the unemployed, elderly, orphans and widows not to fall through the cracks. It is more of economic solidarity.

Let’s look at the basic income proposal. If every Kenyan is to receive Sh5,000, this will increase demand for essential commodities because the many people who can afford essential supplies but end up receiving the government stipend are incentivised to bulk purchase, leading to fierce competition for essential goods. This will result in food inflation.

On the supply side, in such a crisis, producers of essential goods should be operating at optimal level because there is an opportunity to make more profits, whilst on the other hand imports have been limited due to containment policies therefore there is limited supply of essential goods leading to increase in their prices.

Some will argue that economies like the US and Canada are effecting the basic income programmes.

This is the danger of copying and pasting ideas because economic structures are unique and cannot adopt a one-size-fits-all policy. In fact, in the US, a big chunk of the basic income will be going to rent payments.
Going to the second point, much worse in the basic income proposal is how government should raise the funds for the stipend provision.

One group argues that government should print more money and the mechanism to transmit it therefore should be through the paying of the stipend.

Of course this is will lead to monetary inflation, where more money is chasing few goods and the consequences of that will be chaos in the exchange rate, local economy and public debt structure.

The other group argues that the government should borrow money to finance the programme. Finance professionals should be the first to know that it is disastrous for an individual to borrow for consumption.

They even classify it as bad debt, and same applies for government borrowing. It should be about creating value out of the loan. That is why government loans are channelled towards development spending.

So, a basic income proposal which is a free for all reward-scheme, cannot work for us. We can therefore talk about cash transfer assistance programme which has a redistribution-effect. And since its principle is redistribution, the funds should come from tax collection to avoid monetary and food inflation.

Which brings me to the supplementary budget tabled in Parliament. The Treasury still holds that Kenya Revenue Authority will manage to collect total revenue of 18.2 percent of GDP (which is Sh 1.8 trillion since nominal GDP by end of fiscal year was expected to hit Sh10 trillion) by the end the fiscal year.

At the same time, Treasury admits that KRA has missed targets on ordinary revenue between July 2019 and March 2020 by Sh132.2 billion. This begs the question; are the officials at Treasury even aware of Covid-19 and its adverse effects?