Experts project expenditure cuts in 2021/22 budget

Spending cuts are likely to be instituted next financial year, experts say, even as National Treasury CS Ukur Yatani kicks off the 2021/22 budget preparation process.

In a virtual event set for Thursday, Treasury will highlight on the Medium-Term Plan III, macro-economic outlook for the medium term, and highlights of the financial year 2021/22 and the medium term budget process.

This will set the ground for public participation in the budget preparation process, a key element as enshrined in Article 201 of the Constitution.

The Public Finance Management Act requires that by August 30, the National Treasury should issue a budget circular to all government entities to start the preparation for the 2021/22 budget.

This provides the dates, the general policy framework including indications for revenue and expenditures anticipated in the coming year.

Though the actual financial year will start on July 1, 2021, the projections of revenue and expenditure have to be based on current realities.

Experts at the International Budget Partnership (IBP) Kenya project a likelihood of reduced spending in the next financial year, based on the current macro-economic environment where Covid-19 has hit hard the country’s economy.

“We expect some fair cuts on expenditures as revenues are likely to take the worst decline in 2021. This is especially if private sector that contributes to income tax do not pick up business in good time,” said John Kinuthia, senior program officer at IBP Kenya

According to Kinuthia, the only feasible way is to go into some form of austerity, since borrowing is already at a brink with no clarity on how to pay back.

The country’s debt currently stands at Sh6.693 trillion of which Sh3.515 is external while Sh3.177 has been borrowed internally, latest Central Bank data shows.

“Should we advance in the business as usual attitude we have seen in the current Covid period, then we will end up with more debt obligations,” Kinuthia told the Star yesterday.

The effects of Covid-19 on the economy has proved to be a headache to the Kenya Revenue Authority, which despite recording a good performance in the 2019/20 financial year, it is struggling to meet its revenue obligations.

The government has in the past been forced to borrow to bridge budget deficits as a result of low revenue collection.

There has been sharp deeps in revenue collection for some of the government's reliable tax revenue such as VAT and import duty, IBP notes.

Other sources such as income tax have stagnated, and current job losses may affect that stable revenue source as well.

“Therefore, we should expect some fair adjustments in planned expenditures for the first and second quarter of 2020/2021 financial year," IBP notes.

Since the recovery of the economy is still unpredictable as a result of the ongoing effects of Covid-19 on the economy, the next financial year is likely to yield low returns for the taxman.

KRA is however optimistic of hitting its revenue targets for the current financial year ending June 30, 2021, despite a slow start in the first two months of the current financial year, which have been marked with drops.

National Treasury has projected Sh1.63 trillion as ordinary revenues for the financial year 2020/21, to help support government spending in the Sh2.79 trillion planned budget for the year ending June 30, 2021.

In the wake of Covid-19 disruption on the economy, the taxman has so far recorded low revenues in the months of July and August, which have declined by 16.4 per cent and 13.4 per cent respectively, compared to same period last year.

KRA collected Sh115.8 billion in and by August 26, it had netted Sh85 billion.

The taxman is however confident with the economy slowly re-opening, its basket is going to fill up as the financial year unfolds.

“The worse is behind us,” commissioner in-charge of research Alex Mwangi said during a recent virtual forum, noting the worse months for the authority were April, May and June, when the impact of Covid-19 was greatly felt in the economy.

This included job losses that affected growth on Pay As You Earn (PAYE).

The closure of bars and restaurants as a measure to control the spread of Coronavirus also denied KRA a sizable amount of excise duty, mainly from alcoholic drinks and cigarettes.

CS Yatani has been keen to reduce the country’s fiscal deficit, expected to drop to Sh722 billion in the financial year 2021/22.

“This will remain fiscal consolidation over the medium so as to stabilise growth in public debt,” he said.