Treasury forced back to shoestring budget as Finance Bill falls

The Finance Bill 2024 had been expected to raise an additional Sh302 billion.

In Summary

• The government has been under pressure from IMF and the World Bank to raise more revenues to meet its budgetary obligations, including debt repayment.

Treasury Cabinet Secretary Njuguna Ndung'u at Parliament Buildings on June 13, 2024./
Treasury Cabinet Secretary Njuguna Ndung'u at Parliament Buildings on June 13, 2024./

Treasury is now facing a tough balancing act on managing the country's expenditure for the next financial year starting next week, following the withdrawal of the contentious Finance Bill 2024.

President William Ruto’s on Wednesday said he would not sign the Bill that had sparked protests across the country, as Kenyans decried over-taxation by the government.

The President rejected the Bill in totality, referring it back to the National Assembly with a recommendation to delete all the clauses, a decision that now leaves Treasury with a Sh302 billion hole in projected revenues that it had planned on to fund the 2024-25 Sh3.9 trillion budget, alongside borrowing.

Kenya Revenue Authority (KRA) had been given a target of Sh2.92 trillion in the next financial year, up from the current Sh2.57 trillion, which is expected to be missed by at least Sh300 billion.

This means Treasury will have to work with a shoestring budget for the next financial year amid major cuts in spending, which are likely to affect service delivery to Kenyans while cutting or stalling development projects.

President Ruto directed further austerity measures to reduce expenditure, starting with his office (Executive Office of the President) and extending to the entire executive arm of government.

“I direct that operational expenditure in the residency be reduced to remove allocations for the confidential vote, reduce travel budget, hospitality and purchase of motor vehicles, renovations and other expenditures,” the President said.

He further proposed that Parliament, the Judiciary and County Governments, working with the National Treasury, also undertake budget cuts and austerity to ensure the country lives within its means, a move that comes after an earlier Cabinet decision to cut spending.

This means Treasury will also have to raid key allocations in ministries and state departments, to try and cut to fit as spending goes below Sh3.9 trillion, with a possibility of averaging the current financial year’s Sh3.7 trillion budget.

Counties are among those that are likely to be the biggest casualties as CS Njuguna Ndung’u walks a tightrope to keep both governments running, a move that could see allocations cut to below Sh400 billion.

Roads, agriculture, social protection and Teachers Service Commission are also facing a second attempt to slash their budgets, after an initial plan to cut Sh15.1 billion, Sh6.7 billion, Sh5.5 billion and Sh18.9 billion, respectively.

Ministries that Treasury is also likely to raid includes education, which has the biggest allocation of Sh656.6 billion in the 2024-25 budget, energy, ICT and infrastructure with a budget of Sh477.2 billion, and national security with an initial proposed allocation of Sh377.5 billion.

Employment in government is also likely to be frozen for longer to tame the high recurrent expenditures (which includes salaries, operations and maintenance), which had been set to go up to Sh2.84 trillion, from Sh2.53 trillion.

Cabinet Secretary Njuguna Ndung’u had projected the fiscal deficit including grants at Sh597.0 billion, down from Sh925.0 billion in 2023-24.

“The fiscal deficit will be financed by net external borrowing of Sh333.8 billion and net domestic borrowing of Sh263.2 billion,” he said during the budget reading.

The deficit is however expected to go up amid increased borrowing on the back of revenue shortfalls where KRA has been struggling to meet its targets.

A budget deficit occurs when a government spends more than it collects in taxes. Reducing tax rates may also cause a deficit if spending is not reduced to account for the decrease in revenue. 

Experts foresee changes with supplementary budgets.

“We have seen supplementary budgets which are not very emotive being used to sneak in some expenditures, so it might still go up,” said Ken Gichinga, Chief Economist at business analytics consulting firm–Mentoria Consulting. 

The government has been under pressure from IMF and the World Bank to raise more revenues to meet its budgetary obligations, including debt repayment, where the country has in recent times been at risk of default.

Of every Sh10 collected as tax, about Sh6 is said to go into debt repayment. The country's debt stood at Sh10.4 trillion as of March.

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