ENHANCING EXPENDITURE

Stop Covid-19 tax reversals, instead stimulate consumption for economic recovery

One measure that will be very instrumental is creating a more digitalised and automated economy

In Summary

• Most of the economic agents who are able to reimagine our supply chains through demand and consequently impact our economy positively are largely the middle class.

• But with the reversal of these measures, the money supply to these consumers is going to be adversely affected. 

Treasury CS Ukur Yatani
Treasury CS Ukur Yatani
Image: FILE

Coronavirus pandemic has had a lot of effects on our economy as a country.

To cushion households and prevent the economy from slipping into a recession, the government came up with some fiscal and monetary measures. They included revising the PAYE tax obligation from 30 to 25 per cent, decreasing the resident corporate tax from 30 to 25 per cent, and partnered with M-Pesa to remove charges of transactions not exceeding Sh1,000 among others.

The government, however, reversed these measures in January even though the pandemic hasn’t ended and its effects continue to be felt right from leading manufacturing companies to ‘mama mbogas’ in the village.

For instance, the highest tax band of 30 per cent has been lowered from Sh47, 059 to Sh32, 333. This means that an individual earning Sh50,000, according to the PAYE calculator, effective January 2021, has a tax obligation of Sh7,059.35 up from Sh4,150.45 during the Covid-19 cushion

. The business corporate tax has also been reversed from 25 to 30 per cent. The one per cent turn over tax has been suspended but a 1.5 per cent digital tax has been introduced. The ‘Kazi kwa Vijana’ community project has also been suspended.

We now seek to evaluate the effectiveness of these reversals and if they constitute good economics. The pursuit of the government should be to find a way of stimulating consumption, which has been adversely affected by the pandemic and which accounts to 68 per cent of our GDP. Most of the economic agents who are able to reimagine our supply chains through demand and consequently impact our economy positively are largely the middle class.

With the reversal of these measures, the money supply to these consumers is going to be adversely affected. For instance, the ‘Kazi ka Vijana’ initiative employed many Kenyans who had lost employment due to the pandemic. Following its suspension, these people have lost employment and are thus unable to contribute towards our consumption expenditure.

With the reversal of the M-Pesa, transactions are going to decrease. The reversal of corporate tax is also going to affect many corporations negatively. Many of the companies were still able invest even during Covid-19 times because they had been assured of the tax reduction. We understand that investment expenditure accounts for close to 17 per cent of our aggregate expenditure and the reversal would be a reason of decrease in the business confidence which will consequently lead to a decrease in our GDP.

We understand that every government should be able to play its role in the post-Covid-19 economic recovery process. One measure that will be very instrumental in this process is creating a more digitalised and automated economy.

Covid-19 has greatly limited human physical interaction and many businesses have shifted online. The 1.5 per cent digital tax will, however, make this transition bumpier. Our solution lies not in the reversals but in a more structured way on increasing consumption expenditure.

Nguka studies economics at UoN