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Country's debt and budget deficit a spending, not revenue, problem

Country's debt and budget deficit a spending, not revenue, problem
  • Our budget deficit and debt crisis stems from the government’s persistent overspending and misplaced spending priorities.

  • We would not have a budget deficit problem and, consequently, a debt problem if we did not have a spending problem.

  • This means more tax revenue will not solve our debt and deficit crises.

  • In fact, it will make it worse, because no matter how robustly our tax revenue grows and no matter how much Mr Rotich taxes poor Wanjiku, this administration will always find a way to spend everything it collects — plus more.

Despite Cabinet Secretary Henry Rotich and the National Treasury being in denial, we face a serious debt problem. The projected budget deficit for the 2019/2020 fiscal year is Sh607 billion or 5.8 per cent of Gross Domestic Product (GDP). The actual deficit is far much higher and will likely be close to double digits.

LEAKAGES

There are two major reasons why this is so. The first is, Mr Rotich’s deficit numbers do not take into account the massive and fast-accumulating pending bills. The other is the ever-present delightful mystery of Mr Rotich’s budget maths — always project a big jump in gross tax receipts every financial year despite falling short in previous year’s targets. This, of course, means the funding shortfalls have to be met through more borrowing; which would then lead to a much higher actual budget deficit. Every time government spending is greater than the amount collected in revenues, the government runs a deficit, which increases the debt.

What then is the root cause of our big budget deficits and our ballooning debt? Mr Rotich, the country’s Treasurer, is operating on the assumption that there is no way to fix our chronic budget problems without more money. His main message during every budget day is that the tax revenues simply are not enough to cover the cost of government. That the reason why we have a 5.4 trillion shilling national debt is because we have not been taxed enough. That the country is running sustained deficits because Kenyans are taxed too little and/or that there are revenue leakages somewhere. That is a red herring by Mr Rotich & Co, which we are falling for hook, line and sinker.

PRIORITIES

Tax revenue today is significantly greater than it was when the Jubilee administration came into office. The Kenya Revenue Authority (KRA) will in the 2018/2019 fiscal year collect almost twice as much tax it collected in the first fiscal year of this administration. So if revenue isn’t a problem, why is our debt situation worsening by the day then? The reason we have all these debt is because we spend too much. All the available data shows our debt problem is really a spending, not a revenue problem. Government spending growth has dramatically outpaced the revenue to match it, even though revenue was still growing. Put simply, tax revenue is growing. We have just spent too much for our revenue to cover.

Our budget deficit and debt crisis stems from the government’s persistent overspending and misplaced spending priorities. We would not have a budget deficit problem and, consequently, a debt problem if we did not have a spending problem. This means more tax revenue will not solve our debt and deficit crises. In fact, it will make it worse, because no matter how robustly our tax revenue grows and no matter how much Mr Rotich taxes poor Wanjiku, this administration will always find a way to spend everything it collects — plus more.

Until this issue is properly addressed in a manner that does not undermine the dynamic and competitive nature of the economy, this great political-economic risk will remain. If we are ever to get our budget deficit and debt under control, we need to trim long-term spending growth.

The writer is a Senior Adviser, Saudi Arabian Monetary Authority.