Budget challenges pointing to an urgent need to enlarge the national cake

Written By: Ken Gichinga
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This year’s budget, themed “Creating Jobs, Transforming Lives: Harnessing the Big Four” sought to address the emerging economic challenges, not least the high level of unemployment and its damaging effects on society.

It appears that even at a GDP growth rate of 6.3%, the Kenyan economy is unable to absorb the 800,000 young men and women who join the labour force every year.

While this year’s budget was a step in the right direction, it was a small step. The expectation was that the government would use the occasion to exhaustively tackle the structural constraints that prevent the economy from creating high quality, meaningful jobs.

To most Kenyans, the budget making process has never been viewed through the lens of prosperity. For many, it represents an annual ceremony that often paves the way for a higher cost of living.

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This perception could possibly stem from the fact that the country lacks an official policy that outlines the key principles of our tax system and that guides the entire budget making process. Policy makers should urgently consider crafting a policy that will firmly place Kenya on the path towards maximum production and thus enlarging the national cake.

Any student of economics will know that growing the economy can only be achieved by harnessing the four factors of production: land, labour, capital and enterprise. A good tax policy should outline the relevant tax measures that will ensure the maximum utilization of these four factors.

On land matters, the current budget makes references to the Capital Gains Tax and applies a 12.5% tax on the land value appreciation. This measure can certainly help both the national and county governments raise revenue for various public projects. However, there is no mention of incentives that would address the challenges around idle, fertile land in Kenya. It is ironical that food security in Kenya remains a major challenge, while at the same time idle fertile land is in abundance and much of the food that we import can be produced locally, if the right incentives are applied.

Last year, increased purchase of food such as staple maize from Uganda saw Kenya running a  4.13 billion shilling trade deficit against Uganda for the first time ever. Urgent budgetary measures need to be deployed to reverse this trend and to incentivize the cultivation of idle, fertile land.

Concerning labour, it was refreshing that some allocation of 1 billion shillings was directed towards the Ajira Digital Programme Fund. This will certainly give selected participants some exposure to the digital economy. That said, the numbers involved are a drop in the ocean. Last year, through the program, only 7,168 youth were trained. This is less than 1 percent of the 800,000 youth that join the labour force every year.

Perhaps aligning the youth agenda with the Big Four project would have yielded more dividends. For example on the Food Security pillar, the youth can play a big role in increasing the country’s production at a time when the average age of the Kenyan farmer is 60 years old and the country is eagerly looking a new generation of innovative young agribusiness professionals who can introduce the latest farming techniques.

Regarding capital, the central issue has always been around opening the credit markets to the normal forces of supply and demand. It’s no secret that since that interest rate cap was introduced in September 2016, banks have reduced their lending to businesses and have instead chosen to invest in Treasury bills and bonds thereby contributing to a tough business environment.

The court of appeal has already pronounced itself on the interest rate cap legislation, terming it as unconstitutional and giving parliament one year to craft the relevant laws. It therefore came as a surprise when the issue of the rate cap featured in the budget as a proposal in a manner to suggest that the topic was still open for debate, thus contradicting the court’s position on the same.

Finally, on the state of enterprise, the perennial challenge has been around delayed payments, which have effectively crippled businesses around the country. There was a major sigh of relief, when President Kenyatta in his Madaraka Day speech directed county governments to settle the 100 billion shillings that was owed to suppliers.

However, this could prove to be difficult given the current stalemate between the National Assembly and the Senate over the Division of the Revenue Allocation Bill 2019, which could see disbursements of county funds delayed.

It would be great progress if future budgets would pay special attention to these four factors of production. By doing so, Kenya will be aligned towards a true path to prosperity.

Ken Gichinga is CEO at Mentoria Economics; Twitter: @kgichinga

The views expressed in this article don’t necessarily represent KBC’s opinion.

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