"Analyzing the FY 2023/24 Budget: Priorities, Reforms, and Economic Outlook"FY 2023/24 Budget Overview"
ANALYSIS OF THE FY 2023/24 BUDGET
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The 2023 Budget is the First Budget of the Kenya Kwanza Administration under the leadership of His Excellency Honourable Dr. William Samoei Ruto, The President of the Republic of Kenya and Commander-in-Chief of the Defence Forces.
Government Revenue and Expenditure:
?To restrain borrowing and utilize projected revenues and grants, the total programmed expenditures for the fiscal year 2023/24 have been capped at Ksh 3.68 trillion. Allocations to the priority sectors under BETA are as follows:
Agricultural Transformation and Inclusive Growth:
Ksh 49.9 billion allocated to ensure food security through climate change mitigation and adaptation, and support for farmers.
Key allocations include funds for the Fertilizer Subsidy Programme, Small-Scale Irrigation and Value Addition Project, National Agricultural Value Chain Development Project, National Agricultural and Rural Inclusivity Project, Kenya Cereal Enhancement Programme, Emergency Locust Response, livestock production improvement, Blue Economy Priority Programmes, Climate Smart Agricultural Productivity Project, resilience enhancement for food production and nutrition security program, and processing and registration of title deeds.
Transforming the Micro, Small and Medium Enterprise (MSME) Economy:
Allocations made to promote accessibility to affordable credit include funds for the Hustlers Fund, Youth Enterprise Development Fund, Women Enterprise Fund, and provision of finances to SMEs in the Manufacturing Sector.
Housing and Settlement:
Key allocations to support the affordable housing initiative include funds for the Kenya affordable housing project (KMRC), Kenya Informal Settlement Improvement Project-Phase II, construction of affordable housing units, construction of markets, Construction of Social Housing Units, and the Kenya Urban Programme (KenUP).
Enhancing Quality and Affordable Healthcare:
Ksh 141.2 billion allocated to promote access to quality and affordable healthcare.
Key allocations include funds for Universal Health Coverage, Managed Equipment Services, Free Maternity Health Care, medical cover for the elderly and severely disabled persons, the Global Fund, vaccines and immunizations program, construction of Kenya National Hospital Burns and Paediatrics Centre, and construction and strengthening of the Cancer Centre.
Digital Superhighway and Creative Economy:
Ksh 15.1 billion allocated to promote productivity and competitiveness in the ICT sector.
Key allocations include funds for Horizontal Infrastructure Phase I, Konza Data Centre and Smart City Facilities, Construction of Kenya Advanced Institute of Science and Technology (KAIST) at Konza Technopolis, maintenance and rehabilitation of the National Optic Fibre Backbone Phase II Expansion Cable, construction of Konza Complex Phase 1 B, and Last Mile County Connectivity Network.
Other key allocations are made to thematic areas such as Investing in Critical Infrastructure, Improving Education Outcomes, Supporting Manufacturing for Job Creation, and Improving National Security, ensuring adequate funding for road and bridge construction, railways, sea and airports, energy generation, education sector improvements, manufacturing sector productivity, and security agency operations.
Constituency Development and Marginalized Areas:
Ksh 53.5 billion for the National Government Constituency Development Fund.
Ksh 10.9 billion for the Equalization Fund to finance programs in previously marginalized areas.
Transfers from the National Government to County Governments
In the FY 2023/24, County Governments will receive a combined allocation of Ksh 442.1 billion, including Ksh 385.4 billion as equitable share. Additionally, County Governments will receive conditional and unconditional allocations amounting to Ksh 56.7 billion to support their developmental efforts.
Economic Outlook:
Kenya's economic growth in 2022 experienced a slowdown, with a rate of 4.8 percent compared to 7.6 percent in 2021. This deceleration was primarily due to the adverse impacts of various shocks that affected the economy. The services sector played a significant role in supporting the growth in 2022, while the agricultural sector contracted for the second consecutive year. The prolonged drought had an adverse effect, causing a slowdown in both the manufacturing sector and the wholesale and retail trade sectors.
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In 2023, the economy is expected to rebound and expand by 5.5 percent, surpassing the growth rate of 4.8 percent in 2022. This upward trajectory is projected to continue over the medium term. The rebound will be driven by a private sector-led growth that is broad-based, with the services sector performing strongly. Additionally, the agriculture sector is expected to recover due to improved weather conditions during the March-May rainy season. The government's implementation of interventions under the Bottom-Up Economic Transformation Agenda (BETA) will further reinforce this growth outlook.
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The government remains committed to supporting economic recovery through the pursuit of prudent macroeconomic policies. These policies aim to reduce debt vulnerabilities and promote sustainable and inclusive development. As part of these efforts, it is expected that the inflation rate will return to the target range within the second quarter of FY 2023/24.
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Sector-specific Analysis:
Procurement Reforms:
By December 2023, an end-to-end e-Government Procurement system (e-GP) will be implemented for both the National and County Governments. This system will improve the efficiency and transparency of procurement functions.
The National Treasury has revamped the AGPO portal to enable real-time registration and transparent monitoring of the scheme, which promotes enterprises owned by women, youth, and persons with disabilities.
State Corporations Reforms:
The Cabinet has approved the Privatization Bill, 2023, aiming to repeal the Privatization Act, 2005, streamline privatization processes, and restructure State Owned Enterprises (SOEs).
To enhance the financial sustainability of KPLC, the government will restructure its balance sheet, focusing on reducing significant loan balances, payables, and receivables.
Regarding Kenya Airways, the government's policy is to turnaround the airline and position it as a Pan-African carrier, ensuring profitability and sustainability, ultimately reducing its dependence on budgetary support.
Financial Sector Stability and Development:
The CBK is collaborating with other agencies and regulators, including the Office of the Data Protection Commissioner, to bring all Digital Credit Providers under regulation, safeguarding consumers.
The Central Bank will launch an upgraded Central Securities Depository called "DhowCSD." This enhanced depository will expand services to the public, market participants, and support investments from the diaspora.
To mitigate money laundering risks, the Central Bank has reviewed and strengthened the Know Your Customer (KYC) and customer due diligence (CDD) processes in the banking sector.
Deposit Insurance Reforms:
The Kenya Deposit Insurance Corporation is currently reviewing the adequacy of the current coverage limit of Ksh 500,000 to enhance depositor protection, especially for Micro, Small, and Medium Enterprises (MSMEs).
Pension Reforms:
The National Treasury has established an innovative scheme called the Kenya National Entrepreneurs Saving Trust (KNEST), focusing on the informal segment of our economy.
Public Service Schemes will develop user-friendly online platforms that enable pensioners to conveniently access their pension statements, make inquiries, and update their personal information.
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Taxation Policies:
The Finance Bill, 2023 has been designed to address various aspects of the Kenyan economy, with the aim of reducing the cost of living, supporting businesses, creating jobs, and improving the livelihoods of the citizens. The bill includes several measures to achieve these objectives:
Income Tax:
Reduction of the Residential Rental Income tax rate from 10% to 7.5% to encourage landlords to comply with tax regulations.
Decrease the corporate tax rate on non-residents from 37.5% to 30% to promote fairness.
Exemption of manufacturers of human vaccines from withholding taxes on royalties and interest paid to non-residents.
Introduction of tax relief equal to 15% of contributions or a maximum of Ksh 5,000 per month, whichever is lower, for a Post-Retirement Medical Fund.
Exemption of investment income earned by Post-Retirement Medical Funds from income tax.
Value Added Tax:
Zero-rating of LPG products from VAT to make them more affordable.
Removal of VAT for aircraft, parts, and engines to attract pilot training and aircraft repair activities to Kenya.
Extension of the exemption on machinery and equipment used in the manufacture of pharmaceuticals to locally purchased products.
Excise Duty:
Removal of annual inflationary adjustment for specific rates of excise duty to bring stability and predictability.
Reduction of excise duty on fees charged for money transfer services by banks, money transfer agencies, and other financial service providers from 20% to 15%.
Decrease of excise duty on money transfer charges by cellular mobile providers from 12% to 10% of the excisable value.
Import Declaration Fee (IDF) and Railway Development Levy (RDL):
Reduction of IDF from 3.5% to 2.5% and RDL from 2% to 1.5% to promote fairness and equity.
Exemption of LPG from IDF and RDL to lower costs and encourage the use of LPG.
Exemption of all aircraft, helicopters, aircraft engines, and spare parts from IDF and RDL to support the aviation sector.
In addition to these measures, the Finance Bill, 2023 also aims to enhance revenue generation for financing proposed expenditures through the following changes:
Income Tax:
Introduction of a new tax on repatriated profit for non-residents at a rate of 15% to align with the rate charged on dividends paid to non-residents.
Increase in the turnover tax rate from 1% to 3%, with a lower threshold of Ksh 25 million.
Introduction of a 5% withholding tax on gross payments related to digital content monetization.
Implementation of a 3% tax on the value of digital assets transferred or exchanged to ensure fairness in taxation.
Introduction of a 5% withholding tax on payments made to residents for sales promotion, marketing, and advertising services.
Value Added Tax:
Increase in the VAT rate on petroleum products from 8% to 16% to address loopholes in the sector.
Excise Duty:
Introduction of excise duty on imported fish at Ksh 100,000 per metric ton or 10% of the customs value to protect local fishermen.
Implementation of excise duty on powdered juice at a rate of Ksh 25 per kilogram for fairness in taxation.
Introduction of excise duty on imported sugar at a rate of Ksh 5 per kilogram to safeguard local industries.
Imposition of excise duty on imported furniture at a rate of 30% to support local carpenters and artisans.
Introduction of excise duty on imported cement at a rate of 10% of the value or Ksh 1.50 per kilogram to promote local manufacturing.
Implementation of a 15% excise duty on fees charged for advertising alcoholic beverages, betting, gaming, lottery, and prize competitions to discourage participation in these activities.
Introduction of excise duty at 15% on imported paints to protect local manufacturers.
Increase in excise duty on betting, gaming, lottery, and prize competitions from 7.5% to 12.5% due to their negative externalities on society.
Housing Levy:
Introduction of an Affordable Housing Levy at a rate of 1.5% per month of an employee’s gross monthly salary to generate funds for the development of affordable housing, associated infrastructure, and affordable home financing.
Tax Procedure:
Introduction of a one-year amnesty relief on interest and penalties until 31st December 2022 to encourage individuals with tax debts to settle their obligations
Fiscal Deficit and Debt Management
The target for the budget is to increase the overall revenue, which includes appropriation-in-aid, to Ksh 2.9 trillion, equivalent to 17.9 percent of the Gross Domestic Product (GDP) in the fiscal year 2023/24. Out of this amount, ordinary revenue amounts to Ksh 2.6 trillion, which is 15.8 percent of GDP, and Ministerial appropriation-in-aid is Ksh 348.6 billion, equivalent to 2.1 percent of GDP.
To achieve this goal, the government is implementing a combination of tax administrative measures and tax policy reforms.
Regarding tax policy, the government will implement various measures to enhance revenue collection. This includes the implementation of the National Tax Policy and the finalization of the Medium-Term Revenue Strategy (MTRS) for the period spanning from FY 2023/24 to 2026/27.
In terms of tax administration, the Kenya Revenue Authority (KRA) is undertaking reforms to streamline taxation by integrating its systems, taxpayers, and businesses. This integration will enable the automatic transfer of data through machine-to-machine processes and, where appropriate, facilitate real-time processing. The objective is to monitor business transactions in real-time, thereby reducing revenue losses due to tax avoidance and evasion.
On the expenditure side, the total expenditure in FY 2023/24 amounts to Ksh 3.7 trillion, equivalent to 22.6 percent of GDP. This expenditure includes recurrent expenses totaling Ksh 2.5 trillion, which is 15.6 percent of GDP, and development expenses amounting to Ksh 713.3 billion, equivalent to 4.4 percent of GDP. Additionally, Ksh 385.4 billion is projected to be allocated as the equitable share to County Governments.
Considering the commitment to controlling expenses and increasing revenues, the projected fiscal deficit, including grants, for FY 2023/24 is Ksh 718.0 billion, equivalent to 4.4 percent of GDP. To finance this deficit, there will be a net external borrowing of Ksh 131.5 billion, which accounts for 0.8 percent of GDP, and net domestic borrowing of Ksh 586.5 billion, equivalent to 3.6 percent of GDP.
Social Welfare and Development
Protecting Vulnerable Groups and Promoting Social Development
To ensure the well-being of vulnerable members in our society, a significant allocation of Ksh 38.2 billion has been dedicated to support their needs. This allocation includes:
Cash Transfers:
Ksh 18.0 billion for cash transfers specifically aimed at elderly individuals.
Ksh 7.9 billion for orphans and vulnerable children (OVC).
Ksh 1.2 billion for cash transfers to persons with severe disabilities.
Social Safety Nets:
Ksh 5.7 billion for the Kenya Hunger Safety Net Programme.
Ksh 3.3 billion for the Kenya Social and Economic Inclusion Project.
Ksh 459 million for the National Development Fund for Persons living with Disabilities.
Promoting Equity, Poverty Reduction, Women, and Youth Empowerment
In order to empower the youth, support businesses owned by youth and women, and foster equality, a total of Ksh 82.1 billion has been allocated. Key allocations include:
Youth and Women Empowerment:
Ksh 3.0 billion for the National Government Affirmative Action Fund.
Ksh 13.2 billion for the National Youth Service.
Ksh 602 million for the Kenya Youth Empowerment and Opportunities Project.
Cultural and Gender Initiatives:
Ksh 249 million to support the film industry.
Ksh 245 million for Strengthening Prevention and Response to Gender-Based Violence in Kenya Project.
To promote regional equity, reduce poverty, and enhance social development, the following allocations have been made: Stimulating Tourism Growth, Sports, Culture, Recreation, and Arts
To support and enhance tourism, sports, culture, recreation, and arts, a total of Ksh 22.1 billion has been allocated. Key allocations include:
Sports, Arts, and Social Development:
Ksh 16.0 billion for the Sports, Arts, and Social Development Fund.
Ksh 4.1 billion for the Tourism Fund.
Tourism Promotion and Development:
Ksh 2.0 billion for the Tourism Promotion Fund.
Environmental Protection, Water, and Natural Resources
To ensure access to clean water, sustainable environmental practices, and effective natural resource management, the following allocations have been provided:
Water Infrastructure and Management:
Ksh 43.3 billion for water and sewerage infrastructure development.
Ksh 12.4 billion for water resources management.
Ksh 1.6 billion for water storage and flood control.
Ksh 19.7 billion for irrigation and land reclamation.
Ksh 1.9 billion for water harvesting and storage for irrigation.
Environmental Conservation and Climate Change Response:
Ksh 14.4 billion for forests and water towers conservation.
Ksh 3.8 billion for environment management and protection.
Ksh 3.6 billion for the Kenya Financing Locally Led Climate Action Project.
Ksh 1.1 billion for Human-Wildlife Conflict Compensation.
Ksh 800 million for Wildlife Insurance.
Improving Governance and Sustaining the Fight against Corruption
To combat corruption and ensure good governance, the following allocations have been made:
Anti-Corruption Initiatives:
Ksh 3.9 billion to the Ethics and Anti-Corruption Commission.
Ksh 3.6 billion to the Office of the Director of Public Prosecutions.
Ksh 8.4 billion to the Criminal Investigations Services.
Ksh 8.0 billion to the Office of the Auditor General.
?Analysis and Conclusion
To address their budget shortfalls, governments have two primary options: raising taxes or borrowing money. However, in the current economic climate characterized by decreasing incomes and high unemployment rates, the question arises: where will the necessary funds come from? The answer lies in the wealthier segment of society.
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Given the concentration of wealth among a small percentage of individuals, it becomes natural for governments to increase taxes on the affluent. This approach facilitates a redistribution of wealth within the economy, shifting resources from the "haves" to the "have nots." The "have-nots," who are already experiencing hardships, begin to harbor resentment toward the wealthy "haves."
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On the other side, the affluent individuals, facing the pressures of a weak economy, declining asset values, and higher taxes, also start to resent the "have-nots." If the economic depression persists, it can potentially lead to social unrest and disorder. Moreover, these tensions may not only escalate within a country but can also strain relations between debtor and creditor nations.
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Such a situation can create a climate that fosters significant political changes, which may sometimes veer towards the extreme. Looking back at history, we can observe that in the 1930s, this kind of scenario resulted in Hitler's rise to power, triggered a war in Europe, and deepened the economic depression in the United States. The pressure to take action and alleviate the depression intensifies.
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It is crucial to remember that during these times, a substantial portion of what people consider as money is actually credit. Consequently, when credit dries up, individuals find themselves lacking sufficient funds. The desperate need for money becomes evident, and it is worth recalling that the authority to print money lies in the hands of certain entities
MB MUCHIRI ADVOCATES