…And why Ruto must find a way of growing the national cake, rather than attempting to grow the Treasury’s share of that cake.
By Peter Wanyonyi
“Icontend,” quipped Sir Winston Churchill once, “that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” The Old Lion was not exactly an economist, but his instinct for getting things right – and summing them in a pithy quote – was unequalled. Churchill’s acerbic wit is largely unknown in Kenya today, which is a pity because so many of his observations apply to our country, economy, leadership, and future.
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President William Ruto was handed a poisoned chalice of a country by his predecessor, Uhuru Kenyatta, whose ill-advised loan-borrowing binges sometimes resembled the out-of-control drinking of an alcohol addict. In the 10 years of Uhuru’s presidency, Kenya’s debt ballooned. Debt-to-GDP ratio grew from 42% of GDP to 69% between 2013 – 2020. Interest repayments on domestic debt jumped from Sh188.67 billion ($1.34 billion) to over Sh704 billion ($5 billion) over the same period. The story gets even worse when one peers under the covers: as Uhuru’s presidency wound down in December 2022, Kenya’s nominal debt stood at Sh10.42 trillion ($74 billion) – an incredible 67% of our national GDP. Just over half of this was owed to foreign entities – but the real scandal was why the money was borrowed in the first place.
Huge signature projects like the standard gauge railway and the Nairobi Expressway are usually held up as evidence of what the loans were borrowed for. But there’s more to this than meets the eye – it is now common knowledge that much of the debt was used to fund recurrent expenditure, including government salaries and the like. Other than the big infrastructure projects, little or none of the money has gone into growth-generating initiatives. The government treats the actual numbers as State secrets, and is so loathe to share its true debt position with lenders that the Chinese – whose loans make up 64% of Kenya’s bilateral external debt and just over 17% of total external public debt – are claimed to have set up a hacking squad in Kenya to penetrate government IT installations and exfiltrate data on debts and repayments.
Collecting more taxes
This huge and growing debt crisis is, then, what Ruto inherited from Uhuru. The Ruto administration’s solution to the debt crisis has been predictable: the government has resolved to reduce the national debt by collecting more taxes to repay the loans, while tapping national savings such as pensions at a low interest rate, to fund economic projects. Ruto also pledged to reform Kenya’s tax system to ensure the rich pay more taxes than they currently do, claiming that Kenya currently taxes commerce rather than wealth.
To make this happen, Ruto unveiled new targets for the Kenya Revenue Authority (KRA), which is no required to raise an extra Sh1.41 trillion ($10 billion) this year. This is an increase of nearly 50% compared to last year – and the target keeps growing: by 2027, KRA is expected to be collecting just under Sh7.04 trillion ($50 billion) in revenue. It’s a daunting task. Even assuming the revenue target is realised, the ugly truth is that 60% of the money collected will go towards debt repayments.
In June 2023, Kenya’s lawmakers passed the biggest budget in Kenya’s history, totalling about Sh3.7 trillion. This colossal amount has seen a radical increase in the number of different taxes levied on Kenyans, with new taxes expected to generate an additional Sh281.6 billion ($2 billion) in revenue this financial year. Controversially, Ruto has also introduced a new housing tax to finance a low-cost housing scheme. As the taxes add up, Kenyans – already reeling from imported inflation and the Covid-induced slowdown in the economy, from which Kenya is yet to recover – have been left with no financial recourse, as even previously well-off middle-class professionals now struggle to make ends meet.
The underlying cost
International and local inflation has seen the shilling lose heavily against the dollar, driving up the all-important cost of petrol – which is an underlying cost for just about everything in Kenya. The price of petrol had already been pushed up when Ruto removed the ruinous fuel subsidies that Uhuru had applied to fuel and maize flour, Kenya’s main staple. And there’s no good news: the resultant high prices are expected to get worse in the short to medium term, and the depreciation of the shilling makes debt repayments ever more expensive, creating a brutal cycle from which Kenya does not have an easy way of extricating itself.
Kenya will not be able to tax its way out of debt and into prosperity. Ruto and his team must find a way of growing the national cake, rather than attempting to grow the treasury’s share of that cake via new taxes. Growing the tax intake requires initiatives that Ruto needs to focus his team on, and chief among these is spurring economic growth over the next few years.
Corrupt fat cats
Kenya is not a very easy place to do business in, and the reasons are many – official red tape is horrendous, and the resultant corruption eats away at whatever money investors make. Ruto should declare corruption a national emergency and ruthlessly deal with the corrupt fat cats who hold the country’s economy to ransom using their political connections to control government and parastatal spending.
Kenya’s county governments are a total waste of space – they are useless and getting worse. However, they cannot be done away with in the short term, as they are enshrined in the Constitution of Kenya. Ruto needs to deploy the tools at his disposal as president to beat the counties into delivery mode for the services that have been devolved to them. In the long term, Ruto needs to kickstart the conversation we all know must be had about the counties: do we need that many counties, each with its own government and assembly and their attendant petit corruption, which mimics the national government’s monumental rot and further cuts down the amount of money that actually reaches its intended purpose.
The informal sector in Kenya has always been able to avoid paying taxes by hiding revenue from the government. Getting them to pay their fair share of taxes is difficult but not impossible – but can only be achieved by addressing corruption, which allows small-scale businesses to bribe the tax man and government officials and thus avoid paying taxes.
There are other initiatives that Ruto should embark on – basics like just cleaning up the garbage dumps strewn across the country while the county governments responsible run around on money-burning “benchmarking” trips abroad, incentivising rather than threatening Kenyans abroad to invest more in Kenya, making Kenya an easier destination to travel to by removing the onerous and pointless visa processes that our tourists have to brave just to come to Kenya, accelerating the electrification programmes that are underway across the country, and cutting down on duplication of government functions at county and national levels, for example.
Ruto’s proposed new taxes have earned him the uncherished nickname of “Zakayo”, the Swahili version of the Biblical name “Zacchaeus” – the chief tax-collector at Jericho during Jesus’ ministry on earth.
But whereas the Biblical Zakayo is known for his faith in climbing a sycamore tree to catch a glimpse of Jesus, Kenya’s is determined to apply a different Biblical parallel: when the Pharisees tried to trap Jesus by asking him if the people should pay taxes to the Romans or not, Jesus pointed at the coins they used, which had a portrait of Caesar on them, and told them to “render unto Caesar what is Caesar’s”.
Paying taxes is not quite the problem for Kenyans, it is the amount paid as a proportion of income, and relative to the cost of living, that is the problem. This, in the end, will determine whether Ruto succeeds in achieving his ambitious revenue targets or not – and so far, it does not look good for Ruto.