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TAX NEWS - June 2010

Kenya Tax: Staggering Sh1 Trillion Plan with No Tax Increases

Nairobi — With his massive Sh1 trillion spending plan -- and the fact that the economy is expected to grow at a modest 4 per cent this year -- pundits had predicted that Finance minister Uhuru Kenyatta would institute crippling tax increases.

The minister confounded the predictions. This year's budget did not introduce any major tax increases. Neither has the minister provided for a spike in domestic borrowing.

At Sh109 billion, what the government wants to borrow this year is way below what was budgeted for last year. Neither has Mr Kenyatta factored any substantial increase in the level of external funding for projects.

Mr Kenyatta's budget for last year, factored external support at Sh50 billion, compared to Sh82 billion this year. The puzzle, therefore, is: Where is the money to fund the trillion shilling budget going to come from? The details are in the fine print of the budget speech.

Basically, Mr Kenyatta's budget has made overly ambitious domestic revenue collection targets. This year, he expects to collect a massive Sh688.5 billion in ordinary revenues. Whether the experiment will work remains to be seen considering that all this money is expected to be collected from what amounts to a mere tinkering of the level of existing taxes.

Mr Kenyatta's hopes for higher revenues are basically predicated on reforming the taxation system. Against the backdrop of modest growth projections of 4 per cent, it is doubtful the target for ordinary revenues will be achievable in the next 12 months.

With a large proportion of the spending plan tied to salaries, pensions and domestic debt service, Mr Kenyatta's budget has little room for implementing spending cuts within the financial year. Mr Kenyatta will this year be spending Sh80 billion in servicing debt. It is a worrisome trend because it means that Kenya now spends more money in debt service than it spends on health.

And with the wage bill projected at Sh109 billion, Mr Kenyatta will be walking a tight rope throughout the fiscal year. On Thursday, the minister said the country would seek to access more concessionary ways of funding the budget. It is the latest hint that Kenya may be forced to start negotiating a programme with the International Monetary Fund.

Such a programme could unlock billions of shillings in concessionary and quick disbursing budget support from international lending institutions, including the World Bank and the European Union. Kenya will need money on cheaper terms especially if it is to maintain the high level of spending on infrastructure.

The new budget has increased the budget for infrastructure by a massive Sh30 billion over last year's level. This time round, there were no typographical errors in the budget estimate documents, which Mr Kenyatta presented to Parliament. Last year, several discrepancies and errors emerged between line items in the estimates.

It was discovered later that it was all a matter of lapses in the systems of capturing budget data and recording it. The errors were a result of inconsistent coding, aggravated by the system's lack of adequate software controls in reconciling totals. It is understood that the government had to seek technical assistance from the International Monetary Fund to clean up its IT systems.
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