Spending, Taxes and Fiscal space – The Difficult Trade-offs of Restoring Kenya’s Fiscal Health

Kenya Ports Authority Invests Ksh 20 Billion to Modernize Four Berths at Mombasa Port

As mandated under the Public Finance Management Act of 2012, Treasury published the Budget Policy Statement (BPS) outlining the government’s spending priorities for the next fiscal year. 

Parsing through the BPS, it’s clear that the government will be seeking to restore fiscal health while still stimulating economic activity.

However, given that traditionally the two goals require somewhat divergent policy responses, achieving both will require delicate policy

balancing. 

On the growth side, the Big Four Agenda will continue to guide policy priorities. 

The projects, largely hinged on a public-private partnership (PPP) framework could reduce the government’s debt burden in the near term.

comparison of the FY’2019-20 budget and the projected FY’2020-21 budget

However, with the restoration of fiscal space as a key priority, the government plans to reduce expenditure to 23.6% of GDP from 26.0% this year. While some strand of literature has argued that this may provide a “quick fix” to debt problems, a parallel strand argues that spending cuts are self-defeating due to their implications for economic growth and revenues.

Revenue outlook has remained considerably weak. In the first half of the year, revenues undershot expectations by Ksh 138 billion. 

While Treasury has expressed optimism that it will close the revenue gap in the second half, the weakness in income tax revenues mostly reflecting deteriorating labor market conditions and weak earnings may prove challenging for the fiscal authority.

Any material shortfall may warrant either deeper spending cuts, which may hurt output or tax hikes which may invite a serious public backlash. 

This may see Treasury shore up it’s borrowing in the short term to cover the gap. This may sustain pressure on the cover, causing further steepening, offsetting the effect of Monday’s surprise policy rate cut.


NCBA Research, NCBA Weekly Fixed Income Report – 27th January 2020