The outbreak of the coronavirus pandemic and the different measures introduced by the government to control the spread of the virus has slowed down economic growth leading to underperformance in revenue collection. This is as a result of the slowdown of trade, travel restrictions and the tax reliefs introduced by the government that constrain the economy and revenue collection.
In a special bulletin, the Budget Parliamentary Office (BPO) in March estimated that Kshs 122 billion is likely to be lost in revenue collection between April and June 2020. According to the Kenya Revenue Authority (KRA), the government fell short of its Kshs 1.5 trillion third quarter 2019/20 revenue target, by Kshs 212 billion. This is as a result of tax reliefs introduced such as a reduction in general value-added tax (VAT) to 14 from 16 percent, reduction in pay as you earn (PAYE) from 30 to 25 percent, reduction of corporate income tax from 30 to 25 percent, and 100 percent tax relief for earnings below Kshs 24,000 among others.
Table 1: Summary of Tax measures and associated revenue losses (Effective April 1st, 2020)
|S.N||Tax Measure||Revenue Loss (Kshs. Millions)|
|1.||100% PAYE tax relief for earnings below Kshs. 24,000||19,840|
|2.||Reduction of PAYE top band from 30% to 25%||7,080|
|3.||Reduction of Corporate Income Tax from 30% to 25%||45,691|
|4.||Reduction of Turnover Tax from 3% to 1% for MSMEs||50|
|5.||Reduction of VAT from 16% to 14%||49,598|
Source: BPO special bulletin- March, 2020.
But collecting fewer revenues against the target does not necessarily mean that KRA is necessarily underperforming. Overall revenue collection was still higher than previous years by the third quarter of 2019/20, with collections of Kshs 1.3 trillion compared to the same period in 2018/19 where collections were Kshs. 1.2 trillion – a 14 percent increase. Instead what we are seeing here is a consistent systemic challenge of not being able to forecast revenue collections effectively, while encouraging an ever-increasing budget deficit.
Figure 1: The revenue shortfall in the FY 2019/20 (Q3) of 14 percent is the highest revenue deficit since the FY 2013/14.
Compared to the general election in FY 2017/18, the reduction in revenue as a result of the impact of COVID-19. The Q3 revenue deficit as a result of the election was 10 percent, and the projected Q3 revenue deficit for this year is 14 percent. KRA estimates that the government full-year revenue for FY 2019/20 might fall short of the revised target by Kshs 283 billion (15 percent), compared to a shortfall of Kshs 124 billion in FY 2018/19. Therefore we can safely estimate that total revenue collected in FY 2019/20 will be less than the total revenue collected in 2018/19 by about Kshs 60 billion.
The effect of this shortfall on the counties’ budgets will be negative as the equitable share is reduced. County reliance on the equitable share is to the tune of 88% (not counting conditional grants or balances brought forward). On the other hand, own source revenue (OSR) has been declining steadily over the years from an already low average of 12 percent between 2013/14 and 2015/16, to below 10 percent in 2017/18. As a result, budgets will need to be reprioritized, translating into a deterioration of key devolved functions – most dangerously in the social sectors, unless the counties are able to use their finances more efficiently.
Figure 2: County governments are highly dependent on equitable share (on average 88%) while OSR contributes on average just above 10% to county budgets (excluding balance brought forward and conditional grants).
The counties have consistently failed to achieve their OSR targets since FY 2013/14 at an average of 36 percent revenue shortfall. In FY 2018/19, the counties missed their OSR target of Kshs 54 billion by 25 percent, which was slightly better than the 34 percent shortfall of OSR target of Kshs 49 billion in FY 2017/18. The shortfall is expected to increase this financial year. This highlights the historical difficulty counties have faced in preparing realistic revenue projections. Funding gaps occasioned by unrealized revenue projections are the major source of fiscal constraints faced by counties while implementing their annual budgets
Figure 3: High variance between the OSR targets and actual OSR collection in counties, average 36 percent between FY 2013/14 and FY 2018/19.
Further to challenges in revenue collection, are the challenges of implementation. In the 2017/18 auditor general reports, it showed that projects worth over Kshs 40 billion had stalled due to poor disbursement of funds across the counties between FY 2013/14 and 2017/18; this figure could double following the looming shortfall and reprioritization. Additionally, a reduction in revenue by almost Kshs 60 billion could result in a stoppage of execution of key projects. For instance construction of dams and irrigation of farms, for instance, Falama water project in Mandera South – which was slated to provide 16,000m3 every day to over 252,000 residents and the neighbouring counties – worth Kshs 212 million, scheduled to be completed this fiscal year. This project risks being included among the stalled projects.
Since the onset of devolution, county governments’ annually spent an average of Kshs 124 billion (43%) on personnel emoluments, Kshs 85 billion (30%) on development expenditure and Kshs 78 billion (27%) on operations and maintenance. Personnel emoluments are largely unlikely to be reduced since it is a non-discretionary expenditure. This leaves development, and operations and maintenance vulnerable to budget cuts. This will result in reducing the aggregate demand in the counties, reducing employment and low economic growth in parallel with higher incidences of asset breakdowns and ultimately higher costs of maintenance.
However, there is some give when it comes to personnel emoluments. Reports by the auditor general have shown that a large proportion of the wage bill in counties comprises ‘ghost’ workers. For instance, in Nakuru County, the auditor general report for FY 2017/18 showed that the county has been struggling to finance a Kshs 5 billion wage bill annually out of which Kshs 26 million goes to uncounted employees. Similarly, in Siaya County the government has been paying Kshs 13 million monthly to ‘ghost’ workers. Clearly there are efficiencies to be gain from reviewing staff costs.
Figure 4: Personnel emoluments and operations and maintenance expenditures in counties have been increasing consistently at an average rate of about 14% and 13% respectively while development expenditure has been more erratic.
Given this context, and with a view to promoting continuity, the following considerations can help guide a way forward.
- County governments should ensure value for money is realized in any budget allocation set for the different sectors, that is, maximizing impact with the limited resources. This requires prioritization of projects that provide value to the larger population. For long, counties have been associated with outrageous expenditures on “misplaced” priorities for instance construction of their residences, huge expenditures on construction of county offices main gates and expensive stationery.
- The county governments should consider reducing the current huge wage bills. They should consider freezing salary increments and recruitment until the economy revives back to its normality, streamlining job description to avoid duplication of duties and reviewing payrolls to kick out ‘ghost’ workers.
- The respective county treasury should partner with relevant stakeholders to train the county governments on tax analysis and revenue forecasting. The consistent revenue shortfalls across the counties have been associated with unrealistic revenue forecasts, this has been worsened by the slow-down in the economy.