Despite tough talk, Gov’t yet to deliver on planned austerity measures

Despite talking tough on implementing far reaching budget cuts, the government has found it tough going to sustain the austerity walk as doubts on fiscal consolidation emerge.

This is as the planned budget cuts failed to yield significant adjustments to government spending even as revenue mobilization efforts fell behind targets in the first six months of the 2019/20 fiscal year.

Having taken office in early July, National Treasury Cabinet Secretary Ukur Yatani promised significant spending rationalization inside ministries and state departments.

Even so, the planning minister has found himself  in limbo as the government’s appetite for capital goods threatens to throw the austerity train off the rails.

The high affinity for new development projects under the economic transformation drive showed its head in October as the National Treasury presented its first supplementary budget with the view of pushing spending by a further Ksh.81 billion.

The Appropriations Bill which opened the window for the inclusion of new development projects would get the National Assembly nod in December inserting new spending to the tune of Ksh.54 billion after adjustments.

New spending was however authorized under weak revenue mobilization in the first six months of the fiscal year to December as revenues registered a Ksh.138.7 billion shortfall  on the back of poor ministerial appropriations in aid (A-i-A) and shortcomings in income and excise taxes.

Moreover, major expenditure heads were marked by under-absorption with recurrent and development spending registering a shortfall of Ksh.24.8 billion and Ksh.98 billion respectively from a general lag in the processing of pension payments and the poor filtering in of grants.

The Treasury has however defended its planned consolidation insisting austerity remains the go to option to taming ballooning public debt and widening fiscal deficits.

Even so, Institute of Economic Affairs (IEA) Chief Executive Officer Kwame Owino debunks the half year fiscal outturn as too weak to merit the austerity connotation.

“A discussion on fiscal consolidation requires more seriousness as it is one thing to admit we are on austerity,” he said.

On their part, researchers at Genghis Capital warn of sounding alarm bells from the expansive government spending even as the domestic borrowing target is revised upwards to Ksh.391.4 billion from the original sum total of Ksh.300.3 billion.

“Overall, we do not see the realism of fiscal consolidation in the fiscal year and more so, the fiscal deficit is expected to rise,” noted the Genghis 2020 Playbook in part.

Reality check

The National Treasury had hoped to trim the overall fiscal deficit in June to 6.8 percent up from 7.7 percent in June 2019 to contain growth in public debt and the corresponding financing gap.

Nevertheless, researchers at AIB Capital insist austerity remains further out from the doable as the composition of recurrent expenditure prove too stubborn to master.

According to data compiled by the firm’s research desk, domestic and foreign payments gobble up 19 and nine percent of all recurrent allocations as wages and salaries ingest another 28 percent of recurrent expenditures.

Meanwhile, NCBA bank warns of the tough trade-offs between fiscal rebalancing and catalysing demand behind what was a tough macroeconomic environment in 2019.

“The pains of spending cuts at a time when business confidence is fragile and individual incomes weak may slow economic activity in the short-term, potentially proving self-defeating,” noted the lender in its inaugural 2020 economic outlook report.

The bank’s sentiment are flanked by Kenya Business Guide Research Analyst Titus Maina who warns of a dire economic crunch in the eventuality of significant spending cuts by government.

“The government is the biggest spender in the economy. As such, less government transaction in the economy mean fewer investments and job creation for businesses that rely on government contracts,” he said.

Central Bank of Kenya (CBK) Governor Patrick Njoroge has however urged for time for planned consolidation to filter through even as he insists of the soundness of Treasury’s fiscal consolidation plan.

“The needle is headed in the right direction. The question should be on whether the policy is solid or we are back in the era of abracadabra,” he said.

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