Treasury at pains to fund expanded Ksh.3.6T budget

National Treasury Cabinet Secretary Ukur Yatani faces a pain staking challenge to explain the funding of the 2021/22 budget when he delivers his statement on the spending plans next Thursday.

According to a new budget analysis by the Parliament Budget Office (PBO), an independent arm of the legislature, the government has struggled to raise revenues in line with expectations pushing up fiscal deficits and borrowing.

An analysis by the office for instance shows revenues as a share of economic activity has slacked to just 15.5 per cent from a higher 18 per cent at the en of June in 2014.

The PBO has cited the lethargic collections as the primary source of the widening funding deficit to government spending, and ultimately accelerating growth in public debt.

While the National Treasury has previously proposed reforms to grow government income, PBO argues the measures have been ineffective.

“It is evident that the National Treasury needs to move away from the usual revenue collection enhancement measures which have proved to be ineffective in increasing revenue as a share of GDP over the last couple of years,” read part of the PBO report.

The PBO argues reforms have failed to address the primary course of dwindling tax heads such as income tax and VAT collections which can be attributed to a collapse in formal employment and multiple tax exemptions.

In the financial year commencing in July, Treasury estimates total revenue at Ksh.2.04 trillion or about 16.4 per cent of GDP.

Under proposals contained in the 2021 Finance Bill, the exchequer has recommended changes expanding the definition and scope of the digital services tax, the enhancement of the role of the Kenya Revenue Authority (KRA) in collections and excise duty on items such as nicotine substitutes and jewelry.

The bill however leaves out any new income tax proposals, a first for the Finance Bill in years.
Nevertheless, the PBO is pessimistic of the impact of the changes to overall collections.

“Tax enhancement measures such as strengthening the audit function in the domestic tax department, enhanced scanning, resolution of tax disputes through alternative dispute resolution and fast-tracking the conclusion of cases before the Tax Appeals Tribunal do not address the structural issues that have contributed to the decline in revenues,” added the PBO.

“Further, the proposals contained in the Finance Bill are unlikely to contribute to significant increase in revenue as a share of GDP.”

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