Within the next two weeks, Treasury secretary Henry Rotich will read this year’s budget speech.
A quick read through the 2016/2017 Budget Policy Statement puts budgeted expenditure for the next financial year at Sh2.05 trillion. This represents an eight per cent growth compared to the current financial year.
The same budget policy report says that the government intends to finance the 2016/2017 budget using Sh1.5 trillion in local tax revenues and expected grant income.
The projected budget deficit therefore stands at about Sh555.4 billion!
Although the budget deficit of Sh555.4 billion is six per cent lower than the revised one of 2015/2016, this is still a lot of money that the government must generate within a year to fully finance its expenditure plans.
The key question always remains how the Treasury will finance the budget deficit without negatively affecting economic fundamentals such as inflation, as a result of heavy borrowing or tax increases that may have a negative impact on projected economic growth of roughly about six per cent of the gross domestic product (GDP).
With the pending General Election in 2017, another key consideration is the conditional allocations required for the Justice, Law and Order programmes — given that institutions such as the Independent Electoral and Boundaries Commission (IEBC) must be funded to commence preparation for the elections.
In terms of funding, there are sectors that have been given priority. These include education and agriculture, which contributed to about 30 per cent of the GDP in the 2015/2016 financial year as per the official Economic Survey.
This is not to forget the Jubilee government’s key infrastructure projects such as the planned extension of the standard gauge railway, which although debt funded, have implications on the overall debt ceiling.
The above realities leave the Treasury with the very important question of how to fund the budget deficit. This calls for austerity in addition to well thought-out fiscal measures.
From a macroeconomic perspective, it is important for the government to avoid the temptation of overborrowing from the domestic market. Our economy is to a large extent private sector-driven.
Therefore, when the government crowds the domestic borrowing market, this creates competition between business and the government for the same funds. This will see interest rates skyrocket, hence slowing down economic growth.
Another area that the government needs to examine in detail for purposes of minimising the budget deficit is the bludgeoning recurrent expenditure, especially on salaries and emoluments to both the national and county government staff.
Recurrent expenditure simply consumes and does not create wealth. Even as the government expects economic growth to stand around 6.1 per cent in 2016/17, there should be a modest attempt to reduce the recurrent expenditure burden, based on the budget estimates.
It is also important that sector-specific budget allocation is utilised for its purpose rather than diverted to areas that may not be of priority.
Source: CNBC Africa