How budget policy seeks to spur economic growth

Wednesday, June 17th, 2020 00:00 |
Treasury Cabinet secretary Ukur Yatani shortly before leaving for the 2020 Budget reading in Parliament. Photo/PD/John Ochieng

Nelson Ngaira

Historically, government budget represents policy announcements that signal government’s intentions over the next financial year.

The Kenya budget for 2020/21 financial year has been prepared under unprecedented difficult economic times occasioned by the wide spread of Covid-19 pandemic. 

International Monetary Fund (IMF) projects a 3 per cent negative growth rate in the global economy in 2020 owing to the pandemic.

Likewise, economies in the emerging and developing countries are also expected to contract by 1 percent in the same period. 

However, on the positive side IMF also projects a quick rebound of the world economy in 2021 expected to grow at 5.8 per cent.

Understandably so, the budget aims at stimulating the economy to safeguard livelihoods, jobs, businesses while facilitating faster industrial recovery. 

The government has therefore enumerated a raft of measures that will facilitate a rebound of the Kenya economy post Covid-19.

One of the measures is to roll out an 8-Point Economic Stimulus Programme (ESP) amounting to Sh56.6 billion, which is about 2.1 per cent of the total budgeted expenditure of Sh2.73 trillion. 

Thematic areas

The ESP targets diverse thematic areas including infrastructure; education; business; health; agriculture; tourism; environment, water and sanitation facilities and manufacturing.

This is indeed a welcome move given the financial distress facing many citizens and businesses alike owing to subdued overall demand due to decrease in disposable income. 

The aim of the ESP is to catalyse overall demand to increase output and incomes in the short-term.

It is debatable as to whether the Sh56.6 billion set aside for the programme is sufficient for the intended purposes. That aside, to achieve the intended objective effective implementation is critical.

 Implementation in this case is measured by the timeliness and target for the ESP. From experience government appropriations take quite some time before implementation.

Take an example of the appropriations for pending bills and value added tax (VAT) refunds that the government owes individuals and businesses. 

Excessive time lag in the implementation of the ESP may fail to yield the anticipated outcome.

Delayed implementation may lead to negative effects such as higher inflation if it comes after the recovery has happened. The government should therefore fast track implementation of the ESP.

As earlier stated, the overall objective of the ESP is to raise demand, with the expectation to increase the economic output. As such, the target for the ESP is critical in two complementary forms. 

First, it should target economic agents both businesses and households likely to raise spending while responding to the stimulus.

For instance, low-income earners are likely to spend any additional income from the stimulus, hence boosting the economy compared to high-income earners. 

Affected sectors

Second, the most adversely affected sectors should receive the most benefit out of the ESP. In the context of Covid-19, the tourism, health and SME sectors are highly impacted negatively.

It is commendable that these are some of the sectors that the government, through the ESP, target to stimulate.

Furthermore, measures aimed at instilling fiscal discipline among state corporations and government agencies should also be seen as an impetus to government’s effort to spur economic growth.

Public procurement processes have been marred with reports of corruption across different levels of government. 

Procurement system

By consolidating and digitising government procurement processes under the e-procurement system, this should minimise leakages occasioned by corruption. 

However, this will depend on how well the online procurement platform will be managed.

The National Treasury has also proposed to withhold funding for state corporations and government agencies that do not implement an agreed upon action plan for clearing pending bills.

This is an important step to have moneys held in pending bills pushed for circulation in the economy. 

Overall, the government has articulated its intentions to rebuild the economy and support economic growth in the aftermath of the Covid-19 pandemic.

It remains to be seen how the government will navigate the implementation phase for the measures to achieve the targeted objectives. 

Nelson Ngaira is a Tax Manager at EY. The views expressed herein are not necessarily those of EY

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