Public finances and national debt: What lessons can we learn from our own wallets?

Introduction

Public finance and personal finance may seem to have nothing in common, but in practice they have the same basic characteristics: revenue/income, savings, sustainable levels of expenditure and debt, and debt management. This comparison is worth bearing in mind as we consider Kenya’s public finances and national debt. As citizens, we should each ask ourselves: “Would I be comfortable with the state of Kenya’s finances if it reflected my own personal financial position?” But first, let’s examine each aspect of public finance in turn.

Revenue The Government must continue to boost revenue performance and enhance tax compliance. It can leverage Information Technology and use third-party data, deploy automation for VAT compliance and promote taxpayer education, integrate scanners for import duty, fast track tax appeal tribunal cases and seek alternative dispute resolution instead of resorting to the courts. These efficiencies will boost revenue performance and contribute to improved compliance even in the current environment.

Domestic savings Although Kenya is a middle-income economy, it has been unable to mobilise adequate domestic savings. Private consumption is higher in the country than private investment, attributed largely to the relative predominance of low incomes. In the long run, boosting higher national income and savings will require attractive interest rates and policies to mobilise domestic savings.

Sustainable expenditure Initiatives to rationalise recurrent expenditure should continue with The National Treasury taking the lead. Interest payments on debt are increasingly absorbing a larger share of government revenues; the total debt service as a percentage of revenue has increased from 18.6% in FY 2012/2013 to 42.8% in FY 2018/2019.

A significant portion of this debt is in foreign currency. The total external debt service as a percentage of exports increased from 6.6% in FY 2012/2013 to 60.1% in FY 2018/2019. To progress on a sustainable path, the Government needs to prioritise efficiency gains and the effective utilisation of public resources - in effect, doing more with less. Concessionary loans should also be favoured to commercial loans.

Source: National Treasury & Central Bank of Kenya

"Although Kenya is a middle-income economy, it has been unable to mobilise adequate domestic savings. Private consumption is higher in the country than private investment, attributed largely to the relative predominance of low incomes. In the long run, boosting higher national income and savings will require attractive interest rates and policies to mobilise domestic savings."

Budget deficit The Government increasingly operates in a limited fiscal space, notwithstanding the current threats to public health and the economy, brought about by revenue shortfalls and rising expenditure. Maintaining a balance between revenue and expenditure is critical to managing macroeconomic stability and growth and reducing the rate at which public debt is increasing. The budget deficit in FY 2018/2019 was KES 721.1 billion (equivalent to 7.7% of GDP); in FY 2019/2020 it was projected to be KES 657.3 billion (equivalent to 6.3% of the GDP).

We need to ask ourselves whether this is sustainable, particularly in the current environment with the added difficulties in collecting tax revenue. More than likely, the Government will need to reduce this level of public debt in FY 2020/2021 and thereafter.

Laws and regulations The pressure of expenditure, largely due to the implementation of key government projects, has been blamed for the Government’s inability to cut spending. In 2018, The National Treasury released public investment management guidelines which are intended to streamline the use of government resources for projects as part of an overall programme of reform. These guidelines were designed with the intention of spurring economic growth and development. Previously, projects were entered in the budget without verifying their quality or cost effectiveness. In 2020, The National Treasury drafted Assets and Liabilities Policies and Guidelines which will lead to the standardisation of public sector policies, better records and more informed decision-making.

Debt management Future debt management rests on the decisions we make now. Measures to limit the acceleration of debt include ensuring that Kenya’s debt-to-GDP ratio reduces from the current 61%. If the Government must finance more debt, in the context of Parliament having approved the raising of the debt ceiling to KES 9 billion, it should favour concessionary loans instead of commercial loans. Kenya’s debt has risen from KES 1.894 trillion as of June 2013 to KES 5.809 trillion as of June 2019, as shown in the following graph. The total debt as a percentage of GDP has risen at the same time from 42.1% to 61.1%.

Source: The National Treasury and the Central Bank of Kenya

Decisions Over the last five years, the annual growth in Kenya’s revenue has averaged 13% while the annual growth of debt averaged 22%. This gap between monies earned and monies owed has required the Government to borrow. Each component of public finance is complex. As citizens and taxpayers, however, we have an obligation to engage in public discourse on the way forward. One way to encourage discourse is to make the underlying issues relatable. As a country and as individuals, we need to ask ourselves some tough questions and therefore, relating public finance to private finance is not so far-fetched as it may sound.

Public Financial Management Reforms in Zambia in the 21st Century

"Considering the impact of the current health and economic crisis, the Zambian Government will have to make some tough choices, including where to realise more value and where to cut expenditure." PwC Zambia Partner, Charity Mulenga shares her thoughts in this article.

Read on

NPO as a catalyst of economic growth

NGOs have become increasingly important to the promotion of sustainable development in Kenya. In this article, PwC's Gideon Rotich and Mwangi Karanja discuss why joint partnerships between governments, NGOs and the private sector are crucial to Kenya’s development trajectory.

Read on

Preparing to rebuild our economy now

As governments develop longer-term economic stimulus packages, they should design them around the core principle of building stronger, more resilient economies that support the long-term health and wellbeing of citizens. PwC's James Nyakundi discusses more in this article.

Read on