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Regional recovery plan depends on more borrowing and tougher tax enforcement
Budget day on 10 June in East Africa meant 'borrowing', as the region's three biggest economies unveiled their tax and spending plans for the coming fiscal year. All are planning to fuel an economic revival with borrowing in a coordinated piece of Keynesian expansion (AC Vol 61 No 13, Rose-tinted budgets).
Kenya, Tanzania and Uganda plan to borrow at least US$16 billion as part of their budget plans, fuelled by both domestic and external borrowing. Addressing growing debt burdens, which are already causing particular concern in Kenya, will have to wait until after the coronavirus pandemic. And with signs of a third wave hitting Uganda, combined with painfully slow distribution of vaccines across Africa, the post-pandemic economy could be a long time coming.
Of the three, Tanzania's public finances are in the best shape after recording 4.8% growth in the first year of the pandemic. Finance Minister Mwigulu Nchemba and the Treasury forecast that Tanzania's fiscal deficit will fall from to 1.8% from 2.6% on the strength of a 5.6% economic growth rate driving a 9% increase in tax revenues. Nchemba is increasing public spending by a modest 4%.
One new source of revenue will be a levy on mobile-money payments, which cash-strapped treasuries favour because it is so easy to administer, although it does nothing to reduce social inequities. Progressive income tax is unpopular with most of the political class in the region and is set at far lower levels than in the West.
In Uganda, Finance Minister Amos Lugoloobi (yet to be confirmed in the post) plans to cut infrastructure spending and increase revenue by 15%. With a debt-to-GDP ratio nudging 50%, the government is facing a combination of budgetary and political pressure after the disputed election in January.
Kenya's treasury secretary, Ukur Yatani, plans to take a more expansionary route by hiking infrastructure spending on President Uhuru Kenyatta's Big Four projects, as part of a budget that forecasts only a small fall in the budget deficit from 8.7% to 7.5%. Like those of his neighbours, Yatani's budget is predicated on a hefty 13% increase in the tax take.
Many Kenyans are criticising the government's turbo-charged borrowing, with debt-service taking almost two thirds of state revenues this year and the trajectory for the three years to come looking tougher still (AC Vol 62 No 9, Don’t show us the money).
Regional economists have warned that there is little scope for significant spending cuts on infrastructure, even if ministers wanted to take that approach. There is logic to spending your way out of a recession, and the three countries forecast economic growth of between 4.3% and 6.6%, with Kenya set to recover fastest.
All the governments in the region are relying on hugely boosting the tax take, mostly through indirect taxation, which hits the poorest hardest. Thanks to the political clout of the region's companies and their owners, governments tend not to favour increases in corporation tax or income tax.
Lacklustre economic conditions could force a change of course. In Kenya, fuel taxes continue to rise, hitting the country's lower middle class hardest. The treasury's repeated promises in recent years to tackle corporate tax exemptions have delivered little.
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