MPs rejection of finance bill is good, but let’s explore ways to reduce debt
In a historic moment, Kenyan MPs seized the opportunity and rejected several proposals in the Finance Bill 2022. In many ways, this represents a victory for the many Kenyans who have been ravaged by an unprecedented economic downturn triggered by the Covid pandemic and a relentless rise in the cost of living.
At the heart of the finance bill was a series of proposals to levy an excise tax on commodities that would have triggered stinging cost inflation and its socio-economic effects. This aggressive attempt to raise revenue is fueled by the need to service the public debt, which has increased almost fivefold since 2013.
The only way out of this trap lies in the very strong articulation of the political class on a clear path to drastically reduce the debt to manageable levels. A fruitful debate about reducing public debt will lead to an honest conversation about developing national fiscal policy.
In this policy, the distinction between progressive and regressive taxes should be worked out. Consumption taxes such as excise duties are a regressive tax whose primary value in economic history has been to regulate activities that may generate negative externalities such as gambling addiction and other undesirable behaviors.
However, the application of excise tax in Kenya has been divorced from this historical understanding and has simply been leveraged to extract revenue from citizens on even the most innocuous items such as bottled water. What is even more disturbing is the misunderstanding that demand for these items is inelastic – essentially that people will pay for these items at any price.
Research has demonstrated that Kenyans are price sensitive and will seek cheaper substitutes, and in some cases, such as the alcohol market, cheaper substitutes could pose serious health risks to citizens. Although the above concerns may seem serious, they do not represent the worst effects of a weak tax regime which is the destruction of the country’s production cycle.
As Kenyans seek cheaper substitutes due to excise tax inflationary pressures, they tend to find these alternatives in other jurisdictions. This is the basis of the culture of importation which has paralyzed national production.
Everything from food to drinks to clothes seems to come from outside the country, which amounts to killing jobs at home in favor of creating jobs abroad. The imbalance between imports and exports has persisted for so long that even the limited access to the dollars needed to sustain such an import culture has been the subject of recent news.
With the abundance of unused land in Kenya, as well as high levels of unemployment, policies that undermine production present a clear and present danger to the tapestry that weaves our socio-economic fabric. Ironically, while the 2022 elections were presented as a competition of economic ideas, none of the leading candidates came forward with thoughtful proposals to address Kenya’s fiscal and monetary policy. How much money does the economy need to sustain full employment?
What is the appropriate tax structure to encourage business? What is the best way to unlock all production factors? These are the real weighty questions that leading politicians have turned away from. Hopefully the next three months will be an opportunity for these issues to be at the heart of political debate and forge a new national conversation.