{"id":440902,"date":"2011-06-14T11:23:38","date_gmt":"2011-06-14T11:23:38","guid":{"rendered":"http:\/\/www.ghanamma.net\/2011\/06\/14\/understanding-key-issues-about-the-annual-budget\/"},"modified":"2011-06-14T11:23:38","modified_gmt":"2011-06-14T11:23:38","slug":"understanding-key-issues-about-the-annual-budget","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2011\/06\/14\/understanding-key-issues-about-the-annual-budget\/","title":{"rendered":"Understanding Key Issues About the Annual Budget"},"content":{"rendered":"
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Business Daily<\/a> (Nairobi)<\/p>\n

Mohammed Wehliye<\/p>\n

14 June 2011<\/p>\n

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opinion<\/p>\n

A lot has been written about the Budget, how it affects this or that industry or business, or how it will increase or decrease growth.<\/p>\n

Undoubtedly, all those factors are important but there has been little to explain to the layman the key numbers. There are a lot of numbers flying around but just like your home budget, there are only a few that matter.<\/p>\n

These are how much you intend to spend, where you intend to spend, your income and what you plan to do with any surplus or deficit.<\/p>\n

The Budget has two components, namely recurrent expenditure and development expenditure. Recurrent expenditure is the money set aside for wages, salaries, and emoluments and for running and maintenance of already existing government institutions and paraphernalia.<\/p>\n

On the other hand, development expenditure outlines expenditure on new capital and social infrastructure such as construction of new roads, schools, hospitals and public utilities.<\/p>\n

In the current Budget, Finance minister Uhuru Kenyatta proposes to spend Sh1,155 billion on both recurrent and development expenditure during the fiscal year 2011\/12. Of the total budgeted expenditure, Sh754.4 billion will go to recurrent expenditure. The remaining Sh398.6 billion will be for development expenditure.<\/p>\n

Sources of revenue<\/strong><\/p>\n

This expenditure has to be funded or sourced from somewhere. The government has many sources of revenue which in the main consist of direct taxes on individual and corporate incomes, taxes on goods and services, capital gains tax, inheritance tax, among others. From these sources the minister expects to raise 787.6 billion shillings.<\/p>\n

Simple arithmetic will tell you that he intends to spend more than his estimated revenue collection. After making provisions for other adjustments such as debt servicing, redemptions etc, this leaves him with a total deficit (new borrowing) of Sh236.2 billion. It is important to distinguish between the Operating Balance (which is really recurrent spending and current taxation) and the Fiscal Balance which adds development spending on public infrastructure to the Operating Balance.<\/p>\n

Budget sustainability normally requires that recurrent expenditures are financed by recurrent revenues over the full economic cycle. This is the first level balancing of the books.<\/p>\n

So looking at the current budget, you will find that government revenue more than covers the recurrent expenditure. In fact in the unlikely scenario where the minister decided to spend nothing on development, he would have balanced his books at the first level and left with a cool Sh33 billion. It is not good if any part of the recurrent expenditure was going to be funded through borrowing as has been the case some years in the past. The minister’s Budget therefore passes the first test. The question some would ask then is, if we have “balanced our books” at this level, why spend another Sh399 billion on capital expenditure and in the process create a deficit that would further add to our national debt and how much of this deficit is enough?<\/p>\n

We cannot afford not to set aside capital investments because we need development projects to grow our economy and create jobs. In fact, we have a longer term vision in which we expect to achieve middle income status by 2030.<\/p>\n

We need to develop as a nation for our own sake and for the sake of future generations. Capital expenditure therefore provides long-term benefits that span several generations.<\/p>\n

Enjoy the benefits<\/strong><\/p>\n

It is acceptable for the government to have recourse to borrowing some part of the capital budget. On equity grounds alone, the burdens of the provision of public infrastructure should be matched against the generations that enjoy the benefits.<\/p>\n

The only funding vehicle that can achieve that matching is debt. That is why we needed to borrow 66 per cent of the development expenditure from both domestic and external sources. How much was enough? Well, development expenditure was set at 35 per cent of total expenditure as the government needs to do enough to keep Vision 2030 alive.<\/p>\n

A simple back-of-the envelope calculation would show that given the current level of private sector investment, the government would need to invest at least three times its current level of investment per annum to have a chance of reaching vision 2030 targets.<\/p>\n

The current development budget is just a fraction of that amount. Furthermore one has to consider the fact that even the Sh399 billion development budget set aside for the coming fiscal year will not be fully disbursed.<\/p>\n

If the government’s current record is a guide, then around 70 per cent of the capital budget will be implemented (or less than 20 per cent of the total investment levels needed for Vision 2020). That is why the deficit is just about right and why the minister also got his development Budget levels right.<\/p>\n

There is, however, an urgent need to constrain recurrent expenditure so that more revenue is left for development and less is borrowed in the future to keep the country’s debt to GDP at sustainable levels. But all in all, this is a robust budget of growth which hopefully will lay a solid foundation for the future goal of achieving middle income country status.<\/p>\n

The writer is vice president, financial risk management, Riyadh Bank, Saudi Arabia.<\/em><\/p>\n

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