Tough balancing act as the necessity for economic stimulations is countered by the growing budget deficit.

The Finance Minister is set to read the budget next week and we have seen projections of increases in the overall budget to Kshs 3.0 trillion from Kshs 2.9 trillion this current year. The overall revenues and expenditure have been on the rise but the expenditure has been increasing at a higher rate than the revenues.

With a couple of tax measures initially undertaken to assist people whether the pandemic already reversed, it is expected that this financial year we could see better revenue collections as we have already seen some recovery in the first quarter of this year. There are a couple of economic concerns that the government has to balance in order to ensure they steer the economy back to its long-term growth projections. Some of the challenges currently facing the economy include:

• The high cost of living: despite the inflation rate remaining low we have seen the oil prices go up by over 16% over the last one year and it is also projected that we shall some increase in the food prices especially basic needs like bread which is projected to start being charged 16% VAT away from the current rate of 0%. Also, with the high reliance on Boda Boda we expect the cost of owning them to increase since the excise duty we expect the exercise duty to increase as they change from a flat figure of 11,608.23 to 15%.
  

• The high debt levels:  The country continues to suffer an increase in the debt level and with the continuous high fiscal deficit (difference between revenues and expenditure) the debt is projected to continue growing. For this financial year, this is projected at Kshs 1.0 trillion. The big challenge that this possesses is that it opens the economy to significant vulnerabilities if there are lots of foreign borrowings and if largely local borrowings this leads to the crowding out of the private sector. In the ending financial year we have seen a decline in credit to the private sector as the investments in government securities provides high risk-adjusted return.
  

• The high unemployment rate: due to the pandemic we have seen a lot of people lose their jobs. The government should create an enabling environment for businesses to expand and encourage others to start and run business.
  

• Elections and Referendum: given that next year shall be an election year, there is an expectation that the country should set apart some cash towards that. With the referendum still going there is a chance that we shall see some budget reallocation towards it if this is to proceed. The demand for cash shall be further affected by the reduction in economic activity due to increased political risks as people delay their investments until after the election.
  

• Uncertainty in the global economic environment: due to the ongoing pandemic there are a lot of uncertainties in the general performance of the global economy which will spill over to the local economic performance. With our economy largely dependent on trade we are largely impacted by the happenings globally.
  

In the short term, the government is left with few options other than increasing the tax collections and continue borrowings to bridge the gap. To increase revenue collections the government needs to both raise the tax base and increase the compliance levels for those already in the tax bracket. We have seen a couple of measures put in place by the Kenya Revenues Authority, to this end we expect more compliance efforts with most people not already contributing starting to contribute.

In the long term, the government could relook at reorganizing the expenditure base and look for other sources of revenue like privatization of some of its companies either a fresh or selling stakes in the ones already sold out before.

In this budget, we have seen some tax increase measures which include among others increasing the tax of some commodities like bread from 0% to 16% and motorcycles from being taxed using a flat figure to 15% of the purchase cost. There have been however some sectors like the healthcare and manufacturing sectors that have seen a reduction in their taxation status in a bid to support the growth of the economy. For the next financial years, the balancing of cash-raising by the government and stimulating the economy shall be a key focus.