Kenya’s William Ruto faces tough choices as tax law derails

Kenyan President William Ruto must be feeling frustrated – his plans to raise taxes for his cash-strapped, debt-ridden government have suffered another setback.

He bowed to public pressure after recent massive anti-tax protests, which led to parliament being set on fire and withdrew the finance bill for next year.

But an appeals court last week struck down his tax plan last year.

Three judges ruled unanimously that 2023 legislation to raise taxes on wages, fuel and mobile money transactions was “fundamentally flawed” and “unconstitutional” because it did not follow established procedures.

Both moves pose a challenge to the government’s ability to raise extra cash to fund the national budget and repay $78bn (£61.4bn) of public debt.

Ndindi Nyoro, chairman of parliament’s budget committee, told the BBC the latest ruling could lead to a severe budget deficit this year and limit the government’s ability to manage affairs.

“If you look at the two fiscal bills that have now expired, cumulatively, the revenue loss is over 500 billion shillings ($3.8 billion),” Nyoro said.

The government submits a Finance Bill to Parliament before the start of each financial year (July) to introduce new taxes or amend existing taxes, primarily to raise more funds.

Around the same time, the government also presents what is known as an appropriations bill – which shows how revenue will be allocated and spent among government departments.

In a stark reminder of the messy state of government finances, this year’s appropriations bill was signed into law and the corresponding finance bill to fund the spending plan was withdrawn.

Analysts say spending may have to be brought in line with fiscal legislation from 2022, as the government’s tax plans have been effectively off track for two years in a row.

Economist Odhiambo Ramogi said the latest court decision also created uncertainty for taxpayers, despite the court ruling that taxes already collected could not be refunded.

The Indian government has appealed the ruling to the country’s Supreme Court and has sought a stay on the lower court’s decision until the appeal is heard.

The agency believes it is not feasible to immediately reconfigure the system in accordance with the 2022 legislation, a scenario that could paralyze some government services.

The Supreme Court rejected the request but agreed it was an urgent matter and will hear the case this month – even though August is usually a recess month.

Economist Ken Gichinga said the immediate pressure is likely to come from Kenyans who are struggling financially and want to see prices fall.

A classic example is a gas station.

“People want clarity on fuel prices,” he told the BBC.

Mr Ramoji believes the government’s best option is to “re-draft another Finance Bill”.

But given Kenyans’ strong opposition to new taxes, another option is to borrow more money, he said.

However, this may also be difficult given the country’s debt levels and recent downgrades by international credit rating agencies Moody’s and Fitch.

Others suggest the solution may be to raise innovative taxes that don’t overly burden the public – although exactly how is less clear.

All experts agree that for any future tax legislation, lawmakers need to listen to public input.

Policy and governance expert Vincent Kimosop told the BBC: “Our national engagement and discussion on public affairs is changing,” explaining that Kenyans are now actively participating in the governance of the country.

Spending cuts also need to continue.

Mr Nyoro said the government had already made deep cuts but could still be forced to cancel the entire development budget and the salaries of government workers.

“I hate to think about education budgets being cut, higher education funding being cut, public servants being laid off, health care being in jeopardy,” he said.

He added that the biggest problem facing the Kenyan economy is the debt burden that the country has accumulated over the past 12 years.

In response to the withdrawn finance bill, Ruto on Monday signed a supplementary appropriation bill to cope with the reduction in expected revenue.

The plan would reduce government spending by about $1.2 billion, including cuts to the presidency, ministries and funding for transportation and other development projects.

Parliament’s budget committee said the move was “aimed at reducing spending and striking a delicate balance between austerity measures and relief for people’s livelihoods and the economy”.

But the government faces further legal trouble with two human rights groups questioning its power to spend without corresponding revenue.

They believe that Parliament’s supplementary budget process is not in compliance with the law and are asking the court to intervene to “stop the ongoing undermining of our Constitution.”

The government will fight the issue in court while it awaits the outcome of its appeal to the Supreme Court.

Nyoro said the government had “no guarantee of victory” in its court fight and that the choices facing Ruto were so difficult that even bulletproof vests would offer him little protection.