What the Budget Means to Your Pocket

Paul Letiwa

15 June 2011

Nairobi — Beer and cigarette lovers had their pockets raided by this year’s Budget when the Finance minister, Mr Uhuru Kenyatta, announced a new fixed tax rate of Sh70 or 40 per cent per litre on beer and Sh1,200 or 35 per cent increase in the retail price for every 1,000 sticks of cigarettes.

The new measures, which have already taken effect, mean that consumers will have to either fork out more for their favourite drinks or cut down on the amount as prices could rise by at least Sh5, depending on the brand.

Some analysts have suggested that the measures are meant to help contain the abuse of beer, leading to a worrying trend of widespread drunkenness in many parts of the country.

For smokers, sustaining the habit could become dearer with the increments, as cigarette manufacturer British American Tobacco is already revising its prices upwards.

“Just like in the case of cigarettes, the reform in beer taxation is also aimed at meeting the simplicity principle and discouraging abuse of beer,” Mr Kenyatta said in his speech.

Another measure that will puncture holes in some pockets is the increase in withholding tax. For a long time now, some professionals have been enjoying a withholding tax of 5 per cent, but this has now been doubled and will certainly cause a pinch in pockets, especially during these difficult times.

But there are some Kenyans who breathed a sigh of relief after Mr Kenyatta’s Budget statement.

Coming on the back of spiralling inflation, high oil and food prices, a teetering global economy, and unrest in the Middle East, some of the measures in Mr Kenyatta’s Budget have been praised for being pro-poor, aimed at reducing the burden on the hardest hit.

For Ms Mary Juma, who was following the reading of the Budget statement over the radio as she conducted her tailoring business in Nairobi’s Korogocho slums, it was a relief.

And although she could not grasp everything that the minister said, she was glad that the government had zero-rated tax on kerosene, which she uses for cooking and lighting.

“Kerosene has become very expensive. One litre costs more than Sh90 and it is not enough for one day. I spend about Sh200 a day on kerosene alone,” she says.

Apart from being in short supply, the price of maize has risen sharply. A 90-kg bag was going for Sh1,000 in December after the harvest but is now going for more than Sh3,000, putting the staple beyond the reach of many Kenyans.

Many Kenyans are facing starvation as manufacturers grapple with high costs. To ease these burdens and make maize affordable, the minister zero-rated duty on maize imports by gazetted millers for six months.

Imports previously attracted 50 per cent tax, in accordance with the East African Community’s common external tariff (CET).

You might also pay less for rice, as the minister reduced the CET on rice from 75 per cent to 35 per cent.

For livestock and poultry keepers, who are reeling from escalating prices, feeds were zero-rated from the previous 10 per cent and the duty on plastic bags used to store fruit extracts reduced by 15 per cent.

“Aseptic plastic bags used to store these extracts shall be granted duty remission and imported at the rate of 10 per cent instead of a CET rate of 25 per cent,” he said. Import duty on food supplements was lowered from 25 per cent to 10 per cent.

Filing tax returns has been a pain for some employees and some have been penalised for failing to do this.

This “irritation” is now no more, with the proposal by the minister to abolish filing of returns by employees who have one source of income, since their employers have paid their PAYE to the Exchequer.

Funds have also been set aside to support both free primary and day secondary education and health, expanding spending on safety nets to cushion the vulnerable from the current challenges of high food and fuel prices.

A national budget has to walk the fine line between meeting the needs of its citizens and finding the money to do that.

According to some analysts, the government is likely to face a challenging fiscal year, trying to maintain economic growth and meet Vision 2030 targets, control inflation, and keep the debt at sustainable levels as it tries to meet the proposals in the Budget.

“The general view among economists is that the deficit and the government need to borrow and spend is likely to add to the current inflationary problems the country is experiencing. This, of course, is not good for anyone’s wallet, especially the poor,” says Mr Mohamed Wehliye, an expert in financial management.

Although the government stepped up social spending and subsidies to soothe the pain of the economically weaker sections, there is a risk that the size of key subsidies such as food and fuel will overshoot the Budget.

“Petrol and food prices are likely to get even higher and the subsidies provided for these items might not be enough, meaning that the deficit budgeted for could become bigger.

“This will lead to more government borrowing, which will increase the rate of inflation. The extent to which the government can achieve its deficit targets will depend on the pace of economic growth and the movement in global and domestic fuel and food prices,” he says.

“With such a huge Budget, the biggest question on the lips of many Kenyans is where the Finance minister will source money to finance it. Borrowing to fund the Budget may not be a good idea as it could increase public debt,” says Mr Kenneth Kigunda, an investment analyst.

Analysts also expressed concern over the expansionary Budget, saying it would affect the market, especially as it implies that it will add to inflationary pressure.

Despite the positive efforts made by the minister to ease the burden on Kenyans, inflationary pressure signals more belt-tightening by wananchi, who are expected to be the financiers of the enormous Budget, mostly through paying more taxes.

“I think the key driver of everything else is the size of the deficit, which will affect both government spending and borrowing, and how this will affect inflation.

“Whatever else the government would have done for the common man in other sectors will be in vain if inflation goes up to, say, 20 per cent. This is because inflation wipes out all other economic gains and makes subsidies useless,” adds Mr Wehliye.

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