World Bank Deems Ruto’s Tax Plans Unrealistic and Unpredictable

June 7, 2024

The World Bank has warned that the Kenyan government is failing to collect as much revenue as planned, making fiscal consolidation harder.

The International financial institution added that this is compounded by unrealistic revenue forecasting or overly optimistic revenue projections, which can lead to unrealistic spending plans.

According to the World Bank’s latest Kenya Economic Update, President William Ruto’s government may spend more than it collects if revenue projections are consistently missed.

Treasury pointed out,“The fiscal outturn in the first nine months of FY2023/24 shows the government’s continued efforts to remain on a fiscal consolidation path. Steady revenue growth driven by the implementation of tax administration and policy measures in the Finance Act 2023 and government’s efforts to contain growth in primary expenditures resulted in an increased primary surplus.

“Despite increased primary surplus and reduced primary expenditure, achieving fiscal consolidation targets requires realistic revenue forecasting. Revenue mobilization has consistently been below targets, undermining the credibility of the budget process. This can lead to unjustifiably large expenditure allocations and without adequate revenues can lead to accumulation of pending bills.”

Additionally, the World Bank asserts that frequent tax shifts by the government can indicate a lack of commitment to long-term economic stability, discouraging foreign investors seeking reliable and predictable environments.

Businesses require a stable tax environment to make sound investment decisions, the World Bank warns.

Frequent changes make it challenging to develop long-term strategies and can result in missed opportunities.

The World Bank at the same time pointed out that unexpected tax changes can disrupt business operations and directly impact the cost of doing business, particularly for import/export companies dealing with complex international tax regulations.

“The low predictability of tax rates, affecting the import and export sector, seems to be challenging FDI inflows. Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust and hinder strategic planning,” says the World Bank.

“Such unpredictability, exemplified by abrupt tax rate changes or the introduction of new taxes, directly impacts the cost structures of businesses, especially those in the import-export sector. This instability not only discourages investment but also complicates tax compliance, which could lead to decreased government revenue.”

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