Report No. 201-KE The Second Decade: A Basuc Economic Report on Kenya Annex 2 Fiscal Policy for Development (Vol. III of Five Volumes) January 15, 1974 Not For Public Use Eastern Africa Regional Office Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Grciup. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does riot accept responsibility for the accuracy or completeness of the report. UNITS OF VALUATICN The official unit of currency in Kenya is the Kenya Shilling (Sh.) However, in accordance with the practice of the Kenya Government, most large values in the report are expressed in Kenya Pounds (L) L 1 = Sh. 20 Sh 1 = 100 cents Some values have been expressed in terms of constant US dollars for pur- poses of international comparison. CURRENCY EQUIVALENTS From Independence at the end of 1963 until March, 1973, the exchange rate between the Kenya Shilling and the US dollar was retained at $1 = Sh.7.143. This is the exchange rate used throughout the report. Since June 30, 1973, the Kenya Shilling, together with those of Tanzania and Uganda, has been set at a central rate of $1 = Sh.6.9, and all three countries have availed themselves of the wide margins of up to 2¼4 per cent. Exchange Rate Used in the Report Present Rate of Exchange US dollar Sh. 7.143 Sh. 6.9 Kenya Pound $ 2.80 $2.8985 THE MISSION This report is based on the findings of an IBRD mission which visited Kenya in March/April, 1973. The main mission consisted of the following Bank staff: John Burrows - Chief of Mission Ramgopal Agarwala - Macro-Economist George Beier - General Economist (Project Planning and External Assistance) Ved Gandhi - Fiscal Economist Randolph Harris - General Economist (Public Services) Martin W4olf - General Economist (Private Sector) Sven Burmester (Education), Andrew Hayman (Tourism) and Frank Stubenitsky (Health) also participated in the work of the Mission and have contributed to the report. Lyle Hansen was adviser to the Mission. A preliminary report was prepared in August and discussed with the Government of Kenya during October 1973. The present renort incorporates the comments of Government, and where possible, includes more recent material. PREFACE 1. During the course of 1972, the World Bank decided to embark upon a series of "basic" economic re)orts on its major member countries. The nature of country economic work has been under review for some time in the Bank, and the decision to undertake these major reviews on a regular basis reflects the general desire to improve both the quality and the usefulness of this work. The basic economic report is intended to provide a periodic overview of the operations of art economy. From the Bank's point of view, these reports are intended to provide a new perspective of the longer term structural develonments in an economy, to assess the extent to which they can be shaned by policy changes, and to identify the country's external assistance requirements. But mc,re than this, a basic economic report is expected to provide a synoptic view of the many facets of the economy, and thus to bring into focus other work being undertaken by the Bank and else- where at a sectoral or project level. From the country's point of view, it is hoDed that these policy-oriented reports will be valuable in giving ob- jective and possibly new insights into the dynamics of the economy and the options which may he open to the Government in the future management of the economy. 2. This is the first basic economic report on Kenya. The timing is particularlv apPropriate as Kenya prepares to enter the second decade of Independence and is about to publish the Third National Development Plan. W4e feel that it is therefore a suitable time to assess how far Kenya has come during zhe nast ten years, to review her major successes and failures, to assess what prospects lie ahead, and to identify major policy issues. This is the mnrin purpose of the report. Of course, this is not the first Bank report to undertake this task, but the latest in a series. For exam- ple, the Bank published a report on the Kenya economy in 1963 which reviewed the development prospects of the country as it moved towards Independence. In 1967, a major Bank mission reviewed the revised development plan (1966- 70) and again in 1969 another mission reviewed the second (1970-74) plan. Each of these missions and the subsequent reports differed in composition and scope, but all served to make a critical review of Kenya's national plans and to offer constructive comments. At the request of the Government, both the 1969 mission and the recent 1973 mission visited Kenya while the new plan was still in draft form, so that the comments of the mission could be taken into account before the plans were published. 3. A report of this nature must essentially be the result of a com- promise between comprehensiveness and brevitv. The Kenya economy is much too broad and its onerations much too complex to allow for complete cover- age, even in a "basic" report. W4e have therefore deliberately circumscribed the scope of the report in a number of ways which it is important to make clear at the outset. First of all, the report is intended to be a review of the operations of the Kenya economy only, and makes no attempt to review progress or prospects of the wider region to which the Kenyan economy belongs, or even to assess in any comprehensive way how Kenya's development prospects are affected bv her membership oE the East African Commnunity. Some of these relationships are referred to when they are of particular relevance, but the report has not tried to view the Kenyan economy from an integrated regional perspective. This limitation does not in any sense mean that either the Mission or the Bank feels that regional economic considerations are unimportant. On the contrary, it is clear frorn its major financial commitment to the EAC - ii - corporations and the development bank that the Bank fully supports this unique development in regional cooneration which Kenya, Tanzania and Uganda have pioneered. The report focuses on Kenya and ignores the wider Community simply to keep the scope of the report within manageable bounds. This narrow focus becomes seriously myopic only in those sections of the report (on trade policies for instance) where Kenya must clearly act in concert with her partners in the Community. Again, while we try to suggest what options might be best for Kenya, viewed in isolation, we are very conscious that these options will have to be reviewed by all three Partner States, and that the decisions will ultimately be taken with the interests of the whole region in mind. 4. The scope of the mission was circumscribed in a second major re- spect. Even in its focus on Kenya, the renort will not undertake a detailed review of all sectors of the economy and of all economic problems. The eco- nomic literature on Kenya is prolific, and we have drawn heavily on this. In particular, the recent ILO/UNDP Report on Employment, Incomes and Equal- ity in Kenya has presented a very comprehensive and innovative analysis of unemployment and poverty, and we make no attempt to go over this ground again. Rather, we see this report, with its broader macro-economic focus, as being essentially complementary to the ILO/UNDP Report. We have not attempted to add in any significant way to the existing knowledge on the various sectors; instead, we have tried to consolidate and integrate this knowledge into our overall understanding of the operation of the economy. Similarly, we have not placed great emphasis on reviewing progress under the Second Plan or on describing the objectives of the Third Plan, because these tasks have been done very well by the Government itself. 5. Our report does not therefore .try to deal with everything in great depth. On the contrarv, it draws heavily from the wide range of studies al- ready available and tries to use this information to provide a synoptic view of the way in which the economy as a whole functions and perhaps some new in- sights into important relationships betw,yeen variables. Thus, while the re- port tries to be as informative as possible and to present sufficient back- ground data on most asnects of the economy for the general reader, the de- tailed analysis is highly selective and focuses mainly on a number of key issues which wJe see as critical to the future development of Kenya and the well-being of its people. 6. The report is divided into five volumes. The main report traces the major developments in Kenya's first decade of independence, identifies the emerging issues, and examines the major options open to the Government in the future, as the Mission sees them. The remaining four volumes contain the analytical annexes, which discuss the major issues in detail and extend the technical arguments. 7. An outline of the complete report is shown on the opposite page, and a select bibliography of some of the major sources of information on Kenya is given at the end of Volume I. TH:E SECOND DECADE A BASIC ECONOMIC REPORT ON KENYA CONTENTS VOL. I THE MAIN REPORT:: EMERGING ISSUES AND POLICY OPTIONS VOLS. I-V THE ANALYTICAL INNEXES 1. The Macro--Economic Model and Projections 2. Fiscal Policy for Development 3. Key Issues, in the Private Sector 4. Domestic Savings and Financial Intermediation 5. Priorities for Planning and Project Design 6. Priorities for External Assistance ANNEX 2. FISCAI POLICY FOR DEVELOPMENT CONTENTS Page No. CHAPTER 1. INTRODUCTION 1 The Public Sector in t:he Kenya Economy 1 Central Government Finances 4 Local Government Finances 5 Major Policy Issues 6 CHAPTER 2. DEVELOPMENT FINAtCE 8 A. INTRODUCTION 8 B. PUBLIC SECTOR SAVINGS 8 Central Government as a Saver 8 Local Authorities as Savers 16 Parastatal Sector as 'Saver 23 C. DOMESTIC BORROWING 24 National Social Security Fund 24 Other Non-Bank Lenders; 26 Bank Borrowings 26 Interest on Loans to Government 27 D. CONCLUSIONS 28 CHAPTER 3. FISCAL POLICY ANI) INCOME DISTRIBUTION 30 A. INTRODUCTION 30 B. EQUITY IN TAXATION 31 Taxes on Wealth 32 Taxes on Personal Incomes 33 Taxes on Personal Consumption 38 Redistributive Role of Kenya's Tax System 40 C. PATTERNS OF PUBLIC EXPENDITURE 41 D. CONCLUSION 44 Contcnts (Cont'd.) Page No. CHAPTER 4. EMPLOYWNT AND RURAL DEVELOPMENT 45 Introduction 45 3irect Employment by the Public Sector 46 Fiscal Distcrtions and Private Employment 48 Tax Policies towards Agricultural Employment 50 Government Expenditure on Agriculture and Rural Development 51 Conclusion 53 CHAPTER 5. A FISCAL STRATEGY FOR DEVELOPMENT 54 Avoiding a Resource Problem 54 Reviewing the Investment Pattern 58 Focusing on Equity and Employment 59 Financial Viability of Local Authorities 59 Integrating Self-Help Efforts 60 APPENDIX ESTIMATING "BUILT-IN" RECURRENT EXPENDITURE STATISTICAL TABLES CHAPTER 1: ITTRODUCTION The Public Sector in the Kenyan Economy 1.01 Introduction. The public sector in Kenya consists of the Central Government, the various levels of local government and a wide range of para6tatal organizations, including the statutory agricultural boards. In addition, the East African Community (EAC) plays a significant role in the Kenyan economy, particularly through the operations of the common service corporations. It is not intended in this Annex to provide a lengthy analysis of the role of the publLc sector in the total economy. However, we shall try to put the subsequent discussion into context in this introduction by referring to some of the major macro-economic indicators and summarizing the primary underlying economic rLelationships. 1.02 Macro-Economic Indicators. While the public sector has not been as dominant in Kenya as in many African countries, its role and influence on the economy has been growing since Independence. Moreover, within the public sector, the importance of the Central Government has tended to increase relative to the other parts of the public sector. Most of the available indicators bear evidence to these two trends. 1.03 The contribution of the public sector to value-added has increased from less than 25 percent in 1964 to over 30 percent by 1972 (Table 1). The fastest rate of growth was in Central Government, while the role of local government fell sharply aft:er 1970, when the Central Government took over the most important functions of the rural county councils. The relative importance of the public enterprises has not changed since Independence, although they now account for over 22 percent of the total value-added in the enterprise sector of the economy. 1.04 The increasing importance of the public sector is also shown by the statistics of capital formation, where the public sector's share has risen from about 25 percent to over 38 percent between 1964 and 1972 (Table 2). Again, the Central Government was the principal agent of growth, having expanded its share of public sect:or investment from around 35 percent to about 60 percent. 1.05 The growth of the public sector, in terms of both consumption and capital formation, has generated an increasing demand for imports, as shown in Table 3. The absolute level of public sector imports has more than doubled between 1964/65 and 1971/72, while "general government" imports have nearly tripled. However, while the overall growth of public sector activity has led to a rapid expansion in the absolute level of government imports, the public sector's share of imports has not increased. In fact, after rising quite sharply in the early years after Independence, the public sector's share of imports has fallen every year since 1966/67 and, by 1971/72, has returned to about the same level (10-11%) as in 1964/65. A similar trend is found in -4- Central Government Finances 1.11 Tables 9 and 10 set out the overall financial position of the Central Government since 1964/65 and suggests two distinct periods in terms of budgetary performance - one between 1964/65 and 1970/71 and the other since 1971/72. 1.12 1964/65 - 1970/71. This period was marked by very rapid growth of revenues and the generation of substantial government savings. Table 10 shows that during the period 1964/65 and 1970/71, recurrent revenues of the government grew at over 16 percent a year, while recurrent expenditures grew at only 10 percent. At the margin, therefore, Government saved about 39 percent of its growing income. Its average savings rate turned from -5 percent in 1964/65 to +45 percent in 1970/71, and this was a remarkable performance. 1.13 Government also expanded its investment effort very substantially -with the result that even the rapidly growing savings by the Government proved inadequate. Government savings could finance only about a quarter of the capital expenditures over the whole period and another 43 percent had to be financed by net foreign capital. Thus, while the Kenya Government was unable to mobilize sufficient savings to finance its burgeoning invest- ment program, it did make impressive efforts in this direction. Recurrent savings as percent of capital expenditure increased from -24 percent in 1965/66 to +53 percent in 1970/71. Correspondingly, the dependence on foreign aid was reduced from 95 percent to 22 percent. 1.14 During the whole of this period, the Kenya Government did not borrow anything from the Central Bank (Table 11); instead it had a positive outstand- ing balance with it. The deposits of the Kenya Government with the Central Bank increased from i, 3 million in December 1967 to i 16 million in June 1970 and i 22 million in June 1971. Against these deposits, the Central Bank's holdings of Kenya Government securities and treasury bills (as well as advances) were only E 3 million in December 1967, i 8 million in June 1970 and b 15 million in June 1971. 1/ Thus, as an overall policy, the Kenya Government built up a large cash balance with the Central Bank, while financing a significant proportion of its own expenditures from net foreign borrowings. 1.15 The rapid growth of revenues, the accelerating investment effort and the sustained high level of domestic savings during these early years of Independence are all creditworthy achievements. The fact that Kenya was also able to do all this without recourse to deficit financing and without increasing her relative dependence on foreign savings is a remark- able achievement. 1/ Central Bank of Kenya, Economic and Financial Review, Vol. V, No. 1 (July-September, 1972), p. 11. -5- 1.16 1971/72 and 1972/73. Since 1970/71, however, the high momentum of the Central Government budget has been lost. The annual growth of recur- rent revenues has been less than 9 percent, while the recurrent expenditures have grown at about 17 percent per annum. The average savings rate (savings as percent of revenues) of the Government has come down from a high of 19 percent in 1970/71 to 6 percent in 1972/73, and marginal savings have been negative. 1.17 While the growth of government investment has been maintained at the past rate of about 27 percent a year, the role of budgetary savings in financing Government capital expenditure has declined - from 53 percent in 1970/71 to 16 percent in 1972/73. Consequently, the dependence of the budget on foreign capital and deficit financing has started growing. In 1972/73, about a third of capital expenditure by the Government was financed through net foreign borrowings and another 17 percent through the Central BanL. 1.18 The financing of capital expenditure through the Central Bank is a new phenomenon in Kenya's budgetary history. Whereas before 1970/71, the Central Government was a net creditor to the Central Bank, in the last two fiscal years, the Government has financed almost a fifth of its capital expenditure by drawing upon its cash reserves. 1/ While a detailed analysis of the Central Government finances is postponed to Chapter 2, the brief and sketchy over-view presented above highlights certain policy issues which will be indicated before closing this chapter. Local Government Finances 1.19 As suggested by Table 7, local authorities played an important role in Kenya up until 1968/69. They spent about 20 percent of the total expenditures of central and local governments combined. However, from the very beginning the financial position of the local authorities, particularly the county councils, was weak. Between 1966 and 1968, while their own revenues remained constant, their recurrent expenditures increased by about 25 percent. As a result, their recurrent deficits doubled in two years, and a very large part of these deficits had to be financed through central government grants. (Table 12) But in 1968, almost 50 percent of the overall budget deficit of the local authorities was financed through overdrafts and drawing down of reserves. 1.20 Such a financial position could clearly not be sustained for long. Besides, it was not clear whether the county (non-municipal) councils in 1/ This was in addition to short-term borrowings made possible by the recent amendment to the Central Blank of Kenya Act, which increased the limit on central bank's advances to the Government from U12 million set in 1966 to 25 percent of its gross recurrent revenues. For 1972/73 the new limit would permit a borrowing level close to L30 million, compared with actual net borrowing of L6.6 millLon in 1970/71 and b17.4 million in 1971/72. - 6 - particular had the necessary cavability and discipline to manage such large funds. In such circumstances, the Central Covernment considered it advisable to take over some of the major expnediture and revenue functions of the county councils. In 1970, the expenditure functions of primary education, health services and road maintenance, as well as the levy of the graduated personal tax (GPT), was transferred from the county councils to the Central Government. As a result of this move, the local authorities taken together earned a marginal (current) surplus and their overall budRet deficit was reduced sharplv. In 1972, they still show a positive current surplus although their overall deficit has now grown once again. In 1973/74 the GPT was abolished. The implications for local authorities will be discussed later. Miaor Policy Issues 1.21 The central government budget has, in more recent years, started showing the strains of rapid development. The growth rate of recurrent expenditure has accelerated, while the pace of capital expenditure has continued unabated. This raises certain crucial policy questions, particularly in the context of the third plan which is under preparation. Why have the trends of 1964/65 - 1970/71 been reversed? Has the buioyancy of the existing tax structure been exhausted? What reforms in the tax structure can be tmdertaken to revitalize the revenue elasticity? Have the recurrent expend- itures got out of control in any structural fashion? Can the Government investment program be sustained without generating additional savings? Can the parastatals play a role in mobilizing resources, as well as in develop- ment? What role can be assigned to the local authorities in the development process? How can these levels of Government be made financially viable? 1.22 All these questions which relate to development finance must be answered if a feasible role for the public sector as an agent of economic develonment is to be defined over the next plan period. But development expenditure on economic growth is only one, albeit major, national objective. The next plan, and the period beyond, must also aim at other major goals like social justice and income redistribution, employment generation, rural development, and export promotion. Governments' fiscal policy can and should play an important role in the achievement of these objectives as well. 1.23 We shall, therefore, pose a further set of questions. What role has the Government tax policy played in the past in income redistribution? Uhzat has been the role of the allocation of important public services in reducing ineqtualities? How far have the local authorities, which up until recently were responsible for the education and health services at the grass root level, been able to spread the benefits of public services? What is the likely effect of the recent centralization of these services in terms of their effectiveness and distribution among areas and regions? How far does the existing fiscal structure of Kenya have the potential of being redis tributive? 1.24 More recentlv, growing unemplovment, particularly in the urban areas, has become a major concern of the Kenya Government. What role can -7- fiscal policy play in generating employment and increasing incomes among the poor? What tax reforms seerL to be particularly suitable for this purpose? What role needs to be assigned to rural development in the alloca- tion of plan resources? How do agricultural marketing boards and other parastatal bodies fit into the aims of rural develooment and agricultural- based exports? 1.25 These are some of the major policy issues which the Government would have to attend to in planning for the future. What follows only intends to lay down the framework for the analysis of these issues rather than provide answers to them. The following three chapters will look at these issues under the broad headings of Development Finance, Income Distribution, and Employment and Rural Development, while the last chapter will suggest the need for the scope of fiscal reforms and strategy. - 8 - CHAPTER 2: DEVELOPMENT FINANCE A. INTRODUCTION 2.01 It was pointed out in the preceding chapter that in the two years immediatelv after Independence, net foreign borrowings were the only means by which the Government could finance its capital budget. The domestic capital market was just about absent then and the Government on its own was a net dissaver. Of course, the development effort of the Government was also relatively small at that time --its capital expenditure was about 15 percent of the total budget and 3 percent of the GDP at factor cost. 2.02 Since then, the Kenya Government has consistently reduced its dependence on net foreign borrowings by consciously developing the domestic capital market and making an increasingly larger use of the banking system, as well as improving its own savings effort. Various sources of development finance are, therefore, available to the Government in financing the next development plan. In this chapter, we shall first examine the savings performance of the Central Government and the other parts of the public sector. We shall then go on to review the other sources of funds which might be tapped to finance the development program. B. PUBLIC SECTOR SAVINGS Central Government as a Saver 2.03 Tables 10 and 13 highlight the savings performance of the Central Government. Starting with a dissaving of significant amount after Independence, the Kenya Government has built up an impressive savings rate. Over the period 1964/65 - 1970/71, the marginal savings rate of the Central Government was close to 40 percent, and the average savings rate about 6 percent, (Table 10). Central Government savings consistently increased during the 1960s, and in 1970/71 they accounted for 22 percent of national savings and about 5 percent of GDP (Table 13). Between 1964/65 - 1970/71, Government savings financed an average of about 24 percent of capital expenditures which themselves were growing at a rate of about 27 percent a year. 2.04 Such a tremendous savings performance was obviously the result of an impressive tax effort by the Government. During 1964/65 and 1970/71, government revenues grew at more than 16 percent a year, while recurrent expenditures grew at only 10 percent. As noted in Chapter 1, Kenya's budgetary performance during this period was remarkable. Since 1970/71, however, the budgetary situation has changed. The growth rate of revenues -9- has recently slowed down 1/ --from a peak of about 25 percent in 1970/71 to about 4 percent in 1972/73 -- while the growth rate of recurrent expenditure has increased. Against the average revenue growth of about 9 percent in the last two years, the average recurrent expenditure growth has been about 17 percent. As a result, the marginal savings rate has declined significantly. Government capital expenditure has tended to grow, as in the past, at about 20 percent a year, but this is now increasingly financed by net foreign capital inflows and by borrowing from The Central Bank. Government's own savings are expected to finance only 13 percent of capital expenditures in 1972/73 against about 53 percent in 1970/71. 2.05 Thus, there has been a sharp turn in Government savings performance since 1970/71. An explanation of this turn around can be sought within the framework of Government's revenue effort and expenditure pattern. 2.06 Revenue Performance. Tables 14 and 15 reflect the impressive revenue performance of the Government. In 1964/1965, the Central Government raised about 20 percent of monetary GDP in the form of revenues and this was gradually increased to over 30 percent in 1971/72. Even as a proportion of total (monetary and non-monetary) GDP, Government revenues increased from 15 percent in 1964/65 to about 24 percent in 1971/72. 2/ 2.07 Government's tax effort since Independence has been directed towards: (i) increasing the proportion of tax revenues in monetary GDP; and (ii) bringing about structural changes in the tax structure. Table 15 highlights both these trends. 2.08 The Kenya Government :Lncreased its tax revenues significantly between 1964/65 and 1971/72, and tax revenues as a proportion of monetary GDP grew from 16 to 23 percent. This increase was achieved by progressively raising the average burden of a:Ll taxes, except for import duties. The nominal rates of East African import duties were also raised within the Community, but the increases were just about enough to offset the shift in the composition of imports towards lower-duty items, so that the average burden of import duties hardly changed. 2.09 The average rate of taxes on (factor) incomes increased from abou- 6 percent in 1964/65 to 10 percent in 1971/72. The chief elements in the 1/ Recent restrictions on imports, particularly the consumer durables carrying higher customer duties, and the general slow down of manufac- turing sector due to credit: restrictions have seriously affected the receipts from custom duties. 2/ A cross-section regression suggests a "norm" of revenue effort of 16 percent for a country with 10 million population and GNP per capita of US$100. It would appear, thus, that Kenya's performance surpasses this cross-section "norm". - 10 - income tax reform were the reduiction of personal allowances and the revisions in child allowances in 1965/66, introduction of PAYE in 1966/67, and changes in the timina of income tax payments, as well as revisions in the rate structure, in 1970/71 and again in 1971/72 and 1973/74. 2.10 The effective rate of personal income tax was more than doubled --from about 4 percent in 1964/65 to about 9 percent in 1971/72. In addition, although less significant, comnany tax rates were raised from 35 to 40 percent and, more recently, withholdirpg taxes have been levied on dividends, interest and rent of non-resident companies. Thus, income tax in general, and personal income tax in particular, has been the major source of additional revenue to the Central Government and the public sector as a whole. 2.11 The burden of indirect taxes on domestic output was also consistently raised over time. The average burden of taxes on (private) consumption was raised from 3 percent to over 5 percent between 1964/65 and 1971/72, 1/ largely through the upward revisions of excise duty rates and the widening of the excise duty net to include new commodities. Consumption tax were levied for the first time in 1971/72 and further exrended in 1972/73. These taxes have now been replaced by a general sales tax, to which we refer later. This consumption will now be taxed on an ad valorem basis rather than a specific one and the tax will be broader based. It may be expected that this could improve the built-in elasticity of expenditure taxation. 2/ 2.12 As a result of these efforts, there took place a structural shift in government revenues: the share of direct taxes increased significantly, while the share of indirect taxes fell. Todav, Kenya's reliance on indirect taxes is one of the lowest in the developing world. A major element in the increase in direct taxation was the income tax whose share increased from roughly 34 to 44 percent, 3/ while there was a decline in the share of import duties. This structural shift towards an increased reliance on direct taxes (particulaarlv personal income tax) had significant imDlications for the built-in elasticity of tax revenues, to which attention is directed now. 2.13 Built-in Elasticity of Taxation. Table 16 emphasizes how success- ful the Government's tax efforts were in producing buoyant revenue sources. At the margin, Government taxed about 30 percent of the monetary GDP (and 25 percent of total GDP) every year between 1963/65 and 1971/72. Consequently, I/ Annex I has found the following equation for the period since independ- Excise Duty Revenues = -3.18 + .046 (Monetary GDP). 2/ Hlowever, the revenue effect of this change may at first be negative, since it is to be shared with local authorities (see Para 2.39). 3/ This is the highest proportion amongst all African countries, excluding Liberia, as well as Asian countries, excluding Burma. Only some coun- tries in Latin America have achieved such degree of income taxation. - 11 - the buoyancy of tax revenues was 2.0 with respect to monetary GDP and 2.2 with respect to total GDP (Table 16). This is, indeed, a very impressive achievement in the light of the experience of other developing countries. 1/ 2.14 However, a substantial. part of this buoyancy was the product of structural changes, such as revisions in tax rates, tax base, exemptions and deductions, to which reference was made earlier. An estimate made in the Ministry of Finance and Planning suggests that of the b 105 million of tax revenues raised in 1971/72, about b 31 million (or 30 percent) were the result of tax revisions undertaken by the Government since Independence. (This is probably underestimatecl, since it is based on the estimated revenue, rather than the actual revenue, which as Table 17 suggests, has usually been higher.) But even allowing for the revenue effects of these tax revisions, the built-in elasticity of tax revenues is estimated to be 1.2 with respect to monetary GDP 2/ and 1.3 with respect to total GDP for the period since Independence. There are very few developing countries which can boast of a built-in elasticity of more than. unity. 2.15 Recurrent Expenditures. In practice, even an elastic tax structure would not remain an instrument of government savings for long if government consumption grows at a rate equal to or more than the growth rate of revenues; consequently keeping a watch on the recurrent budget is absolutely essential. In many African countries recurrent expenditure on administration and defense has been claiming an increasingly larger share of government resources in recent years. In Kenya, fortunately, this has not occurred. Tables 18 and 19, which give the data on the functional classification of recurrent expenditures, suggest that the allocation of the Government's recurrent budget has changed little since Independence - except for the large increase in the share going to education. In part, this increase has been recent 1/ The following figures of tax buoyancy in 20 developing countries in 1971 shows that very few equalled Kenya's performance: Argentina 1.6 Indonesia 1.1 Peru 1.3 Brazil 1.3 Israel 1.7 Sri Lanka 1.1 (1970) Cameroon 1.7 (1970) Jamaica 2.1 Thailand 0.8 Costa Rica 1.4 Korea 1.2 Uganda 1.7 Ethiopia 0.5 Mexico 2.2 Venezuela 2.2 Gabon 1.8 (1970) Pakistan 1.5 (1970) Zaire 0.8 (1970) Guatemala 1.2 Panama 1.4 2/ This is composed of the following built-in elasticities of major in- dividual taxes with respect to monetary GDP: Personal Income Tax : 1.6 - 1.7 Company Tax : 0.8 Excise Duties : 1.3 - 1.4 Import Duties (elasticity with respect to net com- mercial imports) : 0.5 Other Indirect Taxes : 1.1 GPT 0.4 - 12 - and linked with the Central Government's takeover of primary education from the county councils. Yet, the budget data would seem to indicate that education has always had priority over all other allocations, including that for agriculture. 2.16 It is, of course, possible, under certain conditions, for Govern- ment to lose control over its own rate of consumption. Some of those conditions are now starting to appear in Kenya. The first condition arises when the major components of recurrent expenditure have an income elasticity of demand greater than unity. In Kenya, education is the outstanding example of a service which has claimed an ever-increasing proportion of the recurrent budget and which now appears to absorb a disproportionate share of national resources. 1/ Clearly, the past rate of increase in education expenditure is unsustainable in the long run. And yet the fact is that, given the present wage differentials, the return on, and consequently, the demand for, education is so great 2/ that the Government will find it extremely difficult to control the continued demand for schooling. Unless, therefore, the Government takes firm action in this regard, income elasticity of demand for education might force the government recurrent budget completely out of gear. 2.17 The second dangerous condition could arise if the Government (as the largest single employer of labor force in the economy) is forced to expand its payroll under political pressure. This could be a real risk if the private sector fails to absorb the growing labor force, and open un- employment becomes more prevalent. So far, the Government has not resorted to public sector employment creation, except during the Tripartite Agreements and for specific purposes, such as famine relief. But unemployment in the economv is growing, and so is the concern of both Government and the people about it. UJnless better solutions can be found, there will be an increasing danger of the public sector being obliged to take on the role of employer of last resort (especiallv for school leavers), with serious consequences for the budget, but with possibly little advantage to output. 1/ The following data for 1971 compare the share of education in the Kenya recurrent budget with that in other countries: Burma 16.3 Malagasy Republic 19.1 Cameroon 11.1 (1970) Malaysia 20.7 (1970) Gabon 7.8 Rwanda 28.0 Iran 7.2 Siera Leone 19.1 Iraq 16.6 Sri Lanka 15.1 Kenya 26.9 Sudan 7.9 As a proportion of GDP, Kenya's_expenditure on education is amng the highest in the world (See Table 38). 2/ For further discussion of this point, see Annex 3. 2.18 A somewhat related risk is that, as described in Annex 4, wages will continue to increase in the private sector in the absence of policy reform, and that government salaries will be drawn up after them, with further adverse effects both for the budget and for income distribution. We have assumed a 4% annual rate of "creep" in civil service salaries, (See Appendix). It could be much higher if wages and incomes in the economy as a whole are not controlled. In the past, government employees were able to get their salary structure reviewed twice (in 1967 and in 1971) and their average earnings have increased by about 50 percent since Independence (Table 5). 2.19 Third, if capital expenditures grow very rapidly, particularlv in those sectors for which the recurrent expenditure commitments are heavy, this could significantly affec:t the growth rate of recurrent expenditures and consequently Government savings. 1/ The rapid growth of capital expend- iture in Kenya --about 25 percent per annum since Independence --has already been mentioned. It may be pointed out that capital expenditures in the current plan period have far exceeded the targets. The Second Plan proposed a capital outlay of b 180 million (in constant prices) between 1969/70 and 1973/74. Against this the actual capital expenditure (in current prices) has already been h 195 million during the first four years of the plan. 2/ The annual capital expenditure thus more than doubled during the three years 1969/70 and 1972/73. 2.20 Tables 20 and 21 suggest that in Kenya there has been a heavy bias towards general, community and social services and away from economic services. The former three services, which accounted for about 35 percent of total capital expenditures in 1964/65, accounted for over 70 percent of the same in 1971/72. Given the fact that these services normally. involve a large recurrent expenditure comnitment, 3/ the trends in the composition of central government capital expenditure and the rapidity with which it is growing could have serious implications for govern- ment savings. 1/ Rapid growth of capital expenditures also has serious implications for the balance of payments. 2/ A part of this expansion mnust be illusory in view of the rapid rise in the import prices. 3/ For example, education andl health sectors have been found to cause 33 percent and 25 percent respectively of recurrent expenditure for every pound of government investment in these sectors, against 10 per- cent in agriculture and electricity. See Peter S. Heller, The Dynam- ics of Project Expenditures and the Planning Process: With Reference to Kenya, (Harvard Univers.ity, Ph. D. Thesis, November, 1971), p.6, Tables 1-2. This finding is fairly consistent with the official po- sition given in African Socialism and Its Application to Planning in Kenya, Sessional Paper No. 10, 1965, p. 34. - 14 - 2.21 The Kenyan Government thus faces a potential situation where its recurrent expenditures could grow faster than its revenues, particularly if the buoyancy of revenues is seriously reduced for one reason or another. Perhaps the fiscal situation of the last two years is symptomatic of all these factors at work in an embryonic stage. While the salary increase of 1971 and 1972 is the visible factor in the high growth rate of recurrent expenditures (it is estimated to have increased the government wage bill bv about h 10 million) the rapid increases in recurrent expenditure on education (which grew almost 50 percent over the last two years) and in capital expenditures are also relevant. The effect of rapidly growing capital exDenditures on recurrent expenditures must have been large from the beginning, and it is likely to become even greater in the next few years if the rate of inflation continues. As was mentioned earlier, the slow- down in the growth of revenues, caused by the adverse impact of import restrictions, was yet another contributory factor to the recent fiscal situation. 2.22 It may be worthwhile, therefore, to estimate what the built-in growth rate of recurrent expenditures might be under normal conditions. This should in no circumstances be considered as minimum or desirable. An estimate of the "normal" or "built-in" growth rate of recurrent exDenditure for the Kenyan Government can be develoDed using the economic classification of recurrent expenditures given in Table 22. It appears that presently some 50 percent of central government recurrent spending is on wages and salaries, about 25 percent on the purchases of "other" goods and services, and another 25 percent on transfers of various kinds (including interest). In estimating the future built-in growth rate, we have assumed that the government wage bill increases by 9 percent a year (5 percent employment growth, plus 4 percent salary flcreep"), that government consumption on goods and services grows by 12 percent a year (7 percent real growth, plus 5 percent price inflation), and that transfer payments grow by 2 percent a year. 1/ 2.23 All told, it is estimated that the growth rate of recurrent expend- itures could be about 8 percent a year on reasonable assumptions about future trends. It could grow up to 10% per annum if some increase in real wages is allowed to compensate for an increase in productivity. This compares reason- ably well with the average growth rate of about 9 percent per annum realized during the 1964/65 - 1969/70 period. However, it appears that the annual increase in recurrent expenditure of about 17 percent experienced in recent years has been far above the built-in increase. The most recent data suggest -hat this fast growth rate may continue, 2/ possibly indicating that a structural shift has taken place in the level and growth rate of recurrent expenditures. 1/ For a detailed description of these assumptions, see Appendix to this Annex. 2/ For 1973/74 recurrent expenditure is budgeted at b154 million, which is about 12' higher than the outcome of 1972/73. If the past is any indicator (see Table 17), the actual recurrent expenditure in 1973/74 would exceed b154 million by at least b5 million is not more. - 15- Z.24 Projections of Central Government Savings. The preceding analysis provides the necessary information to make an illustrative set of projections (Table 23) of. government savings and investment at an aggregative level. For these projections it is assumed that GDP will grow at 12 Dercent per annum at current prices (or at 7 percent at constant prices). For the nurposes of the analysis, we compare the likely consequences of two alterna- tive fiscal policies. 2.25 On the one extreme, thte Government mav decide to continue its past fiscal policy, in which case the overall budget deficit is likely to grow from about h 60 million in 1972/73 to about E 200 million in 1977/78, intensifying the current budgetary problems to unmanageable proportions. Annex 1, which projects the trends in Government revenues and expenditures in a much more disggregated fashion than has been done here, also suggests a similar conclusion. 2.26 On the other extreme, if the Government takes early action to improve the fiscal situation, there is n,o reason why a rapid pace of development could not be maintained. One "package" of reforms, for example, might comprise the following actions on the part of the Government: (1) improve the overall elasticity of the existing tax structure from 1.3 to 1.9 (instead of continuously proposing tax revisions similar to those of the period 1967/68 to 1971/72); (2) limit the growth rate of recurrent expenditures to the "built-in" level of 8 percent per annum; and (3) slow down the growth rate of capital expenditure from 25 percent per annum to about 15 percent per annum over the next five years, 1/ either simultaneously improve the efficiency of Government investments and change the investment pattern from more capital intensive projects like those of roads, to less capital intensive projects like those of rural development. 2/ In theory, if all these policy changes were brought about simultaneously, the Kenya Government could finance all its investment from its own savings by 1976/77. lhis, of course, does not necessarily mean that such would be its wisest course. 1/ The Covernment may already have initiated this policy. The development expenditure proposed for 1973/74 is very similar to the capital expendi- ture which was achieved in 1972/73. 2/ The interrelationship between the changes in the composition of govern- ment investment and growth rate of recurrent expenditure must be stressed here. A shift to rural development wculd probably imply a higher level of recurrent expenditure in future. - 16 - 2.27 The reality will obviously be somewhere in between these two ex- tremes. The sensitivity analysis done on the foregoing assumptions suggests that an effort to improve revenue elasticity is the most crucial of all the suggested measures. Should the Government simply focus on improving the revenue elasticity and nothing else, it would be able to increase the financing of its capital expenditures from the present 12 percent to over 50 percent in 1977/78. 2.28 The 1974/74 budget has made substantial moves in this direction. The introduction of the general sales tax and the lowering of income tax exemption limits will have important effects on revenue generation. The sales tax should have a built-in elasticity of close to unity (see Para. 5.11 below) while the reform in income tax, which accounts for some 40% of tax revenues should improve the built-in elasticity of personal income tax greatly. The mission expects that in the long run the impact of these two reforms on the overall built-in elasticity of taxation, which is presently a little over unity, should be more than marginal. Local Authorities as Savers 2.29 Local authorities in Kenya have never been important savers; in fact many of them, particularly the county councils, have been disavers. The financial position of the local authorities has always been vulnerable because, while their responsibilities have grown in line with population and standards of living, they have never had an elastic source of revenue. Moreover, some of the service fees that they can charge are dictated by political rather than economic considerations. 2.30 In Kenya there are two categories of local authorities --municipal or urban councils (11 of them) and county or rural councils (38 of them). All of them are required to provide such important services of local interest as housing, water supplies and sewerage, fire protection, welfare services, public libraries and bus services, markets and centers for the inspection, grading and storing of produce, and the conservation of land and wildlife. 1/ In addition, the municipal councils also provide primary education, health clinics, dispensaries and other medical services, and road construction and maintenance. As indicated above, the local authorities have only a limited revenue base to finance these very important public services from and it is inadequate for the purpose. They can levy rates (or property taxes) and cesses, and impose license fees, but none of these sources of revenue are very elastic. 2/ They can also charge for the provision of 1/ In the Local Government Regulations some 50 public services are listed as lying under the jurisdiction of the local authorities. 2/ The marginal rate of direct and indirect taxes of local governments, with respect to monetary GDP, is extremely small. Annex 1 found the following relationships: (a) direct taxes of municipal and county councils = 1.18 + 0.008 (Monetary GDP); (b) other receipts of mu- nicipal and county councils = 0.009 (Monetary GDP). - 17 - water and sewerage, public markets, slaughter houses, and other services. In addition, the municipal councils charge school fees, 1/ which have been predetermined by the Central Government. Similarly, the health facilities are to be provided free of charge following the policy decision of the Central Government. 2/ 2.31 County Councils. Up until 1969, there was no distinction between municipalities and county councils in terms of the services that they provided, nor in the taxes and charges that they levied. But, by this time almost all the county councils had got themselves into grave financial difficulties. Their tax administration was lax, 3/ tax arears were growing and financial and expenditure control had become wholly inadequate. 4/ As a result, their recurrent budget deficits were growing very rapidly, from E 3 million in 1966 to about b 6 million in 1968, or 70 percent of their own revenues. If fully provided from out of the central government budget, the 1968 deficit would have absorbed about 8 percent of central government revenue. 5/ 2.32 Such a situation clearly could not be tolerated for long. The Central Government could have helped the local authorities to improve their tax administration and expenditure control, but instead it decided to take over their more important functions. 6/ With effect from January 1, 1970, 1/ Till last year they levied a Graduated Personal Tax (GPT) as well. This tax has been abolished now with effect from January 1, 1974, which would reduce the elasticity of municipal taxation still further. 2/ This is not strictly true because the Central Government does charge a "hospital contribution" of b 6 from taxpayers whose taxable incomes exceed E 1,000 and E 12 from those who taxable incomes exceed E 2,000. These revenues are earmarked. 3/ Despite the powers given to the Minister of Local Government (under the Graduated Personal Tax (Imposition of Sanctions) Regulations, 1965) to withhold grants -fromr those local authorities that do not take adequate steps to improve CPT collections, the situation apparently did not improve. 4/ Republic of Kenya, Report of the Controller and Auditor General on County Councils and Municipal Councils (1972). The county councils are said to be overstaffed even now. See Report of the Commission of Enquiry (Public Services Structure and Remuneration Commission), 1970-1971, (The Yewa Report) p. 219. 5/ Of course, the Central Government did not meet the whole of the deficit and the local authorities had to resort to bank overdrafts and the use of their provident funds and capital renewal funds. Over time, the local authorities have built up a bank overdraft of h 4 million. 6/ In centralizing the functions of county councils, the Finance Minister in his 1970/71 budget speech accused them of "mismanagement, dereliction of duty, incompetence, failure to collect revenue, failure to keep accounts, failure to maintain financial control, misuse of funds and decisions based on local political expediencies" and hoped that central- ization would improve the quality and continuity of the services taken over. - 18 - therefore, the Governaaent took over education, health and road maintenance from the county councils which had accounted for about 80 percent of their total expenditures (Table 26), and at the same time also took away their authoritv to levv Graudated Personal Tax 1/ and charge school fees, and stopped road maintenance grants. 2/ Consequently, from 1970 onwards, the total expenditure of COUnIty councils was ctut down to a quarter of its pre- vious level. But, since their revenues had also been cut by one third, the county councils were, for a while, financially viable, though at an extremely truncated level. nBut the situation has once again started deteriorating, and in 1972 their administration expenditures alone exceeded the whole of their tax revenues. 2.33 It is difficult to know whether the centralizing of the county councils' functions has made a signifcant impact on the quantity or quality of the services affected, which apparentlv were deriorating before the transfer took place. Certainly, there is evidence that the central government ministries charged with taking over these functions have all experienced difficulty in absorbing them. For examDle, while the construction and main- tenance of classified roads has undoubtedly imoroved since they were central- ized under the Ministry of Works, neither the Roads Department nor local au- thorities have any effective program for rural access roads. The trasfer of education is difficult to evaluate, since the Central Government's efforts in primary education are focused not on building schools, but on staffing and equipping the schools built by self-help efforts. Here again, it seems that the quality of primary schools is still very low, although the average cost of primary education has increased sharply under the Central Government, mainly because of higher salaries. 3/ The take-over of health services from the county councils does seem to have improved the facilities as well as the quality of staff, but, thaen it has created serious organiza- tional and coordination problems. The supplying of staff and drugs from Nairobi often takes time, provision of many services has to wait for Central Government's approval, and in the meantime the local popuilations have suffered. 4/ 1/ The Local Government (Transfer of Functions) Act, 1969. 2/ Besides the road maintenance grants, the county councils used to re- ceive public health grants which were also abolished. 3/ HI. K. Colebatch, "Some Political Implications of Service Provision: Roads and Schools and Health Services". IDS Working Paper No. 79 (February, 1973), p.8. 4/ Cf. "Standards seems to have fallen in health centers where drugs are increasingly difficult to obtain and the already deficient manpower situation is being worsened with low morale and resignation among former county council staff who have been transferred to Central Gov- ernment service in many cases at lower rates of pay", V.P. Diejomach, "Financing Local Government Authorities in Kenya", IDS Discussion Paper No. 96 (September, 1970), p. 9. - 19 - 2.34 It is clearly premature to assess the effectiveness of the centraliza- tion of local authority services. In many county council areas, the services were either non-existent or deteriorating before 1970, and it is still too early to judge whether Central Government can carry out these services more efficiently than a strengthened and reformed local government structure. But, as we point out in Voltume I, Kenya still has a number of critical decisions to make, about local participation and the provision of services, before the role of local authorities can be adequately defined. 2.35 Municinal Councils. Since the county councils operate principally in the rural areas, where they have the responsibility for bringing a variety of services to the majoritv of Kenva's poor, it is hardlv surprising that they have traditionally operal:ed at a deficit, and have, therefore, been "dissavers" in the economic sense. It is rather more surprising, how- ever, that the municipal councils {which operate in the richest areas of Kenya) have as a whole managed to save verv little (although in the past they have never denended on central government grants to any great extent). 2.36 The combined current surpluses of municipal councils have rarely exceeded E 1 million in any given year, and they have often amounted to only b 0.5 million. On the other hand, they have been an imDortant channel for investment in the public sector. In 1966, for example, their combined capital exoenditure was almost 10 percent of that of Central Government, and by 1972 this proportion had increased to about 20 percent. With this level of expenditure, and little savings of their own, the municipalities have been obliged to relv on borrowing to an increasing extent. Thuts, in 1966 they borrowed about a third of their capital expenditure, and by 1972 this propor- tion had increased to about 70 percent. 2.37 The Financial Viability cf Local Authorities. The Government's attitude towards the future role of the local authorities is not yet very clear, and as mentioned above, difficult decisions still have to be reached in this area. In particular, it is uncertain whether the past trend towards the centralization of services will continue and be entrenched, or whether the Central Government will wish to return some or all of these services to a strenghtened local government structure at some time in the future. It is clear, however, that the financial position of the local authorities is not adequate even under the present allocation of responsibilities, and that a more satisfactory financial, system will have to be sought. Fortunately, there does exist some scope for improving the financial position of all local authorities and, provided the Central Government can exert enough control over their expenditures, it appears that the local authorities (at all levels) could be made financially viable. 11 1/ "Financial Viability" is used here to mean the ability of local autho- rities to cover their recurrent expenditures through their own sources of revenue, perhaps with some contribution to their capital budgets. - 20 - 2.38 The Graduated Personal Tax (GPT) formerly levied bv the municipal cotncils was threoretically a good tax l/ except that its rate structure was never really progressive. 2/ (In fact, it was regressive beyond i 600 per annum). Its administrative requirements, in terms of continuously assessing the incomes of the small wage-earners and self-employed, were also dispro- portionately large. It is no surprise, then that there were serious tax evasions as well as collection problems. 3/ These problems were found to be more serious in the county council areas, where a greater proportion of the income earners are self-employed, than in the cities where most urban formal sector wage-earners are employed. 2.39 It was clear to the Government that if the GPT were to be retained its administration in the municipal council areas would have to be tightened. As an alternative solution, the Government has chosen to abolish the tax, and share Dart of its sales tax revenues with the municiaDl councils. Some form of revenue sharing may help to alleviate the position, although no formula has yet been announced. However, it would obviously remain only a partial solution, and the financial autonomy of the municipal councils will still be severely limited. In the long run the municipal councils must have their own (elastic) revenue instruments, if they are to exercise a responsible role in the country's development. 2.40 Orte of the most obvious underutilized revenue sources is the rates or property assessments in urban areas. The valuation base for rating purposes in most areas has not been revised since 1959, although thev were supposed to be revalued every five vears. 4/ The increase in market values 1/ It was a hybrid between pool tax and income tax and, therefore, could have been an elastic source of revenue. As an example, between 1967 and 1971 while the GDP at current prices grew at 10.7 percent per annum, Nairobi's GPT collections grew at about 12.7 percent per annum. 2/ The rates of Graduated Personal Tax were as follows: Average Average Tax Rate at Income Bracket Annual Tax Tax Rates Mid-point of Bracket (in is) (in Sh.) (in %) (in %) Less than 48 Nil Nil Nil 48 - 96 48 5.00 - 2.50 3.3 96 - 144 72 3.75 - 2.50 3.0 144 - 204 108 3.75 - 2.64 3.1 204 - 312 156 3.82 - 2.50 3.0 312 - 420 240 3.85 - 2.85 3.2 420 - 516 360 4.29 - 3.48 3.8 516 - 600 480 4.65 - 4.00 4.3 600 & Over 600 5% & lower - 3/ An exercise made by the Commissioner of Inland Revenue indicated a collec- tion rate of 50 percent even when an extremely conservative estimate of the potential revenue was made. As a matter of fact, the revenues from GPT had always been stable around , 6 million since Independence. 4/ Nairobi is in a unique position here -- it gets about half of its revenues from this source from Government and commercial properties. Other areas are less fortunate. - 21 - during this period must be very considerable. What is more, the rates are only levied on uTnimproved values of properties at flat rates ranging between 3 and 7 percent in different areas, although some municipalities have been revising their rates upwards to get more revenues. The scope for raising additional revenue from property rating is enormous, particularly in the major urban areas. It would be well worth the cost for municipalities to put a major emphasis on property revaluation, and for them to move towards the improved-value basis of rating which is permissible under the Rating Act. 2.41 Then, there is the whole area of service pricing. In most areas where public housing is provided by local authorities, often for political reasons, rents charged are substarntially lower than the economic rents and far lower than the market rents. (The municipal councils of Nairobi, Mombasa and Kisumu have substantial deficits in their housing accounts.) 1/ Local health services are provided free as a national policy, while education is greatly subsidized at present with the political promise that it will be made free in due course. It is ironic that both these services absorb a significant and growing proportion of local budgets 2/ (Table 26) and yet their pricing does not lie within the Jurisdiction of local authorities. 3/ The local authorities could also explore the possibilities of local sales taxation, as well as licensing of professions, although the legal position on whether or not they can levy these taxes is unclear at this stage. 2.42 In the past, local authorities, particularly the muncipal councils, had to rely very heavily on loans for financing their capital programs. While the National HousinR provided funds for housing, Local Government Loans Authority was the source for all other purposes. Lately, both these authorities are finding it difficuLlt to cope with the growing demands of the local authorities. 4/ The local authorities are consequently being advised to raise loans from the market but, given their weak financial position, even the banks, which are otherwise fairly liquid, are umnilling to lend them the money. It may, therefore, be desirable for the Central Government to strengthen the lending capabilities of the two organizations mentioned above and impart guarantee and tax exemption status to local authority bonds. 1/ V.P. Diejomoah, "Financing Local Government Authorities in Kenya", IDS Discussion Paper No. 96 (September 1970), p. 18. 2/ The population in urban areas is growing at annual. rates far exceeding 3 percent which is the national average. In Nairobi and Mombasa it is growing at rates of 7 percent: and 5.5 percent respectively. 3/ Similarly, the Central Government has not increased road grants to the municipal authorities even though the latter's expenditure on roads has risen steadily over a number of years. See The Ndegwa Report (op. cit.) 4/ This is partly because the central government loans to the Local Govern- ment Loans Authority for further on-lending to local authorities have significantly shrunk from L1 million in 1960 to b8,000 in 1967 and b107,000 in 1969. See Ndegwa Report, p. 220, (op. cit.) - 22 - 2.43 For the county councils, a tax with a more identifiable base will have to be foun.l. The commoditv cesses which are presentlv the mainstay of county councils --they account for about a quarter of their revenues-- are unsatisfactory in many respects. In the first place, they are discrimi- natory between the counties. The counties which are predominant in commercial agriculture, particularly coffee, like the ones in the Central Province, are able to sustain a higher level of public services than other counties. Second, to the extent they are levied at flat rates, specific or ad valorem, and are unrelated to price and marketed quantities, they are inequitable. 1/ And lastlv, they discriminate between crops and thereby distort the alloca- tion of land and other resources. While some cesses might be justified in view of the market and non-market conditions pertaining to particular crops (e.g., coffee), it is advisable to move towards a more uniform system of taxation, such as a land tax. 2/ But, then, land tax must be simple to be within the present administrative capabilities of various local authorities. This would require that it should generally be levied on the basis of land area with as few complications as possible associated with the productivity of land or the income from land. 3/ For the larger farms some concept of "potential income" could become the basis. The idle lands could probably be taxed at a higher rate than lands under farming. 2.44 The possible advantages of a land tax --both as a source of revenue and as an instrument of land use policy-- have been fully discussed else- where. 4/ In the short run, there are administrative impediments to the introduction of a general land tax, particularly in the absence of any capable administrative machinery. There are also dangers and inequities in applying land tax to only registered farms. But in the longer run, a land tax might well become a major instrument of taxation for a reformed local government system. 2.45 To sum up: there definitely exists some potential of improving the financial position of the local authorities and making them move in the direction of financial viability. But this will call for a bigger tax effort, including a tightening of tax administration, as well as serious 1/ It has been found that the small holder coffee sector pays an estimated 0.3 percent more in gross revenues to local authorities than does the estate sector. 2/ It must be noted that while the cesses are collected through the coopera- tive societies, with hardly any cost of collection to the county councils, land taxation will certainly involve some staffing and tax administration. 3/ However, once all lands have been fully registered and classified, which may well be the case by the end of 1970's, land tax should be levied on the basis of "potential" productivity of land. 4/ See ILW/UNDP Report, "Employment Incomes and Equality - A Strategy for Increasing Productive Employment in Kenya," International Labour Office 1972, Technical Paper No. 15, and IBRD Agriculture Sector Survey, IBRD Report No. 254 KE, December 1972. - 23 - attempts at expenditure control. Even when these are attained, local authorities probably will not become an important instrument of savings; a large part of their capital formation will still have to be financed with loans from the Central Government, borrowings from the capital market and even foreign aid. Parastatal Sector as Saver 2.46 Very little information. in any consolidated form is available on the parastatal sector in Kenya, even though it is responsible for about 15 percent of GDP, 1/ absorbs a third of the government investment and a tenth of the country's imports, and contributes over 5 percent of government revenues. There are about 55 parastatal bodies (including 14 commodity boards) which have pri- marily regulatory and administrative functions and whose bujdgets are a part and parcel of the government budcet. Then, there are over 25 organizations (in the field of agriculture, livestock, tourism, construction, trade, financial insti- tutions, transport, etc.) which hIave mainly enterprise functions. Lastly, there are over 30 enterprises in which Government has a minority interest either directly or indirectly through its financial institutions like the Development Finance Company of Kenya (DFCrK), Kenya Tourist Development Corpora- tion (KTDC), Agricultural Development Corporation (ADC), and Kenya Tea Develop- ment Authorit- (KTDA). In total, therefore, there are over 150 orgainizations belonging to th! parastatal sector (excluding the East African Community corporations) wihich have government budgetary involvement, either in the form of recurrent btudgetary grants, long-term loans or equity particination. 2/ 2.47 Public Corporations. Fortunately for the Kenya Government, the public corporations need few subsidies. As Table 27 shows, it is only in 1969/70 that a small subsidy was given to a few of them. A major explanation for this seems to be that, in the past, the Central Government mainly gave them long-term loans (at interest: rate ranging between 5 and 6 percent) rather than participate in their equity. And, as long as the public corporations were not making losses, the Central Government usually received the interest due to it. It is only recently t:hat equity participation of the Government in parastatal enterprises has grown (Table 28). 2.48 Nevertheless, the profitability of many public corporations is extremely low and sometimes negat:ive. Table 29, which gives the profitability of certain selected large public corporations, substantiates this generaliza- tion. The Kenya Tourist Development Corporation, which is not covered in this table, is yet another organization which often makes net losses if the administration expenditture grant it receives from the Government is excluded. In 1971, it had a net loss of E 1.7 million on total assets of E 32.5 million. 1/ This and the following figures include the East African Community and its associated corporations. 2/ According to the data of the Central Bureau of Statistics, the bulk of the long-term loans and equity of the Central Government in recent years have gone to the National Housing Corporation (something like 40 to 50 percent) and the Industrial and Commercial Development Corporation (another 20 to 25 percent). Local authorities have absorbed about 10 to 15 percent of central govrernment loans. - 24 - 2.49 General Government Agencies. The general government agencies have received a net transfer from the government budget practically every year since Independence (Table 30). Their financial dependence on the central government budget has been large and increasing --in 1970/71 grants made to them were about 5 percent of the Government's recurrent budget. A verv large part of the income of the Government from its agencies has taken the form of "interest, dividends and profits" which has been growing. 1/ But, most of it represents the dividends of the Central Bank of Kenya and its predecessor, the Currencv Board. 2.50 This sketchy review of the performance of the parastatal sector clearly suggests that both public corporations and general government agencies (with the exception of Central Bank of Kenya) have not been of any significance in making profits or generating savings. Considering that the Government has invested over E 36 million in public corporations and another i 24 million in government agencies since 1964/65, the financial returns from these invest- ments have not been very impressive. Perhaps the Government was able to receive a return of about 5 to 6 percent (which is the interest it charged on its loans) but, then, it is not clear if this should be considered adequate in terms of the "social cost" of capital. An answer to this question would, of course, depend upon the perceived role of the parastatal sector by the Central Government and others. C. DOMESTIC BORROWING 2.51 As Table 11 reveals, the indebtedness of the Kenya Government has been consistently going up since Independence, 2/ and so has been-the share of domestic debt in total debt. Domestic debt which was less than 20 percent of the total debt in 1965 exceeded 45 percent of the same in 1972. National Social Security Fund 2.52 A major role in providing long-term credit to the Government has been played by the National Social Security Fund (NSSF) which was created in 1966 and has been funded since then largely by the social security contri- butions. 3/ So far the benefit payments by the Fund have been neglibible, 4/ with the result that, since inception, the Fund has been able to invest over 1/ Annex 1 finds the following statistical relationship: rents, royalties, interest and profits of the Government - 0.60 + 0.02 (Monetary GDP). 2/ This is only in absolute terms. Relative to the GDP, Kenya Government debt has been constantly low around 30 percent. 3/ Payable at the rate of 10 percent of the wage bill and shared equally by the employers and the wage employees, the maximum payable by an employee is L20 per month. 4/ They totalled b2 million between 1966 and 1971, against L39 million in contributions. Economic Survey, 1973, p. 199. - 25 - I 26 million in government securities, representing almost a third of the domestic borrowing of the Central Government since 1965. 2.53 In appraising the prospective role of the NSSF in financing future development certain facts must be noted: First, the Ftnd is likely to improve its registration of private employers over time, 1/ particularlv in the rural areas. This should lead to an increase in the contributions received by the Fund and consequently its loanable resources. Second, as the wage bill grows over time, the size of the annual receipts of the Fund will also increase. Assuming that the wage bill in the economy grows at the rate of 10 percent per annum (5 percent for the employment growth and another 5 percent for wage increases), 2/ the contributions received by the Fund should grow from the present level of E 7 million by about E 0.7 million per annum. The Fund's investment income would also certainly grow over time, so that the resources at the disposal of the Fund would easily grow by i 1-1.5 million per annum from the present level of Eh 7 million. 2.54 However, a third factor must be mentioned here. The NSSF is not bound to invest all its resources in central government securities. In fact, latelv it has been investing in local authority (particularly Nairobi) stocks, as well as the stocks of EAC corporations. It has also invested in private equities, of course with the concurrence of the Treasury, and the Annual Reports of the Fund show that it has been investing increasing amounts in non- government and equity stocks in recent years. 3/ As a consequence, the Central Government has been able to mobilize only something like b 5 million annually through the NSSF. 1/ An idea of the degree of under-registration can be guaged from the fact that the Fund received about b 7 million in contributions in 1971 whereas it should have received L 18 million from "modern" sector em- ployees alone (their wage bill was i 184 million in 1971). 2/ Between 1968 and 1971 the wage bill in the economy grew from L 146 million to E 184 million, an increase of about 26 percent, in three years. 3/ Investment Pattern of the NSSF Total (3) + (4) Investments Local. Authority Private as percent Year at cost and EAC Stocks Equities of (2) (1) (2) (3) (4) (in b millions) 1966 1.2 - - - 1967 4.8 0.5 0.1 12.5 1968 10.3 0.5 0.6 10.7 1969 17.5 0.7 1.0 9.7 1970 22.8 1.9 1.6 15.4 1971 29.7 2.7 4.8 25.2 Source: Annual Reports of the National Social Security Fund - 26 - 2.55 It seems, then, that the Kenya Government could expect to receive no more than b 6 to 7 million a year from the NSSF to finance its future development expenditure. Other Non-Bank Lenders 2.56 Other non-bank lenders to the Central Government include the Kenya Post Office Savings Bank, insurance companies, and other private (largely the non-banking finance) companies. 1/ It would be difficult to expect any major increase in the contribution from the Post Office Savings Bank under present circumstances as their net deposits (after withdrawals) have remained static around i 6 million since Independence. 2/ Table 11 confirms that the contribution of the insurance companies to domestic public debt has been marginal and this is largely because they have found housing loans and real estate investments more profitable. They can perhaps be expected to lend no more than h 1-2 million a year to the Government in the future. 2.57 Some of these institutions have been investing in Government securities to fulfill their statutory obligations. But, others, particularly the private comnanies and commercial banks, have certainly been lending larger sums over time, and this would seem to stuggest that existing interest rates on government securities hRve not proved a disincentive. However, as the rate of inflation accelerates, private support to public securities would shrink unless the interest rates are raised. Bank Borrowings 2.58 Non-bank domestic debt, of course, is only one of the means of financing the development effort. In Kenya's case, as Table 9 suggests, only about a quarter to a third of capital expenditure has been financed through non-bank domestic loans. In more recent years. as the growth rate of capital expenditures accelerated, 3/ the non-bank borrowings proved inadequate, and the Government had to borrow increasingly from the commercial banks and foreign sources, as well as draw down accumulated cash reserves at the Central Bank. In 1971/72, this net reduction of cash balances with the Central Bank financed about 35 percent of the budget deficit and borrowings from the commercial banks another 25 percent. This was the largest amount the Central Government ever borrowed from the banking system, and is in sharp contrast to the policies followed during the early years after Independence. A similar picture seems to emerge in 1972/73 as well. 1/ Cereals and Sugar Finance Corporation, an apex organization of the marketing boards, has lately been providing some short-term credit to the Government. 2/ Central Bank of Kenya, Annual Report, (30th June, 1972), p. 49. The deposits of the P.O.S.B. have increased lately but only marginally. 3/ The average annual growth of capital expenditures during the last three years was 28 percent was compared to 19 percent in the three years prior to that. (See Table 10). - 27 - 2.59 While some have queried the propriety of the deficit financing of the last two years, others have seen it as a policy of pump priming, justified by the agricultural drought of 1971 and the recent Blow down of the manufacturing sector of the economy. But, for the economy to benefit from such a Policy without serious inflation, it is essential that such bank monies must be used directly in production activities, or in those activities which help supply the private needs of the bulk of the popula- tion. When about two-thirds of the government expenditure is on social and community and general services which meet the social, rather than the private, needs of the population, a large degree of deficit financing could carry serious inflationary potential. Obviously, then, the acceptable size of the non-inflationary budget deficit in the short run would be determined by the extent to which the employable resources in the economy can be made to pro- duce and expand the supply of private goods. 1/ Othenise, the inflationary effects of the budget deficit can be moderated only by further pressure on the balance of pavments. 2.60 From the analysis presented thus far, it is clear that there are definite limits to which the Kenyan Government can look forward to local, both bank and non-bank, borrowings to finance the next plan. Much will depend upon the policy which the 0overnment adopts regarding the interest on government securities, for this is,verv relevant to attracting canital from the non-captive markets. As Table 11 suggests, neither the size of the domestic debt nor the debt service cost to the budget is high yet, so that the Government can afford to examine the question with an open mind. Interest on Loans to Government 2.61 Government pays 3.6 percent to 4.25 percent interest on treasury bills and other short term advances, 6.1 percent on under five-year loans, 6.8 percent on five-to-ten-year loans and 7.2 percent on long term (10 years and over) loans. If the captive miarket for the government securities proves inadequate in future, which might well be the case, interest rates on public debt will have to be reexamined. The capacity of the NSSF seems to be limited to h 6-7 million and that of the insurance companies to b 1-2 million, and even they might consider the relative return on other forms of invest- ments more attractive than the int:erest rate on government stocks. 2.62 The two principal, and somewhat related, issues that the Govern- ment will have to face here are: how should it maximize the borrowing from local sources, given its plan requiirements, and how can it minimize the costs of borrowing? As we have shown above, the Central Government will face a serious resource gap over the next five years if it "does nothinR" on the tax and expenditure fronts, so that the two questions mentioned here are not irrelevant. 1/ The extent to which the Kenyan economy is monetized in any particular period would also be relevant here. - 28 - 2.63 Depending upon the liquidity of the banking system, and the proba- bility that it will stay that way, the Kenya Government might be able to borrow substantially, while reducing the overall maturity of its debt structure and simultaneously lowering its cost of borrowing. However, should the Government not find itself in such a fortunate situation, it would be able to borrow more only by offering higher interest rate on government securities. This would certainly imply an increase, rather than a reduction, in its total costs. Should such a need arise, it would also be advisable to increase the maturity structure of domestic debt over time. 2.64 No attention has been paid in this annex to the availability of foreign capital to finance the government budget, as the whole question of external assistance to Kenya is dealt with in Annex 6. The general conclusion of that annex is that the gross (and even the net) foreign capital available to the Government during the next three to five years is likely to increase gradually, but that the supply will depend, in part, upon the direction of government investment efforts. Should this be directed to the productive development of the rural areas, the Mission feels that the net foreign resources available to the Government could grow at a faster rate. D. CONCLUSIONS 2.65 If past experience is to be the guide for the future, local authorities certainly, and parastatal bodies probably, will not provide any significant savings to finance the next plan. The burden of public invest- ment will have to be borne by the Central Government, partly because it is the largest single entity in the public sector and partly because it has the necessary potential. 2.66 The Central Government, on its part, might find it difficult to generate substantial savings largely due to the slowing down of revenue growth. It will need to undertake certain elasticity-oriented tax reforms, and simul- taneously look into the growxth rates of certain recurrent as well as develop- ment expenditures. As indicated above, these fiscal reforms have to some extent been incorporated into the 1973/74 budget and this is very welcome. However, without their continued emphasis during the whole of the next plan strategy the Government will have a difficult task in financing its develop- ment programs. 2.67 The Central Government can certainly mobilize additional resources by borrowing in the domestic money and capital markets. The capacity of the National Social Security Fund and insurance companies is likely to increase over time, and the Central Government should make every effort to tap it. The Government can also tap short-term funds from the commercial banks and the Central Bank and use them for productive purposes without too great a danger of causing serious inflation. However, if the rate of inflation picks up in Kenya, and the alternative assets start yielding a higher return, Government will be compelled to restructure its own interest rates to encourage a larger flow of developmental resources to meet its planned outlays. - 29 - 2.68 Kenya's local authorities, even with the best of their efforts, can become financially viable only in terms of their recurrent budgets; they will continue to depend on the oultside help to finance a greater part of their capital formation. This makTes the task of savings generation and mobilizing other resources by the Central Government doubly important. It also calls for an exploration of t:he revenue sharing possibilities with local authorities on an urgent basis. 2.69 The parastatal bodies, particularly some government agencies and most public corporations, could generate more resources than before, but to make any specific recommendations in this regard would require a much more detailed study than it has been possible for this Mission to undertake. - 30 - CHAPTER 3: FISCAL POLICY AND INCOME DISTRIBUTION A. INTRODUCTION 3.01 Data on income distribution in most developing countries are hard to collect, and Kenya is no exception. However, all the indicators that are available tend to show that income disparities in Kenya are wide. We do not intend in this report to undertake any detailed review of the nature and extent of the problem, in view of the now extensive literature on the subject, particularly the ILO/UNDP Report. I/ However, some of the indicators of inequality might be referred to briefly to demonstrate the extent of the problem. 3.02 There are a number of dimensions of the problem of inequality of income. The best known is the income differential between urban and rural areas. In Nairobi, average income per household in 1970 was 16 1,035 a year, which for a family of five, would yield a per capita income of about b 200. This is about four times the per capita income of the country as a whole. On the other hand, most rural households have an income of less than b 60 a year, and many have less than i6 20. 2/ 3.03 But, comparisons of central tendency are misleading, and it is recognized that another dimension of the problem is the wide disparity of incomes within the urban and rural areas. According to an estimate made in Nairobi City Council, for example, while the top 20 percent of income earners in Nairobi receive 59 percent of the total income, the lowest 20 percent earn only 3 percent, and the lower 40 percent only 10 percent of the income. 3/ Similarly, there is growing evidence that income is very unevenly spread in the rural areas, where the real problem is not the cons- picuous continued existence of large farms but the growing number of rural poor, who have not significantly benefited from past agricultural development programs, particularly in less favored regions. 4/ 1/ See especially Chaptera 1 and 16 and Technical Paper No. 4. The subject was also discussed in the Ndegwa Report and the 1972 IBRD Economic Report No. AE-22. 2/ See the ILO/UNDP Mission's estimates quoted in Annex 3. 3/ Data provided by the Nairobi Urban Study Group. Not only are the in- equalities large, they appear to have been growing over time. Cf. the findings of the Ndega Report, that there are growing inequalities in remuneration among employees (p. 34). The data for Nairobi are fairly consistent with the data for the whole urban sector given in the ILO/ UNDP Report, Op. Cit., Table 26, p. 75. 4/ This is an important theme of both the ILO/UNDP Report, op. cit., and the IBRD Agricultural Sector Survey, op. cit. - 31 - 3.04 In Kenya's case, there Ls the additional problem of racial in- equalities. In 1971, whereas about 63 percent of the European employees and 27 percent of the Asian employees earned wages exceeding I 1,200 per annum, the proportion of African employees earning such high wages was only a little over 1 percent. 1/ While the average wage of a European employee was E3 2,500 per annum, that of the Asian was L 370 and of African only b 190. 2/ Even as late as 1971 the average earning of a European was over thirteen times that of an African employee. 3.05 It is no surprise, then, that achieving social justice and reducing inequalities have always been the goals of the Kenyan Government since Independence. Even the current development plan stresses that "A fundamental objective of the Government ... is to secure a just distribu- tion of the national income, both between different sectors and areas of the country and between individuaLs". 3/ Towards the achievement of this goal, the Kenyan Government has always considered fiscal policy generally, and tax policy in particular, as a major instrument. "The tax system should in fact be a major weapon for implementing African Socialism", said the Government in Sessional Paper No. 10, and stressed that, among other things, it must "be a major means for effecting a more equitable distribution of income and wealth." 4/ 3.06 The purpose of this chapter is to indicate the role Kenya's tax structure can have played in the past in reducing the inequalities in incomes and wealth. Although there is little relevant information concerning the impact of fiscal policy on income distribution and equity, we hope that the analysis will serve to highlight some of the limitations of the existing tax system of Kenya in respect of equity and to point to some of the possible implications for policy. Though Etomewhat briefly, the limitations of the present Government expenditure pat:tern as a redistributive device will also be indicated. B. EQUI ' IN TAXATION 3.07 The most important instrument of reducing inequalities, short of direct expropriation of wealth, is often the taxes on wealth. At the second level are the taxes on personal irncomes and, only at the last level can the taxes on consumption be expected to be effective means of bringing about any major redistribution. In discussing the role of Kenya's tax structure as an equity measure an attempt is made below to examine the direct taxes which influence the concentration of wealth and then the taxes which reduce the inequalities in personal incomtes and consumption. 1/ Statistical Abstract, 1972, I'able 233. 2/ Ibid, Tables 219 and 228. 3/ Development Plan, 1970 - 1974, para. 1.8, p. 2. 4/ African Socialism and Its Application to Planning in Kenya (1965), pp. 33 and 35. - 32 - Taxes on Wealth 3.08 Theoretically, taxes on wealth can take various forms. They may be levied on individual items of wealth, for example, land or urban property, or they may be annually levied on the total wealth. Then, instead of levying a tax on wealth annually, the Government may levy it only once at the time of the death --in the form of an estate duty on the total estate or an inheritance tax on the estate. Instead of levying the tax at the time of the death, the Government can also decide to tax the increments in wealth, rather than the total wealth, particularly as and when they are realized, in the form of capital gains. 3.09 Thus, the Government has a wide array of wealth taxes at its disposal, and the rate structure, breadth of the tax base, as well as the frequency of the tax, will determine how heavy the equity orientation of the tax structure will be. A highly progressive tax on wealth, with as few exemptions and deductions (or loopholes) as possible, levied and collected annually, could be the most equitable single tax in this respect, but, then, there is nothing that prohibits the Government from levying more than one tax on wealth simultaneously and, in fact, many governments do precisely that. 3.10 In Kenya the Government has so far chosen to be somewhat lenient in matters of wealth taxation. It only levies once-in-a-life-time estate duty and an annual urban property tax, 1/ the base for which, as will be shown below, is further narrowed by the grant of generous exemptions and deductions. Kenya does not have an annual wealth tax or a land tax or a capital gains tax at the moment. The need for a capital gains tax, at least has been admitted by the Finance Minister in the 1973/74 budget. However, its introduction has been postponed for the time being because of the administra- tive complexities which would be involved. 3.11 The estate duty, which is levied on the estates of the deceased, is on the face of it a highly progressive tax. It is levied at rates varying between 1 percent on estates between b 2,500 - L5,000, and 50 percent on estates over L 1 million. But, for purposes of taxation, the following items, inter alia, are exempt: (1) immovable property situated outside Kenya; (2) any disposition or gift made by the deceased more than three years before his death; (3) any disposition or gift made in consideration of marriage; and, (4) a gift which does not, together with all other gifts to the same donee, exceed b 500. 1/ There is also a 2 percent stamp duty on the conveyancing of property has now been raised to 3 percent for urban property in the 1973/74 budget. - 33 - It is obvious that the exemption of gifts from taxation is a major loophole in the estate duty. This almost reduces the tax into a non-instrument of equity as well as revenue. In 1972/73, the collections under this tax were no more than b 0.6 million. 3.12 The urban property tax is an even less effective instrument of equity. First, it is levied at flat rates and not at progressive rates. Second, being an instrument of local taxation, it suffers from the problem that the urban properties owned by a person are taxed independently by the local authorities, and not combined fcr taxation purposes with income or wealth subject to central government taxation. (Of course, given the fact that the tax is not levied on progressive rates, this hardly matters.) Worse still, the tax is levied on an unimproved-value basis and, therefore, excludes those improvements, which, over time, become a substantial part of an individual's wealth. To top it: all, even the reassessments of unimproved values, which are supposed to be made every five years, have seldom been undertaken. In certain urban areELs property reassessments have not been made since 1951. Is it a surprisse that the municipal councils earned no more than 1L 3 million from this scurce in 1971? 3.13 In Kenya, since there is probably more wealth in the rural than in the urban areas, any form of wealth taxation which excludes rural wealth will remain a relatively unimportant instrument of redistributinn. Of course, it must be admitted that the land reforms of the sixties, including the break up of the large farms and the initiation of the small holder settlement schemes, must have reduced the inequality in land holdings, but, as noted earlier, much inequality still remains. 3.14 Although there is now no data to support or refute the contention, it is possible that income and consumption distribution is more skewed than the distribution of wealth. If this is so, and when evidence becomes available to show it, the Government would clearly have to focus greater attention on personal inco"xe taxation and consumption taxation in order to achieve greater equity. Taxes on Personal Incomes 3.15 In theory the progressive taxation of personal incomes can be viewed as an alternative to the control of incomes, particularly where political and other factors act as serious obstacles to adopting an "effec- tive" incomes and wages policy. - 34 - 3.16 The income tax in Kenya is a fairly progressive tax in structure. The marginal tax rates graduate from a minimum of 10 percent to a maximum of 70 percent 1/ and, as Table 31 suggests, this implies an average tax rate of 4 percent for income around b 1,000 and 55 percent for incomes around i 20,000. An interesting feature of Kenya's income tax structure from the equity point of view, and this was introduced in the 1973/74 budget only, is that the income taxpayers are given personal tax reliefs instead of personal income allowances. Before the 1973/74 budget single persons used to be able to deduct a personal allowance of b 216 from their income for tax assessment purposes. For married persons, the personal allowance was L 480, plus an allowance of I, 120 for every child (up to a maximum of four children). This meant that a family of six would pay no income tax at all if its income was less than L 960 per year. Under the new system, a single person receives i 18 as personal relief from his tax liability, while married invididuals receive double this amount for themselves (and h 9 for each child up to a maximum of four children). This reform is certainly most welcome because the previous system of deducting a given amount as personal allowance from the total income to arrive at taxable income benefitted the richer tax payers more than the poorer ones and hence was inequitable. 3.17 Although the redistributive effect of income taxation is apparently high, there are certain factors which could mitigate this and which must be pointed out in any assessment of the income tax's potentialities in this respect. 3.18 In the first place, it should be noted that the income tax rates given in Table 31 do not reflect the "effective" rates of taxation on the middle and higher income groups. This is because these taxpayers enjoy certain allowances and exemptions which further reduce their taxable incomes and, therefore, tax liabilities. There are three important tax benefits which the relatively better-off tax payers enjoy under the personal income tax: 1/ The income tax rates, which have been revised with effect from January 1, 1974, are as follows: Total Income Tax Rates Total Income Tax Rates On the first b 1,200 10.0 On the next b 600 45.0 On the next E 600 15.0 On the next E 600 50.0 On the next b 600 20.0 On the next E 600 55.0 On the next b 600 25.0 On the next L 600 60.0 On the next E 600 30.0 On the next E 1,800 65.0 On the next E 600 35.0 On income in excess On the next b 600 40.0 of E 9,000 70.0 Every income tax payer in Kenya also pays a fixed hospital contribution of i 6 (if his taxable income is E 2,000 or less) or L 12 (if it exceeds L 2,000). - 35 - - The imputed income front owner-occupied housing, which was taxable up until 1960, is now exempt. As a matter of fact, the self-employed professionals have now been allowed a deduction of L 700 per annum from their income as housing allowance. - Only the income earned in the Partner States, and not world income, is subject to taxation in Kenya. - Various benefits provided by employers in kind are not adequately taxed: for example, the value of free medical service is not taxable and the value of furnished housing provided by the employer is calculated at 15 percent of the employee salary, which in most cases is much less than its true market rental. 3.19 It is clear that most, if not all, of these allowances benefit the richer tax payers more than the poorer ones so that, at the upper ends of the income scale, income tax in Kenya is not as progressive as would appear from Table 31. Up until 1973/74 there were many other deductions benefitting the richer tax payers as well, such as full or partial deductions for contribu- tions to pension funds, provident funds, retirement funds, and insurance premiums, but many of these have now been abolished or greatly modified. While this is a welcome step 1/ in improving the equity of the income tax, there is still room for further changes to be made. 3.20 A second factor which determines the potency of income tax in Kenya is its scope, which is determined by the exemption limits of the tax. Pre- sently a married individual whose income is less than b 360 does not pay income tax and earns a further exemption of L 90 for each child up to a maximum of four children. Considering that the definition of a "child" is extremely liberal in the income tax legislation (it includes an adopted child, step child or any child who is in the custody and maintenance of the tax payer by virtue of any custom of the community to which he belongs) and that the extended family system is prevalent in Kenya, it should be quite common for married individuals to avoid income tax altogether. 3.21 Although the exemption Limits have been reduced in 1973/74 (from b 960 to 1 720 for a married indivudual with four children), they are still very high in the Kenyan context wlhere the per capita income is around b 50 and the minimum urban wage less than L 150 a year. The validity of this point can be seen from the fact that in 1971 only about 40,000 employees forming about 7 percent of the wage earners in the modern sector of the Kenyan economy 1/ And so is the new levy of wii:hholding taxes of 30% on the rents earned by the non-residents and of 12 1/2% on the pensions and retirement annunities received by them. - 36 - earned than E 750 per annum. 1/ A tax which only just touches the fringes of the modern sector will always have limited potential for redistribution, even though its rate structure is adequately progressive. 3.22 Another limitation to the redistributive effects of taxation are the weaknesses in the tax administration, particularly in respect of the self-employed and tax payers with multiple sources of incomes, who often belong to the higher income groups. There is some evidence that income tax avoidance by individuals not subject to PAYE (and that means practically all non-wage earners) is large. While the average tax assessment on wage incomes of the employees increased from 12 percent in 1966/67 to 20 percent in 1970/71, there was no increase whatsoever in the tax burden for the self- employed. 2/ There was also hardly any increase in the total income of the latter which was subjected to income tax. 3.23 There may also be some tax evasion in agriculture -- particularly among the large scale farms. For instance, while the gross marketed produc- tion of large farms increased by about 14 percent between 1965 and 1969, 3/ tax revenue from agriculture has remained constant, and has declined significantly as a percentage of total income tax revenue. 4/ 1/ Statistical Abstract, 1972, Table 232 (d). This statement, of course, is valid for the wage earners only. A similar statement can also be made for the self-employed and other individuals paying income tax in Kenya. 2/ Average Tax Assessments on Categories of Individual Taxpayers A. Employees B. Individuals Average Average Aggregate Net Tax Assessment Aggregate Net Tax Assessment Income Assessed (% per 1) Income Assessed (% per i) (in E millions) (in v millions) 1966/67 39.8 4.6 11.6 22.3 3.7 16.6 1967/68 41.0 6.9 16.8 21.1 3.2 15.2 1968/69 44.1 7.8 17.7 23.5 3.7 15.7 1969/70 51.7 9.8 18.9 26.6 4.5 17.2 1970/71 50.9 9.9 19.5 24.4 3.9 16.0 Source: Income Tax Department (Annual Reports) 3/ From L 33.3 to b 37.9 million, see Economic Survey, 1972, Table 44. 4/ See Annex 18, entitled Agricultural Taxation and Subsidies, IBRD Agriculture Sector Survey, Op. Cit. - 37 - 3.24 It is possible that the relatively generous capital allowances given to commercial farmers is one of the factors responsible for reducing taxable income in agriculture but it cannot be the major one. Certain capital expenditures in agriculture, particularly clearing of agricultural lands, planting of permanent and semi-permanent crops, prevention of soil erosion, etc., can be completely written off in the year in which they are incurred. Capital expenditures on farm works can be written off in five years which is substantially more favorable than investment in agricultural or industrial machinery. There has certainly be some growth of tax exempt capital expenditure on fencing and plantations on large farms -- from EL 0.7 million in 1964 to b 1.3 million in 1971 -- even though the total number of large farms as well as their area have been almost constant. It is more likely, though, that the major explanation for tax evasion by the farmers lies with the laxity of the administration of income tax in respect of agricultural incomes, particularly as most farmers do not keep the necessary accounts and records. 3.25 It is of course true that the nature of the agricultural sector has changed significantly since Independence, and the progressive settlement of the previous Scheduled Areas has also reduced the taxable income of the sector. Even the nature of the "large" farm sector has changed, and many of these farms are now under some Eorm of communal settlement, and hence largely outside the scope of personal income tax. The task of taxing agricul- tural incomes is always difficult, however, and there is reason to believe that some genuine and profitable large farms are evading income tax, particu- larly among the newly-established iAfrican farms, many of whom do not yet have adequate accounting systems. 3.26 It is time now to sum up the redistributive powers of present income taxes in Kenya. For the bulk of the income earners even in the modern sector, there is no income tax whatsoever. The taxation of very high incomes is surely progressive but then the nominal degree of progressivity in income taxation is substantially reduced due to the various tax deductions and allowances such taxpayers enjoy in Kenya. The tax avoidance and evasion is probably greatest among the richer members of the community, including many self-employed, than among the rest of the taxpayers; 1/ this further limits the scope of utilizing income tax as a primary redistributive device in Kenya. The recent levy of a 12.5 percent withholding tax on dividend and interest incomes 2/ should, however, help tighten the tax administration and contribute to greater equity. 1/ See Annex 3, Chapter 3, for a discussion of tax evasion by firms in the urban formal sector. 2/ A withholding tax also exists Dn the payments of royalties, management fees, etc., to the non-residents. In the 1973/74 budget a withholding tax of 30 percent has also been levied on the payments of rents and pensions. - 38 - Taxes on Personal Consumption 3.27 Indirect taxes in general and taxes on consumption in particular are seldom considered a means of affecting equity, in any significant sense, largely because these taxes are often regressive in their incidence. Some progressivity can definitely be introduced in their burden by exempting food and other basic necessities, and by taxing extra heavily those goods and services which are consumed mainly by the rich. It would indeed be a surprise if the overall progressivity thus introduced will ever be adequate for equity purposes. 3.28 In Kenya, personal consumption is presently taxed under three separate taxes. In the first place there are excise duties which are levied on the domestic output of selected items like sugar, matches, cigarettes and tobacco, soap, mineral waters, fabrics, beer, wines and paints. Then there is a 10 percent general sales tax which is levied on all domestic as well as imported manufactures 1/ with the exception of petroleum, beer, and electricity which are subject to specific sales tax rates. Third, taxes are also levied on selected personal services including foreign travel, betting and gaming, hotel accommodation, and entertainment. There is also a special tax on the purchase of second hand motor vehicles and impost of a special license fee on them. 3.29 In analyzing the distributive impact of these taxes, it must be mentioned that, up until recently, most consumption taxes in Kenya were specific, which meant that their effective burden tended to fall with rising prices, and this required the Government to increase the tax rates from time to time. The levy of a general sales tax in 1973 is a welcome step towards strengthening the revenue elasticity of consumption taxes as well as introduc- ing a greater degree of progressivity in tax burden -- at least in respect of consumption but possibly in respect of income as well. There are certain factors which lead us to the last judgment. The fact that the tax is levied on manufactures, both domestic and imports, would suggest that its incidence might be progressive with respect to income. The exemption from the levy of the sales tax of traditional food items as well as the very small manufactures would seem to further reinforce possible progressivity. However, while the new Kenya sales tax has many of the attributes of a relevant and desirable tax, we do not believe that indirect taxes in general can be as powerful tools or redistribution as the progressive taxation of income or wealth. 3.30 Several considerations lead to this conclusion. In the first place, the Kenya Government depends heavily on the excise taxation of certain items of basic necessities like sugar, matches, clothing and footwear, which generally have low income elasticities. Even beer and cigarettes,which account for the bulk of excise duties,2/ do not have an income elasticity 1/ This tax, levied in April 1973, replaced the then existing specific con- sumption taxes. For the details of this tax see para. 5.10 below. 2/ In 1972, for example, out of a total of E 17.6 million of excise duties, i 7.6 and b 5.2 were realized from beer and cigarettes respectively. See Economic Survey, 1973, p. 164. - 39 - much higher than unity, so that the redistributive impact of excise duties is limited. 1/ In fact, excise duties may perhaps be considered the least redistributive element in Kenya's indirect tax structure. 3.31 Some progressivity seems to have been imparted to Kenya's indirect tax structure by the introduction of taxes on certain luxury items like electricity, second hand cars, tires, transistor batteries, and various personal services in recent years. All the same, this list is not as large, nor are the rates so high, as would make a serious impression on income distribution. The specific tax rate of one Kenya cent per kilowatt hour of electricity or Sh. 5 per automobile tire, or b 10 per second hand car, or even 10 percent of the price of the entertainment could hardly be considered high. The only luxury item on which indirect taxes of any significance are levied are the automobiles and road vehicles which pay the import duties when imported, and petrol taxes 2/ and annual licenses when used. The average import duty on passenger cars has increased by 50 percent since 1964 to b 70 in 1971 (Table 32). Consequently, government revenues from road taxation have increased from b 7 million in 1964 to b 18 million in 1971. 3.32 A word about the burden of import duties on the consumer is in order here. Table 15, which gives the data on tax ratios for various years since Independence, suggests that the share of import duties in tax revenues has declined over time and that the average rate of import duties has remained constant around 20 percent since 1964/65. 3/ The breakdown given in Table 33 suggests that the average rates of duties on manufactured articles have also remained constant. The average duty rate on beverages and tobacco has declined, while 'that on food and live animals has increased. All this would seem to suggest that, at least at the margin, import duties have not become significantly redistributive. There is, however, no denying the fact that import duties do aEfect the rich as well as the urban income earners more than the poor and rural income earners. The precise effect of this is, however, hard to quantify. 1/ Household surveys conducted by the Institute of Development Studies, Univer- sity of Nairobi, found the income elasticity of these items to be close to 1.1. See Benton F. Massell, "Expenditure Patterns in the Central Province of Kenya: A Preliminary Analysis", IDS Discussion Paper No. 29 (September 1966). Also see by the same author, "Determinants of Household Expenditure in Rural Kenya", IDS Discussion Paper No. 49 (April, 1967). 2/ As Annex 1 reveals, the built-in elasticity of petrol and diesel taxes is extremely small. Petrol and Diesel Taxes = -2.8 + .008 (Monetary GDP). 3/ The (built-in) marginal rate of import duties has been even smaller according to Annex 1. Import Duties = 11.96 + .129 (Value of Imports minus Residual Imports). Thiis means that import duties would have had a marginal rate of 13 percent if no revisions were made over a number of years. - 40 - 3.33 To sum up: while most important excise duties are not a progressive burden on the richer income earners in Kenya, this anomaly is partially corrected by the taxation of luxury imports and the levies on personal services. On the whole it would be difficult to conclude that there will be much overall progressivity in indirect taxes. In fact, a past recent study, utilizing the consumption expenditure data collected in certain urban surveys, concluded that the burden of indirect taxation was in the past regressive, and there is no reason to believe that the recent levy of a sales tax in place of consumption taxes would substantially alter this conclusion. 1/ Redistributive Role of Kenya's Tax System 3.34 Although the Kenya Government expected that it would rely heavily on the tax system to effect income redistribution, the present structure of taxation does not seem to be very progressive. Admittedly there do exist some elements of progression, particularly the heavier taxation of very high incomes and some degree of taxation of personal services. But the taxation of wealth and consunption leaves much to be desired. In 1965, the Government itself formulated a taxation package designed to effect a more equitable distribution of income and wealth. 2/ This included progressive capital gains and inheritance taxes, a plan to lower personal exemptions and make income taxes more progressive, and the principle of taxing luxury items heavily. This package also provided for the elimination of taxes on the extremely poor people, and the strengthening of property taxes. For the benefit of the poor people basic necessities were proposed to be exempt from excise duties. 3.35 The present tax structure, though moving consistently in this direction since Independence still has a long way to go. Over the next plan period, depending upon the seriousness with which the Government takes the problem of income distribution and wants to use the tax instrument to remedy it, the present system of taxation will have to be reviewed and revised. 3/ Some possible reforms towards this end are indicated in the last chapter. 1/ M. J. Westlake, "Kenya's Indirect Tax Structure and the Distribution of Income", IDS Staff Paper No. 102 (June, 1971). Also note the follow- ing: "It is apparent, from the date given in the note, that the distri- bution of income (in the urban areas) was not affected by taxation in 1968-69". ILO Employment, Incomes and Equity: A Strategy for Increas- ing Productive Employment in Kenya, Geneva, 1972, p. 346. 2/ African Socialism and Its Application to Planning in Kenya, p. 35. 3/ Cf. "... the tax system in Kenya ...does not have any significant re- distributive effect...There is therefore a need for a major overhaul of the tax system to improve its equity..." ILO, Op. Cit., pp. 271-272. - 41 - 3.36 While the inequality problem in Kenya is multi-faceted, the tax system can primarily affect the inequalities in personal incomes. The other facets of the problem, such as regional or rural-urban inequalities, can be influenced by the tax structure only indirectly, through tax incentives or disincentives, and these often prove to be rather ineffective means in practice. 3.37 The latter kinds of inequalities can, however, be directly affected through the patterns of publi'c expenditure and the distribution of public services. A pattern of public expenditure which distributes public services more evenly, or favors the backward regions over the advanced or rural areas over the urban, is a useful tool in the hands of a government which is worried about the problem of regional or sector inequalities. It may now be interesting to see how far the Kenya Government has succeeded in this respect. C. PATTERNS OF PUBLIC EXPENDITURE 3.38 Lack of data does not permit an analysis of the direct effects of Government expenditures on personal inequalities; however, the little data which are readily available suggest that public expenditure has not been used as a major device to reduce rural-urban and regional inequal- ities in any significant manner, nor has it generally been used to favor the poorest section of the community. 3.39 Any systematic analysis of expenditure by region is precluded by the fact that budgetary expenditures in Kenya are generally not classified on a geographical basis, 1/ and t'here is little information about the dis- tribution of services. The few indicators which do exist all tend to show that the distribution of services in Kenya at the time of Independence were heavily in favor of the more prosperous areas, especially the urban areas. This pattern still exists today, although the absolute level of services has been increased in all areas. Some data on the availability of public services have been compiled in Table 35 which, though fragmentary, do suggest that the distribution of services in Kenya (in 1970) was still very uneven. Nairobi, for example, has 4.4 percent of tlhe total population of the country but 18.7 percent of the secondary school enrollments. Similarly, Central Province has 15.3 percent of the total population but 24.9 percent of the primary school enrollments. Both also have very high proportion of school age children in the schools --Nairobi with 72 percent. On the other extreme is North- Eastern Province with only 4 percent of its school age population going to the schools. 1/ The disaggregation of nationial plans and budgets into district programs now being undertaken by the Ministry of Finance and Planning will throw much more light on the progress being made to distribute Government expenditure more equitably. - 42 - 3.40 A similar picture emerges with respect to health facilities as well. While the exceptionally dense services in Nairobi are not really comparable with other areas (partly due to the concentration of services in the Kenyatta Hospital, which serves the whole nation) there are clearly tendencies for the distribution of health services to be correlated with prosperity. 3.41 Of course, to assess the effects of fiscal policy on equity, we need to know how expenditure on public expenditure has been distributed. In other words, granted that services were unevenly distributed at the time of Independence, has the pattern of expenditure done anything to redress these inherited imbalances since? Unfortunately, there is no conclusive data on this question, although, again, the few indicators available do not suggest that the inequalities have been reduced. 3.42 The most comprehensive indicator of the geographical distribution of expenditure comes from the expenditure pattern of local authorities. Before the centralization of the county council fuunctions in 1970, local authorities used to provide such important functions as providing primary education, health facilities, water supplies and sewerage, maintenance of minor and unclassified roads, and housing. 1/ Between themselves, they spent something in the order of 20 to 25 percent of the total (both central and local) government expenditures. An examination of their expenditures on social and community services per capital given in Table 34 suggests that the impact of local government expenditure was in fact to widen rather than reduce the inherited discrepancies between provinces. 3.43 In 1968, one of the latest years before the centralization took place, the average expenditure per head by the municipal councils was about ten times that incurred by the county councils. But there were wide varia- tions even within the county councils: for example the two county councils in the North-Eastern province were able to spend only b 0.6 per capita on all services while, on the other hand, average per capita expenditure by the more prosperous councils in Central Province was b 2.2 in the same year. 3.44 There is no denying the fact that a given amount of public expendi- ture does not necessarily signify the same amount of service; and it is questionable whether the quality and even the quantity of public services should be the same in densely populated urban areas like Nairobi as in the sparsely populated rural areas. But the extremes of the availability of services indicated by the figures of Table 34 do suggest that local government expenditures in the past were certainly not redistributive. We suggest elsewhere in this annex that, sooner or later, the Government will have to consider some form of revenue sharing if a local authorities are to be made financially viable again. It is certainly clear that local authorities can never be an instrument for reducing regional inequalities as long as the weaker councils in the poorer areas have to rely mainly on their own financial resources. 1/ For details, see Paras. 2.31 - 2.34 above. - 43 - 3.45 Evidence on the pattern of central government expenditure is much harder to find. The few indicators which are available do not reveal any redistributive tendency, but the evidence is fragmentary and not very con- clusive. For example, Table 35 shows that 65 percent of the expenditure on housing in 1970 was in Nairobi, and (as we point out below) this was mostly spent on middle and upper income housing. Perhaps of more significance, however is the progress made with education, not only because of the great social demand for education, but also because education is one obvious way in which income disparities can be reduced, by providing access to improved employment opportunities. The dEta presented in Table 36 are, therefore, of considerable interest. They show that those provinces whicn in 1968 had more than their "share" of school placed had either retained or increased their share by 1972J On the other hand, those provinces which had less than their share in 1968 have (with one main exception) lost further ground during these four years. Again, it should be emphasized that this is only fragmentary evidence and that other factors Ln past have compensated for the continuing emphasis on the more developed areas. 1/ But it is a further indication towards the conclusion that the pattern of public expenditure has not been effective as a major tool for na:rrowing regional differences. 3.46 There is even less evidence of the extent to which public expend- itures have been used to redress the imbalance between the rich and the poor, wherever they live. All that is possible is to make a qualitative assessment from what we know of t:he general pattern of expenditure in some of the major sectors. Here, again we have to be selective, but on balance it is difficult to conclude that the net impact of government expenditure has been redistributive. A subsi:anatial proportion of the capital expenditure program since 1964 has been directed towards the urban formal sector, includ- ing most of the power, water and other relatively costly services. Virtually all public sector expenditure on housing (including civil service housing) has gone to the upper 30 percent of the urban population --and, therefore, the upper 3 percent of the total population. In the rural areas, the Govern- ment has made great strides to develop agriculture and the quality of life in general, and a large amount of resources have been invested in land transfer and registration, settlement, and the provision of infrastructure services. 3.47 Expenditure on agricultural development, as we emphasize in this report, is generally favorable from an income distribution point of view, particularly in reducing (or controlling the increase in) the gap between the farmer and the urban wage earner. However, much of the past expenditure in the agricultural sector has gone into the more developed areas of Kenya. It is also typically the more progressive farmers within any particular area who are best able to take advantage of new developments. Thus, it is not clear how effective even agricultural expenditure has been as a means for achieving greater equity in the past. 1/ For example, the remission of school fees in some of the poorest areas of the country. - 44 - D. CONCLUSION 3.48 The existing fiscal policy of Kenya has not been a significant instrument for the redistribution of incomes and wealth, or for reducing rural, urban and regional inequalities. Taxation policy is obviously only one, though perhaps an important, instrument in this respect and, as indicated above, there is scope for sharpening the present fiscal policies in this respect. 3.49 The Government is clearly concerned that its expenditure program should have a more redistributive effect, and some of the measures now being taken or contemplated (such as those in housing, rural electrifica- tion and rural water supplies) are discussed elsewhere in the report. We feel, however, that there is an urgent need for a much more profound re- orientation, not only of Government expenditure but of the whole structure of economic growth in Kenya, if an attack on the problem of poverty is to succeed. It is clear that this is a central theme of the report as a whole. 45 - CHAPTER 4: EMPLOYMENT AND RURAL DEVELOPMENT Introduction 4.01 In view of the growing concern over employment in Kenya, it is appropriate to assess the extent to which fiscal policy can help to promote employment and increase the incomes of the poor. Kenya's unemployment problempcan be looked at in two quite distinct ways. First, it can be viewed as a problem of frustrated job seekers, including the presently unemployed, particularly in the urban areas, as well as the school leavers. On the basis of the urban surveys conducted recently the average urban unemployment rate alone is around 11 percent. The rate of unemployment amongst the school leavers and new entrants to the job market is much higher than this -- probably about 21 percent. I/ 4.02 Second, the problem of unemployment can be viewed as a more general problem of the "working poor", that is, the majority of the population i-n both the urban as well as the rural areas of Kenya who have very low incomes and poor services. The poverty oE this category which includes most very small landowners, the landless and much of the urban informal sector, is as much symptomatic of the unemployment problem as the more conspicuous form of poverty brought about by open unemployment. 2/ 4.03 Before examining the roLe of fiscal policy in alleviating unemploy- ment it must be explicitly stated that no single policy instrument will ever be sufficient to remedy the serious unemployment problem which the Kenya Government is facing at the moment:. Fiscal policy, in particular, is often very inadequate for this purpose, especially in the context of dualistic and pluralistic economies with weak economic links. Tackling the unemployment problem in Kenya, therefore, requires a wide frontal attack, as is now well recognized. 4.04 The emphasis of the strategy underlying this report is a restructur- ing of growth particularly towards agriculture and a reform in the process of growth particularly through factor price changes. These two measures could go a long way towards alleviating the problem of poverty in Kenya and make both rapid growth and a more equitable distribution possible. The pur- pose of this annex is to suggest what kind of fiscal pblicy would be con- sistent with such a strategy. Our emphasis in this chapter will be on 1/ Kenya's population is growing at an annual rate of about 3.5% while the urban population (including migration) is growing at about 7%. It is estimated that employment in the modern sector will increase by about 4.5% per annum over the next plan period which would mean that urban unemployment is li'kely to grow even further in the future. 2/ This second and more pervasive aspect of distribution -- the problem of the working poor -- formed the main theme of the ILO/UNDP Report, op. cit. - 46 - measures to effect employment, rather than poverty, although in the final section %.7e shall briefly discuss fiscal policy in relation to rural devel- opment, which is so central to the strategy of reformed structural growth we are discussing. 4.05 On a very general level of argument it can be said that the level of employment in Kenya should be influenced by: (a) the growth performance of the economy; (b) the factor proportions which back this growth performance; and, (c) the structure of growth. In Kenya, the growth rate has been impressive -- the economy has grown at an annual rate of about 7 percent since independence -- so that attention must be focused on factor proportions which have supported the growth of the Kenyan economy as well as the structure of growth. Indeed, factor propor- tions also throw much light on the inequalities in income distribution which were referred to earlier. 4.06 In Kenya's particular circumstances there are two important factors which have a bearing on the factor proportions. Firstly, foreign investment in Kenya is important and this implies that often, if not always, foreign technology and factors proportions appropriate to the developed countries are transplanted in Kenya. Second, the existence of a strong trade union movement in Kenya suggests that the efforts of the Government to encourage employment through policies which might induce wage reduction are likely to meet strong resistance. 1/ 4.07 Among other things, factor proportions can be influenced by changing relative factor prices (provided that a variety of techniques of production are available) and here the government policies, fiscal as well as all others, become highly relevant. In an extreme sense one can argue that as the Govern- ment itself need not be motivated by profit maximization it can alter the factor proportions utilized in the production of public services without reference to relative factor prices. But if this expedient is taken too far the Government can all too easily take upon itself the role of a direct employer of the unemployed, and in many African countries the governments have done precisely this. Direct Employment by the Public Sector 4.08 Government employment (including the Kenya Government and the local governments) has increased by 44 percent between 1964 and 1972 (Table 4) and the share of government sector in modern employment has increased from 1/ Cf. Annex 3. - 47 - 24 to 28 percent. Thus, government employment has increased significantly faster than employment in the non-government sectors. 1/ Since 1964, the Government has negotiated two Tripartite Agreements with labor and manage- ment to increase employment. Under the first agreement of 1964, the Govern- ment contracted to expand its employment by 15 percent while the other employers were to increase their employment by 10 percent. In return, the labor unions agreed not only to abide by a wage freeze but to refrain from work stoppages. IJnder the second Tripartite Agreement, signed in 1969, both Government and other employers undertook to expand employment by 10 percent each. 4.09 It is now generally agreed that such agreements cannot be expected to provide the answer to the unermployment problem. However, as the problem of unemployment grows, it can be expected that increasing political pressure will be put on Government to expand its role as employer. But the public sector in general, and the government sector in particular, cannot take upon itself the responsibility of providing jobs without regard to efficiency criteria or cost considerations. Providing employment for employment's sake would affect the costs of providing public services and would severely impinge on the limited goverrnent resources. The net effect might well be adverse on total output and even the income distribution in the rest of the economy. Besides, if the Government becomes too big an employer (the public sector already employs close to two-fifths of the wage employees in the modern sector), heavy union pressures could threaten the government budget. 4.10 The government sector's own employment strategy might be guided by two principles: (a) to replace capital-intensive techniques by labor-inten- sive techniques, wherever economically feasible; and (b) to put more resources into labor-intensive sectors, whenever this is consistent with overall na- tional policy. A good example of the first principle in action is the Government's continuing experiment with labor-intensive road schemes. If found successful, such methods might be expanded to cover other fields of government activity as well. The second principle is consistent with the general theme of this report. In particular, we show elsewhere in the report that incremental investment in developing small scale agriculture might be expected to give maximum returns in terms of both output and employment. 4.11 Government investment in training which would enhance the productivity and employability of labor is yet another avenue, particularly in programs designed to build up levels of entrepreneurial ability. 2/ Government investment in the development of technology appropriate to Kenya's factor availabilities is also essential. A pattern of government expenditure which would narrow the wide gap which prevails between rural and urban public ser- vices, noted earlier, must accompany expanded efforts to enhance agricultural productivity and incomes. 1/ Also see Ndegwa Report, pp. 28-29. 2/ See, for example, Annex 5. - 48 - 4.12 While the government sector as well as public sector generally would certainly absorb some of the rapidly increasing labor force directly, the bulk of the additions will have to be absorbed in the private sector of the Kenyan economy. Fiscal policy can, and must, play a role in providing the environment in which it will become profitable for the non-government sector to employ more labor. Fiscal Distortions and Private Employment 4.13 As it stands now the tax structure works in favor of capital-inten- sity artificially lowering the price of capital and this is on top of the subsidy enjoyed by capital through the protected exchange rate and generally low interest rates. Three features of existing tax policy need particular mention here. First is the investment allowance of 20 percent (over and above the normal depreciation of 12.5 percent per annum on reducing-balance value) which all new industrial buildings, machinery and equipment, are entitled to under the present company tax. 1/ Second, imports of most capital goods and many intermediate goods are either exempt from custom duty or pay low rates of duty. Finally, as pointed out earlier in this Annex, all capital gains are exempt from tax. 4.14 What the incentive effect of all these is on the investment in the economy or the growth rate achieved by Kenya in the past would be hard to say; it certainly has reduced the price of capital below the shadow price and therefore may have encouraged capital intensity. This is particularly disturbing when the price of labor has been taxed through social security contributions, 2/ in addition to the higher costs imposed by minimum wage legislation and union action. 4.15 From a theoretical point of view, it would appear desirable to abo- lish the concessions given to capital. Even though the additional revenue generated would be small, 3/ some alternative use could be found for it which would have a favorable effect on employment. Another cheaper way of increas- ing jobs will be to use the tax system to encourage a fuller utilization of existing industrial capacity. In theory, there could be many reasons for capacity underutilization which include, among other things, faulty design of plants, purchase of equipment for larger markets and larger scale of production, and high levels of protection which enable firms to establish themselves in 1/ The new hotels and the machinery installed in them are also entitled to investment allowance. 2/ Social security contributions are fixed at 10% of the gross wages to be shared equally between the employers and employees, subject to a maximum contribution by an employee of i 20 per month. 3/ About 135 enterprises investing some b 4.5 million during 1966-1968 claimed i 0.9 million in investment allowance costing the exchequer about i 0.4 million in lost revenues. - 49 - markets prematurely with less than optimum levels of output. 1/ The proposed export subsidy is a step in the right direction. The abolition of the in- vestment incentive and a reducticn in the level of protection, by lowering the custom duties on consumer goods, would also help. 4.16 There are, however, certain crucial questions on which more research will need to be conducted before correcting the price distortions which have been implicit in the tax incentives given to capital so far. Firstly, it is probable that valuing the capital at its shadow price would raise the labor- capital ratio and, therefore, improve the employment prospects. But the effects on the output-labor ratio are not 80 certain. Should the two ratios move in the same direction (and there may be some sectors in which this might happen), the trade-off between employment and labor productivity could be avoided. Otherwise, the trade-off will have to be assessed and a political decision made. 4.17 A second effect of the employment-oriented development strategy could be its effect on savings and capital formation. Once again, very little is known about the saving propensity of profit (particularly when they are likely to be repatriated abroad) vis-a-vis that of wages, and it would be unwise to make a judgment on these without any facts. Such evidence as may exist on this subject would need to be collected and taken into account. 4.18 Lastly, an employment strategy, particularly if it is oriented towards the modern sector alone, would be both inadequate and self-defeating. It would be inadequate because the scope for generating many new jobs in a relatively small modern sector of the economy, simply by correcting the price distortions, will always be limited. 2/ It would also be self-defeating if the wage differential between the urban formal sector and the rest of the economy widens still further, leading to accelerated urban migration and an even greater increase in the reserve army of unemployed. An employment strategy which ignores the remedies for generating employment and incomes on the farm, as well as encouraging the labor force to stay in the rural areas, is bound to be partial at b3est and fail at worst. 1/ Cf. Annex 3. It may be mentioned in passing that many of the suggest- ions contained in the preceding paragraphs have also been made by the ILO/UJNDP Report, largely on t:he ground that capital should be valued at its social cost and shoulcl not be subsidized. 2/ As Annex 3 finds the elasticity of private modern sector employment with respect to output has been as low as 0.1 in the past. Price distortions may also have had some positive effects on investment (and therefore employment) which would be lost. - 50 - Tax Policies Towards Agricultural Employment 4.19 Adopting fiscal policies to raise the level of farm incomes and improve the level of public services in the rural areas must be the twin principles underlying the strategy of generation of agricultural employment. Despite the progress made in both these fields in the past, much more vigorous action will be required if any real impact is to be made on rural poverty and unemployment. The wide gap between the rural and urban areas in matters of community and social services was pointed out in the last chapter. What needs to be stressed now is that closing this gap is essential not only on equity grounds but on employment grounds as well. 4.20 The level of farm incomes clearly depends, among other things, upon the prices that farm products fetch, the intensity with which farm land is utilized, and the level of farm costs. Elsewhere in the report, we have emphasized the importance of correcting the distortions in agricultural prices, which are strongly influenced by the pricing policies laid down by the government, often in the interest of urban consumers. 1/ As well as this, some marketing boards are operating at a low level of efficiency, which further penalizes the producer. The Government has promised to remove the local authority cesses on agricultural commodities at the earliest possible opportunity, and this should be welcome. But the distortions are far more pervasive, and the whole question of agricultural prices and the terms of trade between agriculture and industry must be reviewed as a matter of urgency. 4.21 As far as incomes from agricultural exports are concerned, they face the handicap of an over-valued exchange rate, 2/ and until last year coffee and sisal also were subjected to an export duty. Fortunately for Kenya, the Government never depended heavily on export duty revenues for financing the budget so that the revenue aspect of export duty could be ignored. The re- tention or otherwise of the export duty was, therefore, examined on the basis of non-fscal considerations like its allocative and distributional effects. The case for removal of export duties was always strong and the Mission welcomes its abolition in the 1973/1974 budget. But if the taxation on agriculture, now inherent in the Kenya economy, is to be removed, the agri- cultural exporters should also be partially compensated for the over-valua- tion of the exchange rate. This would require a generalized export subsidy with as few exceptions as possible. The export incentive announced in the 1973/74 budget would apply only to manufactured exports outside the Community. 1/ The terms of trade between the agricultural sector and the rest of the economy moved from 100 in 1964 to 87 in 1970. See Ndegwa Report, Table 22. 2/ Implicit in this is a significant taxation of agricultural exports. See Annex 3. 4.22 The whole package ot taxation and subsidies effecting the agricultural sector needs to be looked into with a view to encouraging agricultural employ- ment. 1/ The Kenya Government has never received any substantial budgetary revenues from the agricultural sector; this should make the task of revision easier. In general, it would appear that the Government might work towards the imposition of a general land tax and the tightening of the administration of agricultural income taxation. At the same time, specific taxes (and subsidies) on individual commodities, which distort land use and create problems of equity, should be progressively removed, and Government has made a good start in this direction. The mission concurs with the recommendation of the Agricultural Sector Survey that input subsidies should be scrapped unless they can be so administered as to benefit the uninitiated small farmers, and that they should be made self-eliminating whenever possible. 4.23 It is difficult to say how much dent all this makes on farmers' productivity and incomes. We feel that tax policy alone can have little effect. But tax measures, coupled with a reorientation of the government investment and recurrent budgets towards agricultural and rural development, would certainly reinforce the effects of the more general strategy outlined in this report. Government Expenditure on Agriculture and Rural Development 4.24 In the early years after Independence the Kenya Government made major efforts in the rural areas in the form of resettlement schemes, land registration and consolidation, introduction of cash crops and crop intensi- fication schemes and encouraging self-help efforts. Attempts were also made in improving rural water supplies, electrification and rural transportation. All these measures helped to increase the employment capacity of small scale agriculture greatly. 2/ Government expenditure on agriculture and rural development has not grown in line with other sectors, however. As a matter of fact, it has been almost static since Independence. (Table 37) 4.25 The Second Development Plan stressed the role of agriculture and rural development and explicitly stated that "The key strategy of this Plan is to direct an increasing share of the total resources available to the nation towards the rural areas". 3/ Apart from agriculture, the emphasis 1/ This subject has also been examined in the recent IBRD Agricultural Sector Survey, op. cit. 2/ G. D. Gwyer, "Employment Opportunities in Kenya Agriculture", East Africa Journal, Vol. 9, No. 3 (March 1972), pp. 23-27. 3/ Development Plan 1970-1974, p. 2. Nevertheless, in the Second Plan allocated only 24% of total expenditure to agriculture (excluding rural development against 42% during the First Plan. - 52 - in the rural areas during the plan period was to be on roads, water supplies, and housing. Another major ingredient of the Plan was to be the government experiment with an integrated Special Rural Development Program (SRDP), which sought to co-ordinate the provision of se:rvices like credit, marketing, and agricultural inputs, particularly to the smallholder farms, to be carried out initially in six divisions of the country and to be extended later to other areas. 4.26 The Second Plan allocated b 40 million for agriculture, i 2.5 million for integrated rural development, b 7 million for rural water supplies and sewerage, h 11 million for rural roads, i 1.5 million for rural housing, and another b 0.5 million on self-help and social welfare schemes. Excluding rural education and rural health, which would obviously absorb large recurrent expenditures, the Government proposed to spend about i 63 million, or about a third of the total plan investment, on agricultural and rural projects. This allocation of resources towards rural sector proj- ects was obviously consistent with the stated key strategy of the Plan and would have made significant impact on the country's rural and urban unemploy- ment problem. 4.27 Unfortunately, the achievements in this area have not been matched with the planned targets. From the very start, the integrated SRDP faced severe difficulties of formulation, coordination, implementation and also experienced financial problems. 1/ Moreover, while expenditure targets of the plan as a whole have generally been exceeded (see para. 2.19 above), expenditure on agriculture and other rural services lagged behind the levels proposed in the plan. 2/ Excluding expenditure on land adjudication, expenditure on agriculture during the 1974-78 has amounted to some i 24 million, or about the same level as allowed for in the plan (See Table 37). However, the actual expenditure figures are at current prices, while the plan targets were in constant prices and a substantial proportion of actual expenditures were for transfers, particularly the purchase of state equity in the sugar industry. Thus, in real terms, development expenditure on agriculture has not been as high as hoped for. 4.28 Table 37 also highlights the trend that the share of government capital expenditure going to agriculture has consistently declined since Independence - from nearly 80 percent in 1964/65 to less than 10 percent in 1972/73. Most of this dramatic fall is due to the sharp decline in the costs of the settlement program after the mid-1960s. But even if these are excluded, expenditure on agriculture does not appear to have grown very substantially. A similar picture emerges with respect to recurrent expenditures on agriculture (Table 18). Rural water supply and rural roads 1/ See Annex 8, IBRD Agricultural Sector Survey, for a review of progress on the SRDP. 2/ These levels themselves were considered to be too low by the 1969 Bank economic mission. See Report No. AE6a, Annex A. - 53 - have, however, been absorbing an increasing share, though very gradually, of government investment from the very low level in 1964/1965. 4.29 While the absorptive capacity problems in agriculture are admittedly serious, the fact remains that t:he government investment expenditures in agriculture and rural development match neither the large needs of the rural population nor the goals of the government laid down in the last Plan. Conclusion 4.30 The Kenya Government can partially remedy the open unemployment by directly employing the job seekers in the public sector itself. However, such a solution must not ignore the cost and efficiency considerations, which, not being easily quantifiable, can easily fall prey to political pressures. It must be stressed that there would always be a resource constraint on the capacity of the Government to em!ploy a growing proportion of the labor force. 4.31 A more useful role that the fiscal policy itself can play in solving the unemployment problem would be: (a) by generally removing the price distortions favoring capital as a factor of production, such as the invest- ment allowance, the import duty exemption given to capital goods and the non-taxation of capital gains; (b) by removing, or at least reducing, the price distortions against labor; and (c) by dropping the cesses levied on individual agricultural commodities. All that this would mean is that fiscal policy would be neutral to factor prices and agricultural prices. This is probably the least that Kenya's fiscal policy can do. 4.32 On the positive side, while various instruments such as wage subsidies or employment allowances have been suggested in the past, the Mission believes that a more useful purpose could be served by redirecting the pattern of government expenditure towards the employment and income- generating activities in agriculture. This would, among other things, require breaking the barrier.of limited absorptive capacity in the rural sector, as discussed in Annex 5. - 54 - CHAPTER 5: A FISCAL STRATEGY FOR DEVELOPMENT Avoiding a Resource Problem 5.01 Any fiscal strategy for the future must, at the very least, avoid a serious resource constraint which the Government might face on its devel- opment efforts. Some recent tendencies seem to suggest that there is a possibility that, unless certain policy measures are undertaken, Government might not be in a position to have at its disposal adequate resources for financing its expanding investment over the next plan. 1/ 5.02 It is true that, to some extent, the Kenya Government can reduce the se-riousness of this problem by reorienting its investment pattern more towa:nls directly productive and less capital-intensive activities like agri- cul;:rxe. It can also do more to stimulate an increased flow of foreign aid .o -e..iya. But, even with these measures, a budgetary constraint is likely to arise during the next plan period, unless the Government undertakes some reforimi of fiscal policy, and this could have serious effects on the balance of paty-ments. 5 ?-s Nevertheless, the Mission feels that the budgetary position, given such reform, need not get out of hand. For example, if the Kenya Government impLoves its tax effort (by raising the present built-in elasticity of 1.3 to i.9) and keeps an eye on the overall growth of its recurrent expenditures, the government sector resource gap would be easily manageable. 5.04 Recurrent Expenditures. Keeping an eye on the recurrent expendi- tures in Kenya's particular circumstances would mean at least three things. First, the rate of growth of the recurrent expenditure on social services, particularly education, will have to be decelerated. In a sense this pro- cess has already been initiated: the share of recurrent expenditure going to education in the 1973/1974 budget has declined slightly over the last year. A review of education policy and certain revisions in the structure of education could provide further scope for trimming such expenditures with- out losing their effectiveness. At the same time, it should also help re- duce the degree of open unemployment in the economy in the long run. 5.05 Second, many governments in Africa and elsewhere have tended, under political pressures, to solve the problem of school-leaver unemployment through public employment. This has often meant that efficiency and cost considerations are ignored, and the government wage bill tends to expand without regard to government resources. While Kenya has not resorted to 1/ Already in 1973/1974 the level of development expenditure is being re- duced from b 73 million to b 62 million, as the Finance Minister has said, "not due to slackness on the part of Ministries but as a result of deliberate action by the Treasury in controlling development spending i.n accordance with the estimates of the financial resources available". (Italics added) Budget Speech, 1973/4. 55 - make-work of this kind in the past, increased vigilance will be called for in the future, as the political pressures of increasing unemployment build up. 5.06 Third, in an economy lLke that of Kenya, there are likely to be strong pressures on government salaries to catch up with the salaries offered in the modern private sector. Despite the political pressures, the salary levels need to be determined with reference to supply conditions and other economic considerations. If the Government can control its own salary levels, it will be easier for it to bring about a more appropriate wage and incomes structure in the economy as a whole, the urgency of which is recognized by the Kenya Government. 5.07 While these are points to be watched, it should be noted that Kenya has never had any serious problem in controlling recurrent expenditures in the past. In fact, as mentioned earlier, the Government was fairly dis- ciplined in this respect, perhaps a little conservative, up until 1970/1971. Only during the last two years hcs the growth in recurrent expenditure ac- celerated and exceeded the growth in revenues, leading to some worry. The Kenya Government itself is very conscious of the changed environment and is attempting to remedy the position. The growth rate of recurrent expenditure proposed for 1973/1974 is about 12 percent, which is significantly lower than achieved in the last few years. It remains to be seen to what extent this reduction can be absorbed without. a loss in momentum. 5.08 Scope for Tax Reform. There is some scope for improving the tax revenue base in the yet untapped instruments of indirect taxation, as well as tightening of administration of direct taxes. The Kenya Government has already taken some steps to exploit these as will be indicated below. The main instruments of commodity taxation until now have been the excise duties (and consumption taxes) which were specific 1/ and limited to less than ten major items, and the import duties, which exempt very many rapidly growing commodities. In addition, the imports of the Kenya Government and the EAC institutions were until recently also exempt from duty. This kind of in- direct tax structure consequently had very limited elasticity indeed. 5.09 To improve upon the elasticity of these taxes, as well as to use them as development tools, it is essential to: (a) broaden the base as much as possible; (b) make the rates ad valorem; (c) have discriminating tax burdens on domestic output and imports to provide the necessary protection; and, 1/ The 1973/74 budget has changed the excise duties on cigarettes and pipe tobacco to an ad valorem basis. - 56 - (d) make the tax rates as non-selective as possible, except for luxuries and other commodities, where the need for discouraging conspicuous consumption is clearly felt. 5.10 The Kenya Government has very recently started moving in this direc- tion by imposing a broad-based sales tax, and by repealing the limited con- sumption taxes. With effect from mid-1973, a 10 percent sales tax was levied on all manufactured goods, locally produced as well as imported, except for petrol, beer and electricity, on which the previous high specific tax rates have been retained. Most food products (e.g., maize and wheat flour, sugar, meat, milk), certain basic necessities (e.g., medicines and pharmaceutical goods, newsprint and books) and some of the agricultural inputs like ferti- lizers and diesel fuel have, however also been exempted from the sales tax. The tax also does not apply to the output of small manufacturers, with a turnover of less than i 5,000. Although exports will be exempt from sales tax, government departments, like other consumers, will have to pay this tax. These exemptions are not very important, and the introduction of the sales tax should go a long way to improve the built-in elasticity of in- direct taxation. 5.11 The immediate net gain to the Government from sales tax will not be very large, however, because of the abolition of the GPT and most of the previous consumption taxes. Sales tax is expected to yield about b 22 million in 1973/74 1/ against which must be written off the loss of b 8 million, due to the repeal of the consumption taxes, and the grants-in-aid which the Government will need to give to the municipal councils to offset the loss of i 8 million of revenues from GPT. On a net basis, therefore, the addition to present government revenues will be small, but in the long run, as con- sumption in the economy grows, sales tax can be expected to become a power- ful revenue tool. Assuming that the gross domestic product (at current prices) will continue to grow at about 12 percent per annum and that aggre- gate consumption grows at the same rate, sales tax revenues can be expected to grow at least as fast. 5.12 The Kenya government has recognized the need for a tariff reform and has started moving in this direction in the 1973/1974 budget in concert with the other two Partner States. Some previous exemptions to import duty have been abolished and dutiable items are now taxed on an ad valorem basis. The old structure that gave very high protection to consumer goods industries and almost no protection to domestic production of capital goods is beginning l/ The value of domestic ouEput plus the imports (including import duties) net of exports was i 290 million in 1970. Of this the sales tax exempt items were about b 57 million (grain mill products -- i 15 million, sugar -- i 11 million, meat products -- i 4 million dairy products -- i 8 million, printing and publishing -- i 9 million, miscellaneous chemical products -- b 10 million). - 57 - to change. 1/ Import duties on a list of very select raw material items have been lowered, and government departments, as well as the EAC corporations, have lost their duty-exempt status. It is quite possible that the immediate net revenue impact of these import duty reforms would not be very large, particularly as the Government has simultaneously agreed to adopt a scheme of export subsidies the details of which have not yet been clearly spelled out. But, then, the purpose of this tariff reform would largely be to make custom duties a tool of development and not a major tool of additional re- venues. 5.13 To be specific: the direction in which Kenya's indirect tax structure could move over the next plan period would be: (a) a uniform tariff on imports determined by the needs of protection accompanied by selective additional sales taxes on luxury imports; (b) a set of excise duties on domestic manufactures, the rates of which should be determined in conparison with the structure of import duties and in the light of crucial allocation and equity considerations; and, (c) a broad-based sales tax, levied both on domestic manu- factures and imports, irhe rates of which could be de- termined by the revenue considerations. 5.14 Some scope also exists in the mobilization of resources through direct taxation. In the area of personal income taxation there has always been an urgent need to reduce the still high exemption limit resulting largely from the grant of libera]. child exemptions. The recent abolition of the GPT has clearly added to t:his urgency. The 1973/1974 budget recognized this urgency and incorporated a number of important income tax reforms. The exemption' levels granted under the income tax have been reduced, so that married persons with four children earning incomes between b 720 and b 960 will also be subject to income tax. Taxpayers now only get fixed tax credits relevant to their family status, and the income tax rates have also been slightly adjusted with effect from 1973/1974. 5.15 The Kenya Government might examine the possibilities of tightening the loopholes which exist in the present tax structure, such as the deduc- tions and allowances for life insurance, 2/ employees' entertainment, and owner-occupied housing. 3/ Various possibilities of tightening the income 1/ See Annex 3. 2/ The 1973/74 budget has restricted the life insurance relief to a tax credit of i 18. 3/ The income tax deductions for contributions to pension funds and provident funds have been disallowed inth 1973/1974 budget. - 58 - tax administration, particularly in relation to the self-employed, might also be explored. It is hoped that the establishment of a national income tax department will improve income tax administration significantly. 5.16 It must be emphasized that some tax reforms need to be considered primarily on grounds of redistribution and equity, although these would also have some revenue implications. Some kind of wealth taxation is one pos- sibility. The imposition of land taxation, coupled with an extension and improvement in urban property taxation and the levy of a capital gains tax, could be yet another alternative. 5.17 The Government of Kenya has invested a substantial amount of re- sources in public enterprises many of which are, by their very nature, com- mercial enterprises. While most of them are performing useful regulatory and development functions, it is not at all clear as to how far they are acting as instruments of resource mobilization or capital formation. The relatively low (and often negative) profits that they are earning at pre- sent would seem to suggest that there is scope for improving their effici- ency and generating higher profits. But, then, the Kenya Government would need to define their role in these terms and make conscious efforts in those directions. 5.18 It is extremely difficult to estimate the revenue impact of all these possibilities and, therefore, the resulting effect on the intensity of remaining resource constraint. To the extent that the resource constraint itself is a function of level and growth rate of capital expenditures, a re- examination of the level of pattern of expenditures may also be in order. Reviewing the Investment Pattern 5.19 The first question here pertains to whether the Government should in some sense slow down the rate of growth of expenditure, particularly its capital formation in infrastructure. Besides the fact that adequate domes- tic and perhaps foreign resources may not be available, the impact of a rapidly growing public investment program on the balance of payments, as well as the future recurrent expenditures, cannot be safely ignored. What impact a slowing down of the government's capital expenditure program will have on the overall rate of growth of the economy must also be considered. This would obviously depend upon the category of expenditure which is de- celerated. ,:5.r nIt the past (and this is true of 1973/1974 budget as well) road cor5t;~ctiorn and housing construction in the public sector have absorbed very significant proportions of government investment, and both of them have been capital intensive in Kenyats case. This has also meant that the country's physical infrastructure, particularly roads, have been relatively well developed. An underlying thesis of this report, therefore, is that Kenya might now divert expenditure from infrastructure, decelerate (and redirect) expenditure on education and reallocate its expenditure, in a relative sense, to directly productive sectors like agriculture. This shift in emphasis seems to be justified not only on grounds of employment and income generation but on many equity grounds as well. - 59 - Focusing on Equity and Employment 5.21 While a fiscal strategy for the future must attempt to avoid a serious resource problem it must do so in such a way as to serve the objec- tives of distributive justice and employment generation. As mentioned earlier, Kenya's tax structure seems to have had limited success in respect of both these objectives. Although personal income tax is progressive in Kenya, it affects a very small proportion of the population and will probably continue doing so even after the recent reforms. The existing property taxes are least progressive over most of the income ranges. A further lowering of the personal allowance, the imposition of progressive capital gains taxes (and, possibly, land taxes), and the tightening and extension of urban pro- perty taxation, could all become instruments of greater equity. 5.22 On the indirect taxes side, the excise duties are somewhat regres- sive and the recently enacted sales tax can be expected to introduce only limited progressivity, since it exempts basic foods. A more progressive taxation of luxuries under excise duties alone could ensure further redis- tribution effects. 5.23 On the expenditure front, deemphasizing urban and higher education in favor of rural and vocational education, trunk primary roads in favor of feeder and rural roads, and reallocating public expenditures in favor of agriculture and rural development generally should be welcome both on equity and employment grounds. 5.24 The tariff reforms indicated above should help to discourage capi- tal intensity and, given the elasticity of factor substitution, encourage employment. Employment generationi may also be helped, though admittedly marginally, by the abolition of investment allowances and the grant of posi- tive tax incentives to employment. Financial Viability of Local Authorities 5.25 If the Kenya Government wants to retain the local authorities and impart a developmental role to them, the local government structure will have to be strengthened and made iinancially viable. (On the other hand, they will also have to be provided with trained personnel and taught finan- cial responsibility.) The fiscal alternatives lie between an autonomous and elastic source of revenue, or else a revenue sharing formula, based on criteria of need and efficiency of revenue mobilization. The 1973/1974 budget has already initiated the process of central government revenue sharing with the municipal councils following the abolition of the GPT. 5.26 But the regional inequality of natural, physical and human re- sources in Kenya is such that sooner or later the Government will have to consider some formula for compensatory grants, even if the local authorities - 60 - were provided with elastic revenue instruments of their own. 1/ The scope for improving the existing property ratings in the municipal council areas and the assessment of land taxation in the country council areas could be the two most important instruments of local taxation. The possibilities of an additional sales tax by local authorities (or a surcharge collected for them by the Central Government) could also be explored. integrating Self-Help Efforts 5.27 Self-help has been ignored in this annex on the ground that it really is not a fiscal instrument. However, to the extent voluntary con- tributions by the public towards development projects ease the strain on fiscal policy, a brief mention is in order. In Kenya, the Harambee, or self-help, movement has proved an extremely valuable way of mobilizing local resources and participation for development. During the years 1965-1972 some i 16 million 2/ has been raised for capital projects in the fields of education, health, water supplies, agriculture and other construction. While such efforts should certainly be encouraged they must be integrated with the design and planning of fiscal policy of the Government. In partic- ular the staffing, maintenance and recurrent spending on such projects must be coordinated with the overall national policies. Both this report (see Annex 5) and the Bank's recent Agricultural Sector Survey discuss the pos- sibilities at some length. 1/ Cf. Report of the Fiscal Commission (1963), pp. 68-69. 2/ Of this amount over i 5 million were contributed during 1971 and 1972 alone. See Economic Survey, 1973, p. 198. APPENDIX Page 1 APPENDIX ESTIMATING "BUILT-IN RECURRENT" EXPENDITURE 1. In estimating the future "built-in" or "normal" growth rate of government recurrent expenditure, we have made separate assumptions about the rate of growth of the three major components of government expenditure --wages and salaries, consumption of goods and services, and transfers. The basis of these disaggregated assumptions are given below. Wage Bill 2. We have assumed: (a) That government employment grows at 5 percent per year. This was the rate of increase of central government employ- ment between 1964 and 1969, 1/ and implies that government investment grows at the same pace as in the past and that the labor-capital ratio in the government sector remains constant. (b) That government employees get only the "normal" salary increments of about 4 percent a year, 2/ which implies that there is no overall salary structure review or general cost of living adjustment during the period. Under these assumptions, the total wage bill of Government would rise by about 9 percent a year, which in itself would result in a built-in rate of growth of 4.5 percent a year in total recurrent expenditure. 3/ Goods and Services 2. We have assumed: (a) That government "real" purchases of goods and services (other than salaries) increase by 7 percent a year. Of this, 5 percent would be the result of Government's increasing employment (assuming a constant ratio of "real" goods and services to employees),, and the other 2 percent reflects an increase in the use of stocks and supplies. 1/ See Table 4. The terminal year of 1969 and has been chosen for this purpose as after this year the civil service was expanded by the take- over by the central government of certain functions and employees of the local authorities. 2/ The 95-point single salary scale proposed by the Ndegwa Commission, which was implemented by the Government in 1971, yields such an annual salary "creep". In reality, wage bill would rise by less than 4 percent if a retiring or resigning higher salaried staff is replaced by a lower- salaried staff. 3/ 0.50 x 0.09 = 0.045. APPENDIX Page 2 (b) That there is a price rise of 5 percent a year. This rate is higher than experienced generally in the past, but is consistent with the rate of inflation in 1971 and 1972 and with our macroeonomic projections. On these assumptions, government expenditures on goods and services would increase by about 12 percent a year leading to a further 3 percent increase in total recurrent expenditure. I/ Transfers 3. There is likely to be some increase in transfer payments in the future (at least the interest payments are likely to grow), but there is little basis for estimating what the rate of increase will be. We have assumed that transfer payments grow at the same rate as in the past, that is, by about 2 percent a year. 2/ This would cause the overall recurrent expenditure to grow by another 0.5 percent a year. 3/ Total Built-in Growth Rate 4. These assumptions therefore give us the following estimate of the total normal (or built-in) growth of recurrent expenditure: Annual Rate of Growth In Price In Percentage Real In- Current % of Total Increase in Terms crease Terms Exgenditures Total Expenditure Wages and salaries 5% 4% 9% 50% 4.5% Goods and services 7% 5% 12% 25% 3.0% Transfers - - 2% 25% 0.5% Total recurrent expenditure 100% 8.0% ui ? ?5 x 0.12 0.030. During 1964/1965 - 1968/1969, government ex- pend4ture on other purchases of goods and services increased by about 10 percent per annum, (Table 22) of which 3% could be estimated to be the effect of inflation. 2/ Since this rate was about equal to the average rate of inflation in the past, transfer payments have remained more or less constant in real terms. This is consistent with the assumptions made in Annex 1. 3/ 0.25 x 0.02 = 0.005. L:ST OF TABLES Table No. 1: CONTRIBUTION OF THE PUBLIC SECTOR TO GROSS DOMESTIC PRODUCTION AT FACTOR COST, 1964 - 1972 2: CONTRIBUTION OF THE PUBLIC SECTOR TO CAPITAL FORMATION, 1964 - 1972 3: PUBLIC SECTOR IMPORTS, 1964/1965 - 1971/1972 4: EMPLOYMENT IN THE PUBLIC SECTOR, 1964 - 1972 5: WAGE BILL IN THE PUBLIC SECTOR, 1964 - 1972 6: AVERAGE EARNINGS OF THE GOVERNMENT EMPLOYEES, 1963 - 1972 7: CONSOLIDATED GENERAL (CENT'RAL AND LOCAL) GOVERNMENT. FINANCES, 1966/1967 - 1971/1972 8: PARASTATAL ENTERPRISES IN RELATION TO THE GOVERNMENT BUDGET, 1965/1966 - 1970/1971 9: CENTRAL GOVERNMENT FINANCES, 1964/1965 - 1972/1973 10: FISCAL TRENDS, 1965/1966 - 1972/1973 11: PUBLIC DEBT - TRENDS, OWNERSHIP AND SERVICING, 1965 - 1972 12: LOCAL GOVERNMENT FINANCES, 1966 - 1972 13: CENTRAL GOVERNMENT SAVINGS, 1964/1965 - 1971/1972 14: REVENUE EFFORT, 1964/1965 -- 1972/1973 15: CENTRAL GOVERNMENT REVENUE RATIOS, 1964/1965 - 1971/1972 16: CENTRAL GOVERNMENT TAX EFFORT, 1963/1964 - 1971/1972 17: BUDGET PERFORMANCE, 1964/1965 - 1972/1973 18: FUNCTIONAL CLASSIFICATION OF CENTRAL GOVERNMENT RECURRENT EXPENDITURE, 1964/1965 - 1972/1973 19: FUNCTIONAL ALLOCATIONS OF CENTRAL GOVERNMENT RECURRENT EXPENDITURES, 1964/1965 - 1972/1973 20: FUNCTIONAL CLASSIFICATION OF CENTRAL GOVERNMENT CAPITAL EXPENDITURES, 1964/1965 - 1971/1972 LIST OF TABLES (Cont'd) Table No. 21: FUNCTIONAL ALLOCATIONS OF CENTRAL GOVERNMENT CAPITAL EXPENDITURES, 1964/1965 - 1971/1972 (SELECTED YEARS) 22: ECONOMIC CLASSIFICATIONS OF CENTRAL GOVERNMENT RECURRENT EXPENDITURES, 1964/1965 - 1971/1972 23: BUDGETARY PROJECTIONS, 1973/1974 - 1977/1978 24: LOCAL GOVERNMENT REVENUES, 1966 - 1972 25: ECONOMIC CLASSIFICATION OF LOCAL GOVERNMENT EXPENDITURES (TOTAL), 1966 - 1972 26: FUNCTIONAL CLASSIFICATION OF LOCAL GOVERNMENT EXPENDITURES (TOTAL), 1966 - 1972 27: GOVERNMENT BUDGET AND PUBLIC CORPORATIONS, 1964/1965 - 1970/1971 28: ECONOMIC CLASSIFICATION OF CENTRAL GOVERNMENT CAPITAL EXPENDITURES, 1964/1965 - 1971/1972 29: PROFITABILITY OF SELECTED PUBLIC CORPORATIONS, 1964/1965 - 1970/1971 30: GOVERNMENT BUDGET AND GENERAL GOVERNMENT AGENCIES, 1964/1965 - 1970/1971 31: INCOME TAX RATES, 1973/74 32: BURDEN OF ROAD TAXATION, 1964 - 1971 33: AVERAGE BURDEN OF IMPORT DUTIES, SELECTED YEARS (by S.I.T.C.) 34: DISTRIBUTION OF LOCAL GOVERNMENT SERVICES, 1968 35: DISTRIBUTION OF PUBLIC SERVICES BY PROVINCE,.AROUND 1970 36: PRIMARY SCHOOL ENROLLMENT BY PROVINCES, 1968 - 1972 37: GOVERNMENT DEVELOPMENT EXPENDITURE ON AGRICULTURE AND SELECTED RURAL SERVICES, 1964/1965 - 1972/1973 38: CENTRAL GOVERNMENT FINANCES: KENYA IN COMPARISON WITH OTHER DEVELOPING COUNTRIES, AROUND 1970 Table 1: CONTRIBUTION OF THE PUBLIC SECTOR TO GROSS DOMESTIC PRODUCT AT FACTOR COST, 1964 - 1972 (in percent) 1964 1965 1966 1967 1968 1969 1970 1971 1972* I. General Government Sector 12.9 13.3 13.0 13.1 14.5 15.1 14.8 16.5 16.8 1. Central Government 8.5 NA NA NA NA NA NA NA 14.3 2. E. A. Community 0.8 NA NA NA NA NA NA NA 0.8 3. Statutory Boards and Parastatal Bodies 0.2 NA NA NA NA NA NA NA 0.3 4. Local Authorities 3.4 NA NA NA NA NA NA NA 1.4 II. Enterprise Sector 11.1 12.0 11.6 11.7 12.0 11.7 12.9 14.4 13.9 TOTAL PUBLIC SECTOR 24.0 25.3 24.6 24.8 26.5 26.8 27.7 30.9 30.7 * Provisional Source: Annual Statistical Abstracts and Economic Survey, 1973 Table 2: CONTRIBUTION OF THE PUBLIC SECTOR TO CAPITAL FORMGATION, 1964 - 1972 1964 1965 1966 1967 1968 1969 1970 1971 1972* (in L million) I. Public Sector 11.1 11.9 19.4 28.5 32.9 30.6 34.2 55.6 61.6 1. Kenya Government 4.2 7.0 8.8 12.8 15.0 17.9 23.7 31.0 36.4 2. E. A. Community 4.8 2.3 6.4 8.8 7.4 6.3 5.6 11.2 6.0 3. Statutory Boards and Parastatal Bodies 0.6 1.2 2.4 3.3 5.2 2.3 2.0 7.7 10.8 4. Local Government 1.4 1.4 1.9 3.7 5.3 4.1 3.0 5.7 8.5 II. Total Public and Private Sectors 44.3 45.7 61.2 82.2 89.5 93.7 112.7 144.2 159.9 (in percent) III. Share of Public Sector in Capital Formation 25.1 26.0 31.7 34.7 36.8 32.7 30.3 38.6 38.5 * Provisional Source: Annual Statistical Abstracts and Economic Survey, 1973 Table 3: PUBLIC SECTOR IMPORTS, 1964/1965 - 1971/1972 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72* (in L million) 1. Public Sector-/ Imports 8.5 14.2 19.1 17.5 16.6 15.9 18.4 19.3 2. General Government-/ (Final Consumption) Imports 3.1 5.2 5.4 4.7 4.8 5.3 7.2 9.3 3. Total Net Imports 82.8 100.7 109.5 110.7 115.4 129.5 163.0 180.8 4. Total (Recurrent and Capital) Expenditures of the Central Government 59.8 69.9 82.6 99.5 111.7 130.2 168.6 195.0 5. General Government GDP 42.9 45.6 50.6 58.5 67.5 74.2 83.7 101.9 6. Public Sector GDP 81.2 88.1 96.4 108.3 122.5 136.7 151.9 188.5 (in percent) 7. Public Sector Imports as percent of Total Net Imports 10.3 14.1 17.4 15.8 14.4 12.3 11.3 10.7 8. Public Sector Imports as percent of Public Sector GDP 10.5 16.1 19.8 16.2 13.6 11.6 12.1 10.2 9. General Government Imports as. percent of Total Net Imports 3.7 5.2 4.9 4.2 4.2 4.1 4.4 5.1 10. General Government Imports asj percent of General Government GDP 7.2 11.3 10.7 8.0 7.1 7.1 8.6 9.1 11. General Government Imports as percent of Central Government Expenditures 5.2 7.4 6.5 4.7 4.3 4.1 4.3 4.8 * Provisional 1/ Public sector here consists of Kenya Government, East African Community (E.A.C.) and East African Corporations. 2/ General Government here means Kenya Government and General Fund Services of E.A.C. only. Source: Statistical Abstract, 1972 Table 4: EMPLOYMENT IN THE PUBLIC SECTOR, 1964-1972 1964 1965 1966 1967 1968 1969 1970 1971 1972* (in 000's) I. Public Sector 182.0 188.2 200.4 212.1 221.9 237.1 247.5 256.0 275.5 1. Kenya Government 85.5 85.1 93.5 94.9 99.1 108.6 159.6-1/ 164.3 177.0 2. (a) E. A. Community (General Fund Services) 3.1 3.3 3.1 3.0 2.9 2.8 3.1 3.2 3.7 (b) E. A. Railways and Harbors 23.3 24.3 26.4 25.4 25.3 23.2 22.5 22.6 23.1 (c) E. A. Posts and Telecommunications 4.5 4.5 4.8 4.7 4.8 4.8 5.5 5.8 5.8 (d) E. A. Airways Corporation 1.7 2.0 2.1 2.5 3.0 3.3 3.8 3.7 3.9 (e) E. A. Cargo Handling Services 8.1 9.2 10.0 7.8 9.6 8.2 8.7 9.9 9.1 (f) E. A. Harbors Corporation - - - - - 1.9 2.2 3.1 3.0 (g) Other E. A. Public Bodies - - - 0.8 1.0 3. Parastatal Bodies - - - 13.4 14.1 17.0 18.4 18.8 23.1 4. Local Government 55.5 59.4 60.2 59.8 63.1 67.3 23.7- 23.8 25.8 II. Total Wage Employment in the "Modern" Sector 575.4 582.0 585.4 597.5 606.4 627.2 644.5 679.7 709.4 (in percent) III. Share of Public Sector in Total Wage Employment 31.6 32.3 34.2 35.4 36.6 37.8 38.4 37.7 38.8 * Provisional l/ Reflects the major transfer of functions from the county councils to the Central Government which took place in 1970. Source: Annual Statistical Abstracts and Economic Survey, 1973 Table 5: WAGE BILL IN THE PUBLIC SECTOR, 1964 - 1972 1964 1965 1966 1967 1968 1969 1970 1971 1972* (in L million) I. Public Sector 45.1 51.4 58.0 62.9 67.1 71.7 79.3 86.8 96.2 1. Kenya Government 19.9 22.8 26.2 27.1 29.4 31.8 43.51' 49.7 52.9 2. E. A. Community and Corporations 14.8 17.0 19.8 18.2 19.4 19.7 21.7 22.7 23.5 3. Parastatal Bodies - - - 3.4 3A). 4.3 .6 .° 11.1 4. Local Government 10.4 11.6 12.0 14.2 14.5 15.9 7.5-1 7.6 8.7 II. Factor Incomes in the Monetary Economy 240.0 250.0 283.5 296.2 330.4 359.9 404.9 448.9 504.1 III. Remuneration of Employees in the Monetary Economy 131.6 137.6 153.2 167.7 189.6 203.4- 224.7 257.3 285.4 (in percent) IV. Share of Public Sector in Factor Incomes 18.8 20.6 20.5 21.2 20.3 19.9 19.6 19.6 19.1 V. Share of Public Sector in the Remuneration of Employees 34.3 37.4 37.9 37.5 35.4 35.3 35.3 34.7 33.7 * Provisional 1/ Reflects the major transfer of functions from the county councils to the Central Government which took place in 1970. Source: Annual Statistical Abstracts and Economic Survey, 1973 Table 6: AVERAGE EARNINGS OF THE GOVERNMENT EMPLOYEES, 1963-1972 Average Earnings Average Earnings Average Earnings of Duployees in General Go;t.l/ General Govt.l/ of of Private Sector 2/ Private Industry Wage B1ll Employment Govt. Employees Employees and Commerce -(-n ITfli6-n (in 000's) (LS) (ES) (ES) 1963 24.4 120.6 202.3 146.1 266.3 1964 30.3 141.0 214.9 153.7 250.4 1965 34.4 144.5 238.1 159.5 259.7 1966 33.2 153.7 248.5 179.5 285.4 1967 41.3 154.7 267.0 3/ 191.8 292.4 1968 43.9 162.2 270.7 206.0 316.3 1969 47.9 176.4 217.5 210.0 325.9 1970 51.1 184.0 277.7 224.8 353.9 1971 57.2 187.8 304.6 4/ 230.1 352.0 1972* 61.6 202.8 303.7 247.5 377.3 * Provisional 1/ General Government is defined to cover the central and local governments only. 2/ Includes Agriculture, Forestry and Fisheries. 3/ There was a Salary Review Commission in 1967. See Sessional Papers Nos. 10 and 11 of 1967. 4/ Across-the-board pay increases were announced in May 1971 following the Ndegwa Commission. Source: Statistical Abstract, 1972 and Economic Survey, 1973 Table 7: CONSOLIDATED GENERAL (CENTRAL AND LOCAL) GOVERNMENT FINANCES, 1966/1967 - 1971/1972 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72* (in b million) 1. Recurrent Revenues 83.1 95.0 102.1 115.2 139.9 158.1 Central Government 66.0 77.7 84.9 99.2 124.2 141.2 Local Governments 17.1 17.3 17.2 16.0 15.7 16.9 2. Recurrent Expenditures 1/ 84.8 92.3 95.1 102.2 115.9 134.2 Central Government 64.8 70.1 75.2 87.1 100.8 118.5 Local Governments 20.0 22.2 19.9 15.1 15.1 15.7 3. Capital Expenditures 1/ 19.2 25.7 30.8 34.4 51.4 63.3. Central Government 16.6 21.8 26.8 31.0 44.4 53.8 Local Governments 2.6 3.9 4.0 3.4 7.0 9.5 4. Total Expenditures 104.0 118.0 125.9 136.6 167.3 197.5 Central Government 81.4 91.9 102.0 118.1 145.2 172.3 Local Governments 22.6 26.1 23.9 18.5 22.1 25.2 5. GDP at Factor Cost 394.1 421.3 459.6 502.2 548.8 611.4* 6. Monetary GDP at Factor Cost 288.0 313.0 345.0 383.0 425.6 476.5* (in percent) 7. Recurrent Revenues/Monetary GDP 28.8 30.4 29.6 30.1 32.9 33.2 8. Total Expenditures/GDP 26.4 28.0 27.4 27.2 30.5 32.3 9. Capital Expenditures/Total Expenditures 18.4 21.8 24.4 25.2 30.7 32.1 10. Local Government Expenditures/Total Expenditures 21.7 22.1 19.0 13.5 13.2 12.8 * Provisional 1/ This is a national accounting concept somewhat different from the concept of the budget documents. Source: Annual Statistical Abstracts and Economic Survey, 1973 Table 8: PARASTATAL ENTERPRISES IN RELATION TO THE GOVERNMENT BUDGET, 1965/1966 - 1970/1971 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 (in E million) 1. Revenues from: 3.6 2.5 3.8 4.5 4.9 8.0 (a) Public Corporations 0.8 0.9 1.1 1.2 1.5 1.5 (b) Government Agencies 2.8 1.6 2.7 3.3 3.4 6.5 2. Total Government Revenues 57.8 66.0 77.7 84.9 99.2 124.2 3. Contribution of Parastatals to Government Revenues (in %) 6.2 3.8 4.9 5.3 4.9 6.4 4. Government Loans and Equity in: 5.7 6.6 7.0 9.6 10.3 15.4 (a) Public Corporations 2.9 4.0 3.5 3.4 7.6 13.8 (b) Government Agencies 2.8 2.6 3.5 6.2 2.7 1.6 5. Government Capital Expenditures 1/ 13.1- 16.6- 21.& 26.8 31.0 44.4 6. Absorption of Capital Budget by Parastatals (in %) 4?.1 39.7 32.1 35.8 33.2 34.6 1/ This is a national accounting concept somewhat different from the concept of development expenditure of the budget documents. Source: Statistical Abstract, 1972 Table 9: CENTRAL GOVERNMENT FINANCES, 1964/1965 - 1972/1973 (in L million) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1971/72 1972/73 1972/73 (A) (A) (A) (A) (A) (A) (A) (B) (A) (B) (R) Recurrent Revenues * 49.3 57.8 66.0 77.7 84.9 99.2 124.2 130.4 141.2 140.0 146.3 Recurrent Expenditures- 56.9 60.7 64.8 70.1 75.2 87.1 100.8 111.2 118.5 124.6 137.7 Recurrent Surplus (+)/ Deficit (-) - 7.6 - 2.9 + 1.2 + 7.6 + 9.7 +12.1 +23.4 +19.2 +22.7 +15.4 + 8.6 Capital Expenditure-/ 10.5 12.1 16.6 21.8 26.8 31.0 44.4 56.62/ 53.8!' 69.32/ 64.9V Over-all Budget Deficit 18.1 15.0 15.4 14.2 17.1 18.9 21.0 37.4 31.1 53.9 56.3 Financed by External Sources (net) 18.6 11.5 8.3 7.8 6.2 10.1 9.6 9.4 26.4 Gross Borrowings 20.5 14.6 11.3 9.8 8.1 12.3 11.7 12.9 30.0 Less Contributions to Sinking Fund & Redemptions 1.9 3.1 3.0 2.0 1.9 2.2 2.1 3.5 3.6 Internal Sources (net) - 0.5 3.5 7.1 6.4 10.9 8.8 11.4 21.7 29.9 Borrowings (net of use of cash balances) 0.6 5.1 7.6 7.0 11.0 10.7 19.6 27.6 33.7 of which Central Bank - - - -1.6 -1.8 - 1.5 0.6 10.8 8.9 Commercial Banks 0.1 3.8 3.2 1.0 5.6 2.2 5.1 7.3 Others3/ 0.5 1.3 4.4 7.6 7-2 10.0 13.9 9.5 8 Less Contributions to Sinking Fund and Redemptions 1.1 1.6 0.5 0.6 1.1 1.9 8.2 5.9 3.8 A = Actual B = Budget Estimate R = Revised-Estimate * includes appropriations-in-aid or departmental revenues. 1/ Excludes repayment of public debt and sinking fund. 2/ These figures correspond to the budget concept of development expenditures. 3/ Borrowings from the National Social Security Fund, Cereal and Sugar Fikancing Corporation, etc. Source: Economic Survey and information supplied by the Ministry of Finance and Planning Table 10: FISCAL TRENDS, 1965/1966 - 1972/1973 (in percent) Average Average Average Average Average 1964/65- 1967/68- 1964/65- 1970/71- 1964/65- 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1966/67 1969/70 1970/71 1972/73 1972/73 1. Annual Growth Rates of Central Governments': Recurrent Revenues 17.2 14.2 17.7 9.3 16.8 25.1 13.7 3.6 15.7 13.0 16.6 8.5 14.5 Recurrent Expenditures 6.7 6.8 8.2 7.3 15.8 15.7 17.6 16.2 6.7 11.5 10.0 16.9 12.1 Capital Expenditures 15.2 37.2 31.3 22.9 15.6 43.2 21.2 20.6 25.8 19.3 27.0 21.0 24.6 2. Recurrent Savings as percent of Recurrent Revendes - 5.0 + 1.8 + 9.8 +11.4 +12.2 +18.8 +16.1 +5.9 - 3.2 11.1 8.1 13.6 8.9 3. Marginal Government Savings as percent of marginal revenues55.3 50.0 36.2 29.2 17.5 45.2 - 6.5 -276.5 62.0 27.6 38.9 Neg. 21.4 4. Recurrent Savings as percent of Capital Expenditure -24.2 + 7.2 +34.8 +36.2 +39.0 +52.7 +42.2 +13.3 -30.0 36.7 24.3 36.1 27.7 5. Contribution of Net Foreign Capital to Capital Expend- itures 95.0 50.0 35.8 23.1 32.6 21.6 17.8 40.7 96.5 30.5 43.0 26.7 39.4 6. Central Bank Financ- ing of Capital Expenditure - - - 7.3 - 6.7 - 4.8 1.4 20.0 13.7 - - 6.3 - 11_7 3.1 Neg. - Negative - - Negligible Source: Table 9. Table 11: PUBLIC DEBT -- TRENDS,I;OWNERSHIP AND SERVICING, 1965 - 1972 As at 30th June * 1965 1966 1967 1968 1969 1970 1971 1972 (in i million) 1. Net Public Debt /1 95.4 105.4 118.6 121.7 142.4 160.1 170.1 194.3 External (net) 76.9 86.1 91.1 85.5 /2 93.3 102.0 94.8 /3 105.8 Internal (net) 18.5 19.3 27.5 36.2 49.1 58.1 75.2 88.5 2. Major Holders of Internal Debt (a) National Social Secutiry Fund - 1.2 3.6 8.2 17.4 17.5 22.5 30.4 (b) Central Government /4 4.7 7.4 8.6 8.4 9.1 9.8 10.4 18.7 (c) Kenya Post Office Savings Bank 1.2 2.1 2.1 2.1 2.1 2.6 2.6- 3.5 (d) Insurance Companies 2.5 3.3 3.8 4.3 4.8 4.9 5.3 6.5 (e) Other Private Companies 0.7 1.0 1.3 1.7 2.6 4.1 6.2 9.2 (f) Commercial Banks 1.0 1.1 1.7 1.7 2.3 8.0 8.5 8.1 (g) Central Bank 3.5 3.5 3.5 3.5 3.5 3.5 3.5 5.7 3. Debt Servicing Charges (Annual) 6.4 7.7 9.3 7.9 8.9 10.7 17.7 16.7 Interest 4.4 4.8 5.2 5.4 6.0 6.6 7.4 8.7 (External) (1.1) (1.3) (1.5) (1.9) (2.4) (3.4) (4.1) (n.a.) (Internal) (3.3) (3.5) (3.7) (3.5) (3.6) (3.2) (3.3) (n.a.) Repayments (excluding Sinking Fund) 2.0 2.9 4.1 2.5 2.9 4.1 10.3 8.0 (External) (1.5) (1.9) (3.9) (2.3) (2.4) (1.6) (7.4) (n.a.) (Internal) (0.5) (1.0) (0.2) (0.2) (0.5) (2.5) (2.9) (n.a.) (in percent) 4. Net Public Debt as Percent of CDP at factor cost /5 28.9 29.4 30.0 28.9 30.9 31.9 29.5 30.0 5. Domestic Debt as Percent of Total Debt 19.4 22.4 23.2 29.8 34.5 36.3 44.2 45.6 6. Interest Payments as Percent of Recurrent Revenues /6 8.9 8.3 7.9 7.0 7.1 6.7 6.0 5.8 7. Debt Servicing Charges as Percent of Total Expenditures /6 9.5 10.6 11.4 8.6 8.7 9.1 12.2 10.0 8. External Debt Payments as Percent of Value of Domestic Exports /7 5.5 6.1 10.4 9.5 7.9 7.4 16.0 8.0 * Except for 1965 and 1966 where the figures pertain to the end of December and not end of June. /1 Figures here relate to net of sinking fund and exclude short-term borrowings. The amount of outstanding treasury bills at the end of June, 1972, was b 16 million. /2 Reduction here reflects devaluation of sterling in 1967/68. /3 Reduction here reflects the repayment of a major railway loan. /4 This includes the nominal value of sinking ftnds along with other Treasury holdings. /5 Data for GDP at factor cost are taken from Statistical Abstract, 1972. /6 Data for recurrent revenues and total expenditures are taken from Table 9. /7 Value of domestic exports taken from Statistical Abstract, 1972, and external debt payments assumed at i 7.0 million for 1972. Source: Economic Survey, 1973. Table 12: LOCAL GOVERNMENT FINANCES, 1966 - 1972 (in L million) 1966 1967 1968 1969 1970 1971* 1972 (B) Recurrent (Own) Revenues 17.2 17.0 17.6 16.9 15.0 16.3 17.5 Recurrent Expenditures 19.5 20.4 24.0 15.8 14.5 15.8 15.6 Recurrent Surplus (+)/Deficit (-) - 2.3 - 3.4 - 6.4 + 1.1 + 0.5 + 0.5 + 1.9 Capital Expenditures 1.9 3.3 4.4 3.7 3.0 11.1 7.9 Over-all Budget Deficit 4.2 6.7 10.8 2.6 2.5 10.6 6.8 Financed by: Central Government Grants 3.4 3.7 3.9 2.6 0.2 1.1 NA Borrowings 0.6 1.4 2.0 2.2 1.5 8.9 NA Others ** 0.2 1.6 4.9 - 2.2 0.8 0.6 NA B = Budget Estimates provided by the Ministry of Finance and Planning. * Provisional ** Largely drawing down of reserves. Source: Annual Statistical Abstracts Table 13: CENTRAL GOVERNMENT SAVINGS, 1964/1965 - 1971/1972 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72* (in E million) 1. Central Government Savings - 7.6 - 2.9 + 1.2 + 7.6 + 9.7 +12.1 +23.4 +22.7 2. National Savings 51.5 56.5 66.8 67.7 80.2 95.8 108.0 124.6 3. Monetary GDP at Factor Cost 243.0 263.0 288.0 313.0 345.0 383.0 425.6 476.5 4. GDP at Factor Cost 329.7 358.3 394.1 421.3 459.6 502.2 548.8 611.4 5. Central Government Savings (in percent) as percent of National Savings -14.8 - 5.1 1.8 11.2 12.1 12.6 21.7 18.2 6. Central Government Savings as percent of Monetary GDP at Factor Cost - 3.1 - 1.1 0.4 2.4 2.8 3.2 5.5 4.8 7. Central Government Savings as percent of GDP at Factor Cost - 2.3 - 0.8 0.3 1.8 2.1 2.4 4.3 3.7 * Provisional Sources: (1) Table 9. (2) Annual Statistical Abstracts and Economic Survey, 1973 Table 14: REVENUE EFFORT. 1964/1965 - 1972/1973 (in i3 million) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1. Taxes on Income and Capital 14.0 16.9 20.1 24.4 25.9 32.5 41.4 47.0 48.9 of which (Personal Income Tax) ( 6.3) ( 7.9) ( 9.9) (10.8) (14.0) (17.3) (21.9) (24.6) (23.0) (Company Tax) ( 7.2) ( 8.0) ( 8.9) (12.2) ( 9.6) (11.9) (15-9) (19-7) (22.0) (Graduated Personal Tax) ( - ) ( - ) ( - ) ( 0.4) ( 1.5) ( 2.4) ( 2.7) ( 1.8) ( 2.8) (Othersl/) ( 0.5) ( 1.0) ( 1.3) ( 1.0) ( 0.8) ( 0.9) ( 0.9) ( 0.9) ( 1.1) 2. Taxes on Consumption and Production 25.8 27.5 33.2 35.7 39.3 43.6 51.7 58.1 60.2 of which (Import Duties) (15.9) (17.2) (20.1) (20.0) (21.8) (24.4) (28.7) (31.1) (2b.8) (Excise Duties) ( 6.2) ( 6.3) ( 8.5) (10.4) (11.8) (13.2) (15.3) (16.0) (16.5) (Petrol and Diesel Tax) ( 1.1) ( 1.2) ( 1.6) ( 1.7) ( 1.8) ( 2.1) ( 2.4) ( 2.4) ( 2.7) (Others-') ( 2.6) ( 2.8) ( 3.0) ( 2.4) ( 3.9) ( 3.9) ( 5.3) ( 8.6) (14.2) A. TOTAL TAX REVENUES (1 + 2) 39.8 44.4 53.3 60.1 65.2 76.1 93.1 105.1 109.1 3. Sale of Goods and Services 5.1 5.2 6.2 7.3 7.7 11.0 12.8 17.5 18.7 of which (Education Department) ( 0.3) ( 0.1) ( 0.2) ( 0.2) ( 0.3) ( 2.6) ( 4.0) ( 4.3) ( 5.4) (Water Charges) (0.7) (0.9) (0.9) ( 1.0) (1.0) ( 1.1) ( 1.1) ( 1.2) (1.2) (Others3/) ( 4.1) ( 4.2) ( 5.1) ( 6.1) ( 6.4) ( 7.3) ( 7.7) (12.0) (12.1) 4. Investment Revenues 4.4 8.2 6.5 10.3 12.0 12.1 18.3 18.6 18.5 of which (Loan Charges4') ( 2.7) ( 2.7) ( 3.6) ( 5.9) ( 6.4) ( 5.5) ( 9.8) ( 4.5) ( 4.3) (Reimbursements from Other Administrations5/) (0-9 ) ( 0.6) ( 1.2) ( 1.4) ( 1.5) ( 1.2) ( 1.0) ( 1.4) ( 1.1) (MiscellaneousY!) ( 0.8) ( 4.9) ( 1.7) ( 3.0) ( 4.1) ( 5.4) ( 7.5) (12.7) (13.1) B. TOTAL REVENUES (1 + 2 + 3 + 4) 49.3 57.8 66.0 77.7 84.9 99.2 124.2 141.2 146.3 - Nil R Revised Estimates 1/ Includes -state duties and export duty. I_ Tncludes motci.. hicle purchase tax, beer tax, trade licenses and other fees, and stamp duties. lric1tud&- aviation landing fees and charges of government departments. 4j Incl;udes interest repayment and sinking fund contributions. 5 e.g.. Jocal authorities E. A. corporations, etc. 6J Includes Central Bank of Kenya Dividends, extra exchequer receipts, etc. Source: Statistical Abstract, (1966 through 1971), Economic Survey, 1973, and Ministry of Finance and Planning Table 15: CENTRAL GOVERNMENT REVENUE RATIOS, 1964/1965 - 1971/1972 (in percent) 1964/65 1965/6f, 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1. Total Revenues as percent of Monetary GDP 20.2 22.0 22.9 24.8 24.6 25.9 29.4 31.0 2. Total Revenues as percent of GDP at factor cost 15.0 16.1 16.7 18.4 18.5 19.8 22.7 24.2 3. Tax Revenues as percent of Total Revenues 80.7 76.8 80.8 77.3 76.8 76.7 75.0 74.4 4. Tax Revenues as percent of Montegary GDP 16.3 16.9 18.5 19.2 18.9 19.9 22.1 23.1 5. Direct Taxes as percent of Tax Revenues 35.2 38.1 37.7 40.6 39.7 42.7 44.5 44.7 6. Indirect Taxes as percent of Tax Revenues 64.8 61.9 62.3 59.4 60.3 57.3 55.5 55.3 7. Income Taxes as percent of Tax Revenues 33.9 35.8 35.3 38.9 38.5 41.5 43.5 43.9 8. Import Duties as percent of Tax Revenues 40.0 38.7 37.7 33.3 33.4 32.1 30.8 29.6 9. Excise Duties and Consumption Taxes* as percent of Tax Revenues 18.6 18.2 18.6 20.0 20.7 20.1 19.2 21.2 10. Income (Personal and Company) Taxes as percent of Factor Incomes in the Monetary Economy 5.6 6.0 6.5 7.4 7.3 8.3 9.6 10.0 11. Personal Income Tax as percent of Incomes from Remuner- ation of Employees and Rental Surplus 4.3 5.0 5.7 5.6 6.6 7.5 8.6 9.1 12. Company Tax as percent of Monetary GDP from Enterprises (includ- ing Non-Profit Institutions 3.7 3.7 3.8 4.8 3.5 3.9 4.7 5.4 13. Import Duties as percent of Value of Net Imports 19.2 17.9 18.3 18.0 18.8 18.9 17.3 17.2 14. Excise Duties and Consumption Taxes as percent of Private Consumption 3.0 3.1 3.5 3.9 4.2 4.4 4.7 5.3 * Includes petrol tax, entertainment tax, second hand motor vehicle purchase tax, airport passenger tax, tra- ditional liquor tax, hotel accomodation tax, beer tax and cigarettes and tobacco tax. Source: Table 14 and Statistical Abstract, 1.972. Table 16: CENTRAL COVERMENT TAX EFFORT, 1963/1964 - 1971/1972 Average Average Average 1963/64 1967/68 1963/64 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1967/68 1971/72 1971/72 1. Tax Revenues Realized (in iniIILnj) 36.8 39.8 44.4 53.3 60.1 65.2 76.1 93.1 105.1 46-9 79.9 i63.8 2. Revenue Estimates f Budget Proposals- in Individual Years (in 4, million) 1.5 1.6 2.4 2.0 3.5 0.7 0.4 0.3 4.5 - - - 3. Estimated Cumulative Revenue Effects of Tax Revisions2l (in i million) 1.5 2.6 6.2 8.6 12.5 14.6 17.7 24.2 30.8 - - - 4. Tax Revenues Adj_used for Tax Revisions: 1963/64 Tax Structure (Row I minus Row 3) 35.3 37.2 38.2 44.7 47.6 50.6 58.4 69.9 74.3 40.6 60.2 50.7 S. BuiLt-in Tax Revenues: 1971172 Tax Structure Structure 2a/ 49.8 52.6 54.0 63.2 66.8 71.6 82.6 98.9 105.1 57.3 85.0 71.6 6. Monetary ODP 234.0 243.0 263.0 288.0 313.0 345.0 383.0 423.0 455.0 268.0 384.0 327.0 7. GDP at Factor Cost 316.6 329.7 358.3 394.1 421.3 459.6 502.2 546.5 584.0 364.0 502.7 434.7 8. Buoyan w/ of Tax Revenues with respect to Mooietary GDP - 2.2 1.4 2.1 1.5 0.8 1.5 2.1 1.7 1.9 1.6 2.0 9. Buoyancy3/ of Tax Revenues with respect to Total CDP - 2.0 1.3 2.0 1.9 0.9 1.8 2.5 1.9 1.9 1.9 2.2 10. Built-in Elasticity-4/ of Tax Reventues with respect to Monetary GDP - 1.4 0.3 1.8 0.7 0.6 1.4 1.9 168 1.0 1.2 1.2 11. Built-in Elasticity4/ of Tax Revenues with respect to Total GDP - 1.3 0.3 1.7 0.9 0.7 1.7 2.2 0.9 1.1 1.5 1.3 i2. Marginrvl Tax Revenues as percent of Marginal Monetary GDP - 33.3 23.0 35.6 27.2 15.9 28.7 67.5 37.5 29.5 31.7 30.9 13. Marginal Tax Revenues as percernt of Marginal (Mone- tary & Non-Monetary)CDP - 22.9 16.1 24.9 18.3 13.3 25.6 60.9 32.0 22.4 27.6 25.6 1/ tCiven in the B;udget Speeches. Insofar as the Treasury often underestimates total revenues at the budget time (see Table 17), the figures given in row 2 In all probability will be somewhat underestimated. 2/ EsLimated in the Ministry of Finance and Planning using disaggregated tax revenues and assuming that the "percentage eflfc.c' of a revenue measure adopted in any particular year continues every year thereafter, e.g., if a change in the tax i in rhP year i resulits in an increase in the tax revenues Tit by x percent, the same percentage effect will continue in the years t+l, L2 . . .. wel, and will be measured by (x.Tict1), (xr'it+2), (x.xit+3), . ..etc. The figures given in row 3 are the result -- . T it+m vherr (m=0, 1, 2, 3....) and n is the number of taxes. 2a/ This is row (4) multiplied by the ratio of realized tax revenues to adjusted tax revenues for year 1971/72 (which is:105.1/74.3). 31 Buoyancy is defined as percentage change in realized revenues divided by percentage change in the monetary GDP or total GDP as the case may be. 4/ Built-in Elasticity is defined as percentage ci-age in built-in tax revenues divided by percentage change in mnaetary GDP or total CUP as the case may be. Source: Miniscry of Fnance and Planning. Table 17: BUDGET PERFORMANCE, 1964/1965 - 1972/1973 (in b million) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1/ I. Revenues Budget Estimates 49.2 55.5 59.3 72.2 76.5 87.4 110.2 130.0 135.4 Actual 49.3 57.8 66.0 77.7 84.9 99.2 124.2 141.2 146.3-' Ratio (in percent) 100.2 104.1 111.3 107.6 111.0 113.5 129.0 108.6 108.5 2/ II. "Voted" Recurrent Expenditures Budget Estimates 27.3 35.9 39.2 43.1 48.0 65.5 81.0 98.5 110.6-/ &t--Dl '1.7 Y/.S s9.G v~~~~~~~~~~~7.5 63.i 72.9 -84.5 iOo.u 117. 35 (Amount Spent without the Authority of the Parliament) (neg.) ( 0.1) ( 0.1) ( 0.1) ( 1.1) ( 1.2) ( 1.8) ( 3.1) (N.A.) Ratio (in percent) 152.7 132.0 127.0 133.4 131.5 111.3 104.3 107.6 106.6 4/ III. Development Expenditures Budget Estimates 15.7 18.4 22.0 26.7 29.3 36.1 37.9 56.6 69.36/ Actual 14.7 15.7 17.7 21.1 25.9 32.3 47.6 53.8 64.9 5 Ratio (in percent) 93.6 85.3 80.4 79.0 88.4 89.5 125.6 95.1 93.7 1/ Includes appropriations-in-aid or the revenues originating on current account from various ministry's service functions. 2/ "Voted" recurrent expenditures is a budget concept which includes only the expenditures of the ministries and excludes all public debt charges, pensions and gratuities and other non-voted expenditures like subscriptions to international organiz- ations and salaries of remunerations of the President, Attorney General, Judges and Justices, exchequer and audit account, public service commission and electoral commissions, etc. This concept is entirely different from the one used in Statistical Abstract and Economic Survey. 3/ Budget estimates cover the original budget estimates only and exclude supplementaries. 4/ This is a budget concept which is different from the concept of capital expenditures given in Statistical Abstract ani Economic Surveys. 5/ Revised Estimate. 6/ These are the original budget estimates and exclude supplementaries of about h 8 million on current account and i 3 mil- lion on development account. Source: Estimates (Annual) and Appropriation Accounts (Annual) Table flU: FPJNCTIOGrAL CLASSIFICATION OF CENTRAL GOVERNMENT RECURRENT EXPENDITURES 1/1964/1965 - 1972/1973 (in F million) C.3Lte;ar 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 (Provisional) 1. General Service- 17.2 18.6 21.5 22.7 22.7 25.0 27.1 34.5 38.0 of which (Adirn,istra- Lon) ( 4.6) ( 3.8) ( 3.9) ( 3.8) ( 4.1) ( 5.3) ( 6.5) 8 8.9) (11.9) (Law and Order) ( 8.0) ( 8.6) ( 9.5) (10.5) (10.4) (11.1) (11.9) (14.2) (13.9) (Defense) ( 2.9) ( 3.9) ( 5.1) ( 5.8) ( 5.3) ( 5.4) ( 6.1) ( 8.4) c 8.9) 2. Community Services 2.4 3.0 3.5 3.4 3.9 4.3 5.2 6.7 9.9 of which (Roads) ( 1.3) ( 1.8) ( 1.9) ( 2.0) ( 2.4) ( 2.9) ( 3-7) ( 4.5) ( 5.1) (Water Works) ( 1.1) ( 1.2) ( 1.6) ( 1.3) ( 1.4) ( 1.4) ( 1-7) ( 2.1) ( 2.2) 3. Social Services 11.0 11.3 13.4 14.6 16.3 25.1 36.6 44.0 49.1 of which (Education) ( 6.2) ( 5.9) ( 7.2) ( 7.9) ( 9.0) (15.8) (25.9) (31.9) (37.0) (Health) ( 3.0) ( 3.6) ( 3.8) ( 4.3) ( 4.7) ( 6.1) ( 7.5) ( 8.3) ('T.9') (Community Development and Others) ( 1.8) ( 1.8) ( 2.4) ( 2.4) ( 2.6) ( 3.2) ( 3.2) ( 3.8) ( 4.2) 4. Economic Services 7.0 8.3 8.4 12.7 15.0 12.8 12.8 15.2 17.9 of which (Agriculture, Veterinary, Forestry) (5 .2) ( 6.5) ( 5.8) ( 7.8) ( 8.7) ( 7.8) ( 7.9) ( 9.8) (10.4) (Commerce arid Industry) ( 0.7) ( 0.7) C 0.8) C 3.1) ( 4.2) ( 2.9) ( 1.5) ( 2.0) ( 2.0) 5. Financial Obligations and Others* 19.3 19.5 18.0 16.7 17.3 19.9 19.1 18.1 22.- of which (Public Debt Interest) ( 4.4) ( 4.8) ( 5.2) ( 5.4) ( 6.0) ( 6.6) ( 7.4) ( 8.7) ( 9.6) (Pensions and Gratuities) ( 3.9) ( 3.8) ( 3.9) C 3.6) ( 3.8) ( 3.8) ( 3.6) ( 3.6) ( 5.4) (Transfers to Local Authorities) ( 2.0) ( 3.4) ( 2.9) ( 3.9) ( 5.6) ( 4.8) ( 0.5) ( 0.7) ( 0.7) TOTAL 56.9 60.7 64.8 70.1 75.2 87.1 100.8 118.5 137.7 1/ Excludes public debt sinking fund and redemptions. 2/ Excludes unallocable expenditure of somne i 5 million, Source: Annual Statistical Abstracts and Ministry of Finance and Planning Table 19: FUNCTIONAL ALLOCATIONS OF CENTR/LL GOVERNMENT RECURRENT EXPENDITURES, 1964/1965 - 1972/1973 (in percent) Category 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1. General Services 30.2 30.6 33.2 32.4 30.2 28.7 26.9 29.1 27.6 of which (Administration) ( 8.1) ( 6.3) ( 6.0) ( 5.4) ( 5.5) ( 6.1) ( 6.4) ( 7.5) ( 8.6) (Law and Order) (14.1) (14.2) (14.7) (15.0) (13.8) (12.7) (11.8) (12.0) (10.1) (Defense) ( 5.1) ( 6.4) ( 7.9) ( 8.3) ( 7.0) ( 6.2) ( 6.1) ( 5.1) C 6.5) 2. Community Services 4.2 4.9 5.4 4.9 5.2 4.9 5.2 5.7 7.2 of which (Roads) ( 2.3) ( 3.0) (2.9) ( 2.9) ( 3.2) ( 3.3) ( 3.7) ( 3.8) ( 3.7) (Water Works) ( 1.9) ( 2.0) ( 2.5) ( 1.9) ( 1.9) ( 1.6) ( 1.5) C 1.9) C 1.6) 3. Social Services 19.3 18.6 20.7 20.8 21.7 28.8 36.3 37.1 35.7 of which (Education) (10.9) ( 9.7) (11.1) (11.3) (12.0) (18.1) (25.8) (26.9) (26.9) (Health) ( 5.3) ( 5.9) ( 5.9) ( 6.1) ( 6.3) ( 7.0) ( 7.4) ( 7.0) ( 5.7) (Community Development and Others) ( 3.1) ( 3.0) ( 3.7) ( 3.4) ( 3.4) ( 3.7) ( 3.1) ( 3.2) ( 3.1) 4. Economic Services 12.3 13.7 13.0 18.1 19.9 14.7 12.7 12.8 13.0 of which (Agriculture, Veterinary, Forestry) ( 9.1) (]0.7) ( 9.0) (11.1) (11.6) ( 9.0) ( 7.8) C 8.3) ( 7.6) (Commerce and Industry) ( 1.2) ( 1.2) ( 1.2) ( 4.4) ( 5.6) ( 3.3) ( 1.5) C 1.7) ( 1.5) 5. Financial Obligations and Others 34.0 22.2 27.7 23.8 23.0 22.9 18.9 15.3 16.5 of which (Public Debt Interest) ( 7.7) ( 7.9) ( 8.0) ( 7.7) ( 8.0) ( 7.6) ( 7.4) ( 6.8) ( 7.0) (Pensions and Gratuities) ( 6.9) ( 6.3) ( 6.0) ( 5.1) ( 5.1) ( 4.4) ( 3.5) ( 3.0) ( 3.9) (Transfers to Local Authorities) ( 3.5) ( 5.6) ( 4.5) ( 5.6) ( 7.4) ( 5.5) ( 0.5) ( 0.6) C 0.5) TOTAL 100.0 102.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 * Provisional Source: Table 18. Table 20: FUNCTIONAL CLASSIFICATION 0F CEINTRAL GOVERFNMFNT CAPITAL EXPENDITURES,* 1964/1965 - 1971/1972 (in 6 million) C.ategory 1964/65 1965/66 1966/67 1967/68 1968169 1969/70 1970/71 1971/72 CE) 1. General Services 0.6 0.7 1.1 2.1 1.8 2.4 3.6 4.8 of which (Administration) ( 0.4) ( 0.3) ( 0.3) ( 0.5) ( 0.5) ( 1.1) ( 1.6) ( 1.7) (Law and Order) ( 0.1) ( 0.3) ( 0.7) ( 1.3) ( 1.1) ( 1.3) ( 2.0) ( 3.0) (Defense) ( - ) ( 0.1) ( 0.1) ( 0.2) ( 0.2) ( - I t - ) ( 0.1) 2. Community Services 1.8 3.9 5.3 5.9 6.9 9.6 14.9 20.3 of which (Roads) ( 1.6) ( 3.4) ( 4.4) t 5.2) ( 6-5) { 9.3) (14.3) (18.9) (Water Works) ( 0.2) ( 0.5) ( 0.9) ( 0.2) ( 0.4) ( 0.3) ( 0.6) ( i.4) 3. Social Services 1.3 1.4 2.9 3.7 6.2 6.7 7.3 9.6 of which (Education) ( 0.6) ( 0.6) ( 0.6) ( 1.4) ( 2.4) ( 1.5) 1.4) C 1.0) (Health) ( 0.1) ( 0.2) ( 0.5) ( 1.1) ( 1.4) ( 2.4) C 2.7) ( 2.9) (Housing) ( 0.5) ( 0.4) ( 1.4) ( 0.8) ( 2.1) ( 2.5) ( 2.7) C 3. 2) (Others) ( 0.1) ( 0.2) ( 0.4) ( 0.4) ( 0.3) ( 0.3) ( 0.5) 2.5) 4. Economic Services 6.4 6.1 6.7 9.0 10.8 11.1 17.5 12.7 of which (Agriculture, Veterinary, Forestry) ( 6.1) ( 5.7) ( 5.6) ( 4.9) ( 5.8) ( 4.0) ( 4.4) ( 5.4) (Corrarece and Industry) (neg.) (neg.) ( 3.5) ( 2.8) 4.1) ( 3.0) 4.4) 5.2) (Electricity and Power) - ) ( - ) ( - ) ( - ) - ) ( 2.6) C4.0) - ) 5. Transfers to Local Authorities 0.4 0.4 _ 0.1 0.1 0.3 0.3 0.4 6. Unallocable _ - 0.6 1.0 1.0 0.9 0.8 0.5 TOTAL 10.5 12.5 16.6 21.8 26.8 31.0 44.4 48.3 E = Estimated * This is a national accounting concept somewhat different from the concept of development expenditure of the budget dczuments. Source: Annual Statistical Abstracts Table 21: FUNCTIONAL ALLOCATIONS OF CENTRAL GOVERNMENT CAPITAL EXPENDITURES, 1964/1965 - 1971/1972 (SELECTED YEARS) (in percent) Category 1964/65 1967/68 1970/71 1971/72 1972/73 1. General Services 5.7 9.6 8.1 9.9 11.0 of which (Administration) ( 3.8) ( 2.3) ( 3.6) ( 3.5) ( 5.0) (Law and Order) (0.9) ( 6.0) ( 4.5) (6.2) ( 4.3) (Defense) ( - ) (0.9) - ) (0.2) ( 1.7) 2. Community Services 17.1 27.1 33.6 42.0 33.6 of which (Roads) (15.2) (23.9) (32.2) (39.1) (30.7) (Water Works) ( 1.9) ( 0.9) ( 1.4) ( 2.9) ( 2.9) 3. Social Services 12.4 17.0 16.4 19.9 19.7 of which (Education) ( 5.7) ( 6.4) ( 3.2) ( 2.1) ( 5.2) (Health) ( 1.0) ( 5.0) ( 6.1) ( 6.0) ( 5.2) (Housing) ( 4.8) ( 3-7) ( 6.1) ( 8.1) ( 6.7) (Others) ( 0.9) ( i.8) ( 1.0) ( 5.2) ( 2.6) 4. Economic Services 61.0 41.2 39.4 26.4 34.6 of which (Agriculture, Veterinary, Forestry) (58.1) (22.5) ( 9.9) (11.2) (17.1) (Commerce and Industry) (neg.) (12.8) ( 9.9) (10.S) ( 3.7) (Electricity and Power) ( -) ( -) (9.0) ( - ) ( -) 5. Transfers to Local Authorities 3.8 0.5 0.7 0.8 1.1 6. Unallocable _ 4.6 1.8 1.0 - TOTAL 100.0 100.0 100.0 100.0 100.0 Source: Table 20. Table 22: ECON!)'OMIC CLASSIFICA.TION OF CENTRAL GOVERNMENT RECURRENT EXPENDITURES, 1964/1965 - 1971/1972 (in E million) GategtEy 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1. Wages and Salaries (incl. benefits) 23.9 24.9 28.0 29.6 31.7 42.1 53.9 68.8 of which (Civilian) (21.9) (22.4) (24.8) (26.3) (28.4) (38.4) (49.2) (64.7) (Armed Forces) ( 2.0) ( 2.5) ( 3.2) ( 3.3) ( 3.3) ( 3.7) ( 3.7) ( 4.1) 2. Other Purchases of Goods and Services 10.8 12.6 13.7 15.0 15.8 19.1 22.6 30.1 of which (Maintenance and Repairs) ( 1-7) ( 2.1) ( 1.8) ( 2.4) ( 2.5) ( 3.1) ( 3-7) ( 5.2) 3. Subsidies 0.3 0.8 0.6 2.5 2.8 1.4 1.2 0.8 of which (Agriculture) ( 0.3) ( 0.8) ( 0.5) ( 2.4) ( 2.8) ( 1.4) ( 1.2) ( 0.8) (Other Sectors) (neg.) (neg.) ( 0.1) ( 0.1) (neg.) (neg.) (neg.) (neg.) 4. Interest 4.4 4.8 5.2 5.4 6.0 6.6 7.4 8.7 of which (Internal Debt) (1.1) ( 1.3) (1.5) ( 1.9) (2.4) ( 3.4) ( 4.1) ( 4.8) (External Debt) ( 3.3) ( 3.5) ( 3.7) ( 3.5) ( 3.6) ( 3.2) ( 3.3) ( 3.9) 5. Other Transfers 17.5 17.6 17.3 17.6 18.9 17.1 16.6 15.6 of which (Persons - including Pensions) ( 4.2) ( 4.1) ( 4.4) ( 4.0) ( 4.3) ( 5.1) ( 4.3) ( 7.7) (Private Non-Profit Institutions - Primarily Educational) ( 4.1) ( 4.6) ( 3.6) ( 4.7) ( 5.5) ( 3.1) ( 2.7) ( 3.1) (Local Authorities) ( 2.0) ( 3.4) ( 2.9) ( 3.9) ( 5.6) ( 4.8) ( 0.5) ( 0.8) TOTAL 56.9 60.7 64.8 70.1 75.2 86.3 101.7 124.0* * See Footnote 2/ to Table 18 Source: Economic Surveys (Annual) Table 23: BUDGETARY PROJECTIONS, 1973/1974 - 1977/1978 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 Assumptions (in 1 million, rounded figures) Assumptions Set I: DO NOTHING 1. Recurrent Revenues 146 169 195 226 261 301 - Built-in elasticity of 1.3 and GDP growth rate of 12% per annum. 2. Recurrent Expenditures 138 161 189 221 259 303 - Growth rate of 17% per annum. realized during 1970/71 - 1972/73. 3. Recurrent Savings 8 8 6 5 2 Neg. 4. Capital Expendituires 65 81 102 127 159 198 = Growth rate cf2 per arn.-ua achieved during 1964/65 - 1972/73. 5. Ratio of Recurrent Savings to Capital Expenditures (in percent) 12 10 6 4 1 Neg. Assumptions Set II: POLICY CHANGES 1. Recurrent Revenues 146 179 220 270 332 408 - Restore Buoyancy of 1.9 given annual GDP growth of 12%. 2. Recurrent Expenditures 138 149 161 174 188 203 - Growth rate contained to 8% per annum. 3. Recurrent Savings 8 30 59 96 144 205 4. Capital Expenditures 65 81 99 119 140 161 - Growth rate of 25%, 22%, 20%, 18%, 15% respectively. 5. Ratio of Recurrent Savings to Capital Expenditures (in percent) 12 37 60 81 103 127 Source: Mission Projections Table 24: LOCAL GOVERN6MENT REVENUES, 1966-1972 (in L million) 156,, _________ ~~~1967 1968 1970 l97le 1972. "c,Iclool Coot ov Municipal Gounty NnciaConty .Uc:flcounyMocyl onyCuty Municipal County, L:Lkia?CouciLsCoocli Total Coun-its CounciLs Torm3. C Cun cils Cuei.,Total ConisC cislt)-- Councils Councils Tutu) i-nc-cu To.to. tu~Cul- sConis oa TAX REVENUELS 4. 7 ).5. 8.2 1±2 _A 9. 4j4 3.5 7.9 2 _.,, 9.,.. 5.6 1.7 7.3 9.5 116 IS 1 2-9 Lq 18 1. Graduated Paersonl Tax 2.6 2.8 5.4 2.7 2.7 5.4 1.9 LI 2.4 4.3 2.0 /I 3. 5.3 Z.3 LI 0.3 2.6 4.,7 0,3 5.8 4.i 0.3 4.4 2. tice...es, Cksoean d Rates 2.1 0.7 2.9 2.3 0,7 3.0 2,5 1.0 3. 5 3.2 1.0 4.2 3.3 1.4 4.7 3. 1.3 9.1 3.8 1%6 5.4 NON8-TAX REVENUES 4_0 9,0 4.8 . . , 4.6 9.8 5.2 2. 73 . 1.-.-I6 16 s2 £2 ., . 3 . Inovue iron Property 1.1 0.2 1.3 I.I 0.2 1,3 1,3 0.4 1.7 1.4 0,3 1,7 1.5 0.5 2.0 1.7 0.5 3.2 1.9 ±'6 2.5 (Buildings and Land Rents) 4. Sale of Goods a,nd Services 3.5 3.7 7.2 3.2 3.3 6.5 3.6 4.0 7.6 3.1 1.6 4.7 4.0 0.9 4.4 4,5 0.9 5.4 4.4 11 5.5 (School Fees) (0.4) (2.8) (3.3) (0.4) (2.7) (3.1) (0.5) (3.2) (87) (0.5) (0.9l) (1,3) (0.5) (0.5) (0.6) nqg. (0.6) (86 cg. 0.6 (Sale of Water) '(10>(1.0) (1.5)') (13U22>(,) (Sale of Deer) (0.3) j 0 /(.)(.) 04) (03) ,Hs.ket M Sl.ghtr ChrSt (3.1)) (0.91 0,) (0.6) (1) (0.8) (0,8) s! , (0.9) ') (0.9) (i (Other salO 3b (8.6)3 (0.6)) (0.7), (0.7), (1.6)1 3, Interact on lnveseteaz 0.3 sags. 0.3 0.4 0.1 0.1 0.2 0.1. 0.5 0.4 0.1 0.5 0.2 net 0.2 0.2 [sa. 0.2 0.1 0. 0.2 6. Miscellanou (isuludlug eourt flora gov't 5raots, loan repayeyonss, sale of capitol easaets, etc.) 0.1 0.1 0.2 0.1 0.2 0.3 0.1 8.1 0.2 0.3 0.1 0.4 0,4 0.2 0.6 0.2 0.2 0.4 'J.5 0.1 0.6 TOT~AL.REVENUES 9._7 7.5 17.2 9.9 7.2 17.0 9.5 6.1 13.6 10.4 6.4 16.9 11,7 3.3 15.0 15.3 3.2 $6.5 740n 3 7 18.5 IL The decine. over previou years is due to the transfer of 105 of the CRCf revenues of Nuir-bi and Nunh.as to the Central Gover,ssnt. Thin swas dune away with in jq7j. Soureet Stati'stics1 Abstract _1972 sd EcnS2.ichors,. 1975. Table 25: - ECON4IC CLASSIFICATION OF LOCAIL GOVERNMENT EXPENDITURES (TOTAL), 1966-1Y92 (in 1: million) 1966 1967 -1968 1969 1970 1971* - Municipal County Municipal County Municipal County municipal County Municipal C19uty r-1104ial County M_nicipol bo_oty ________________________sj twuIc.i.s Cmuncijs lotai Councils Councils Total Councils Councils Total Councils Councils Total Co-ncils Ccmccis T_t.! Councils Councils Total J. Re.urrent Expenditures 8.9 )Q 19.5 8.6 11,7 20.3 9.7 14.2 23.9 9.9 5.9 15.8 11.2 3.2 14.4 12.5 3.3 15.8 !4.4 4.2 186 1. (Personal Emolu=ents) (4.0) (7.7) (11.7) (4.2) (8.7) (12.9) (4.6) (10.7) (15.3) (5.1) (3.9) (9.0) (5.6) (1.8) (7.4) (6.4) (1.8) (8.4) (7Ei6 (2.4) (10.2) 2. (Other Goods and Services) (3.0) (2.5) ( 5.5) (2.4) (2.6) (5.0) (2.8) (3.0) (5.8) (2.4) (1.7) (4.1) (3.0, (1.0) (4,0) (3.9) (101) (2) (2.5) (021) ( 2.7) 3. (Loan Charges) (1.6) (0.2) (1.8) (1.8) (0.2) (2.0) (2.0) (0.2) (2.2) (2.1) (0.2) (2.3) (2.3) (0,2) (2,5) (2 (o.3 (2.8 (2 S G .2 2.7) 4. (Transfers) (0.3) (0.2) (0.5) (0.2) (0.2) (0.4) (0.3) (0.2) (0.5) (0.3) (0.1) (0.4) (0.3) (0.2) (0.5) (0.3) (0.1) (0.4) '0.1) (0,1) ( 0.2) 11. Capital Expenditures 1.6 0.3 1.9 0.3 0.3 3.3 4.0 0.5 4.5 3.5 0.2 3,7 2.5 0.5 3.0 5.0 0,6 11.1 3 2.3 10.4 111. Error in Double CountioR neR. r R. - 0.1 neg. 0.. 0j -0.1 - -0.2 -0.1 -0.3 -0.3 nea. -0.3 -° J nes. - ~ 7 -0.2 -3.14 TOTAL 10.5 10.9 21.4 11.7 12.0 23.7 13.8 14.6 28.4 13.2 6.0 19.2 13.4 3.7 17.1 17.2 3.9 26.9 19.6 6.1 25.7 * Provisional Neg. - negligible Source Statistical Abstract. 1972 nd Economic Survey, 1973 Table 26: FUiNCTIOtAL CLASSIFICATION OF IOCAL GOVERNI T EXPLNDIlURES (TOTAL), 1966-197. (in b ru1lliin) 1966 1967 1968 1969 1970 1971 _ 1972, .-nicaDl1 Countv Municipal County MuniciPal County Municipal County Municipal County Munici pal County Mancpa*l Cojsty Category Councils Coumcils Total Councils Couocila Total Coucls1a Councils Total Councils Councils Total Cnmncil._ Councils Total Cou,Cile Cok,cilt b0t1' Councils nounC1 Is Total 1. Ada.nLini6trotn 1.0 1.0 2.0 0.9 1.0 1.9 1.0 1.2 2.1 0.8 1. 3 2.1 1.1 1.3 2.4 1. _ 28 1. L.0 I I IT. Conrusoity Services 3.1 1.2 4. 2.7 1.4 4.4 3.1 1.5 4.6 2.6 0.3 2L9 3.0 0,3 3.3 I 0,3 3,6 4.0 0.5 45 (Roads) (1.5) (1.2) (2.7) (1.2) (1.3) (2.5) (1.6) (1.4) (3.0) (1,4) (0.2) (1.6) (1.3) (0.2) (1,5) (1.6) (neS.) (1.6) (1.6) (0.2) (1.8) (Sanitary Services) (1.1) (neg.) (1.1) (1.3) (0.1) (1.4) (1.3) (0.1) (1.4) (1.0) (u.1) (1.1) (1.4) (0.1) (1.5) (1.1) (0.3) (1.4) "^.0) (0 3) (2.3) (Others) (0.4) (nag.) (0.4) (0.2) (seg.) (0.2) (0.2) (neg) (0.7) (0.2) (neg.) (0.2) (0.3) (neg.) (0.3) (0.6) (naeg) (0.6) (0.4) (seg.) (0.4) 11. Social nSruican 2.8 7.7 10.5 3.6 8.6 12.2 4. 10.7 15.1 40 2.9 6.9 4.2 0.5 4_7 0 %Q5 5 5 j j6 o.6 6.2 (Health) (0.8) (1.0) (1.8) (0.8) (1.1) (1.9) (0.9) (1.3) (2.2) (0.7) (0.3) (1,0) (0.8) (neg.) (0.8) (1.0) ( - ) (1.0) (1.2) ( - ) (1.2) (Eduication) (1.5) (6.5) (8.0) (1.8) (7.3) (9.1) (2.4) (9.1) (11.5) (2.2) (2.3) (4.5) (2.3) (nee.) (2.3) (2.8) (sag.) (2.8) (3.0: (neg.) (3.0) (Others) (0.3) (0.2) (0.7) (1.0) (0.2) (1.2) (1.0) (0.3) (1.3) (1.1) (0.3) (1.4) (1.1) (0.5) (1.6) (1.2) (0.5) (1.7) (1.4) (0.6) (2.0) IV. Economic Servicer - 0.3 0.3 - 0.2 0.2 - 0.3 0.3 0_ .3 0.3 ,4 0,4 - 0.4 0L4 _ 9O V. Trading See-ices 3.4 0.4 3.8 4.2 0.5 4.7 5.2 0.7 59 58 0,6 6.4 5*0 S ,9 5.9 7.5 0.9 8.4 Si. 2.0 1O.4 (Water Undertakinsg) (1.4) (0.2) (1.6) (1.5) (0.2) (1.7) (1.5) (0.2) (1.7) (1.7) (0.2) (1.9) (1.3) (0.2) (1.5) (1.8) (0.3) (2.1) (3.4) (0.3) (3.7) (Market 6 Slaughter Houses) (0.1) (0.1) (0.2) (0.2) (0.1) (0.3) (0.2) (0.2) (0.4) (0.2) (0.2) (0.4) (0.2) (0.3) (0.5) (0.3) (0.3) (0.6) (0.3) (0.5) (0.8) (Sre-ries 6 Beer Shops) (0.3) (neg.) (0.3) (0.2) (0.1) (0.3) (0.3) (0.1) (0.4) (0.3) (0.1) (0.4) (0.3) (0.1) (0.4) (^.4) (0.1) (0.5) (0.31 (0.2) (0.5) (Hnusing Estatea (incl. Staff H-usin") (1.3) (.sg.) (1.3) (2.0) (neiS) (2.0) (2.9) (0.1) (3.0) (3.3) (o.1) (3.4) (2.9) (0.2) (3.1) (4.7) (0.1) (4.8) (3.8) (0.9) (4.7) (Others) (0.3) (0.1) (0.4) (0.3) (0.1) (0.4) (0.3) (0.1) (0.4) (0.3) (neg.) (0.3) (0.3) (0.1) (0.4) (0.3) (o0.) (0.4) (0.6) (0.1) (0.6) VI. Utall-osble 0.2 0.3 0.5 0.3 0.2 0)5 nag 0.2 0.2 neg. 0.5 0,5 nsA- 0.3 0.3 0,1 0.3 0.4 0.1 O92 S .6 TMtAL 10.5 10.9 21.4 11.7 12.0 23.7 13.7 14.6 28.3 13,2 5.9 19.1 13.4 3.7 17.1 17.3 3,9 21.2 19.5 6.1 25.6 PT i i. . I ,__ ___ _ .._ * Provisional feg. - negligible Source: StainLtical Abstract, 1972 and Eco1nsi Survey, 1973 Table 27: GOVERNMENT BUDGET AND PUBLIC CORPORATIONS, 1964/1965 - 1970/1971 (in E million) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 I. Budget Incomings: (a) Interest Dividends and Profits 0.7 0.8 0.9 1.1 1.2 1.5 1.4 (b) Transfers from Neg. Neg. Neg. Neg. Neg. Neg. 0.1 (c) Loan Repayments 0.4 0.3 0.3 2.5 3.3 2.0 4.4 TOTAL 1.1 1.1 1.2 3.6 4.5 3.5 5.9 TT Budget OLtgoings: (a) Transfers to - - - - 0.1 _ (b) Loans 1.1 2.8 3.7 3.0 3.1 4.7 3.9 (c) Purchase of Equity - 0.1 0.3 0.5 0.3 2.8 9.9 TOTAL 1.1 2.9 4.0 3.5 3.4 7.6 13.8 III. Balance (I - II) +Neg. -1.8 -2.8 +0.1 +1.1 -4.1 -7.9 Neg. = Negligible Source; Statistical Abstract, 1970 and 1972 Table 28: ECONOMTC CLASSIFICATION OF CENTRAL GOVERNMENT CAPITAL EXPENDITURES,* 1964/1965 - 1971/1972 (in i million) Categorv 1964/65 1965166 1966/67 1967/68 1968/69 1969/70 1970/71 1971172 1. Gross Capital Formation 4.4 6.4 lO.0 14.4 16.6 20.0 28.6 36.2 of which (Construction and Works) ( 2.1) ( 3.1) ( 5.4) ( 6.8) ( 7.8) (10.5) (15.8) (19.1) 2. Loans to Other Sectors 6.1 5.7 6.3 6.9 9.9 8.2 6.0 10.3 of which (to Public Corporations) ( 1.1) ( 2.9) ( 3.7) ( 3.0) ( 3.1) ( 4.7) C 4.0) ( 6.6) (to Other General Government Agencies) ( 4.8) ( 2.8) ( 2.6) ( 3.5) t 6.2) ( 2.7) ( 1.6) t 2.2) (to Others) ( - ) C - ) ( - ) ( 0.4) ( 0.6) ( 0.8) ( 0.4) ( 1.5) 3. Investments in Government Enterprises - - 0.3 0.5 0.3 2.8 9.8 1.8 TOTAL 10.5 12.1 16.6 21.8 26.8 31.0 44.4 48.3 * The concept of "capital expenditure" used here is not synonymous with "development expenditure" as used in the budget. Besides, it excludes debt repayments and sinking fund contributions. Source: Economic Survey (Annual) Table 29: PROFITABILITY OF SELECTED PUBLIC CORPORATIONS, 1964/1965 - 1970/1971 (in s0008) ].964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1. Industrial and Commercial DeveLopment Corporation Tocal Assets 524 1,012 1,226 1,702 2,572 4,112 6,278 Income 76 91 83 117 152 277 478 Expenses 31 55 89 98 109 173 272 Profit/Loss +-45 + 36 - 6 + 19 + 43 +104 +206 Rate of Profit/Loss (2) 8.6 3.6 ueg. 1.1 1.7 2.5 3.3 2. Development Finance Company of Kenya (Calendar Years) Total Assets 821 1,533 2,194 2,199 2,597 2,766 3 311 Income 23 77 117 128 140 173 204 Expenses 21 26 33 200 34 58 97 Profit/Loss 2 51 84 - 72 106 115 107 Rate of Profit/Loss (i ) neg. 3.3 3.8 -3.3 4.1 4.2 3.2 3. Kenya Tea Development Authority (Calendar Years) Total Assets 1,458 1,991 2,160 27 2,484 2,740 n.a. Income 172 261 316 509 568 712 n.a. (of which cess) ( 93) (143) (135) (324) (407) (600) n.a. Expenses 448 544 454 504 745 626 n.a. Profit/Loss -276 -283 -138 + 5 -177 + 86 n.a. Rate of Profit/Loss (X) -L8.9 -14.2 - 6.4 neg. - 7.1 + 3.1 n.a. 4. Agricultural Development Corporation Total Assets i.a. 2422 862 n.a. 6.879 7,757 8,219 Income r..a. n.a. n.a. n.a. n.a, 347 340 Expenses r.a. n.a. n.a. n.a. n.a. 460 411 Profit/Loss r.a. -146 -293 n.a. - 83 -113 - 71 Rate of Profit/Loss (Z) n.a. -6.0 -7.6 aa.a -1.2 -1.5 -0.8 5. Agricultural Finance Corporation Total Assets 9,303 102056 9,922 n.a. 10,180 10,792 ll.615 Income 553 621 644 n.a. 870 735 777 Expenses 511 687 682 n.a. 999 819 831 Profit/Loss + 42 - 66 - 38 n.a. -129 - 84 - 54 Rate of Profit/Loss () +t.5 -0.7 -0.4 n.a. -1.3 -0.8 -0.5 6. National Irrigation Board Total Assets n.a. n.a. 1,393 1,589 2,211 2,834 3,094 Income n.a. n.a. 144 160 192 255 316 Expenses n.a. n.a. 193 204 266 341 363 Profit/Loss n.a. n.a. - 49 - 44 - 74 - 86 - 47 Rate of Profit/Loss (2) n.a. n.e. -3.5 -2.8 -3.3 -3.0 -1.5 7. National lousing Corporation Total Assets n.a. n.a. n.a. 6,146 7,517 9,232 11,263 Income a.s. n.a. n.a. 303 375 523 660 Expenses n.a. n.a. n.a. 322 392 512 618 Profit/Loss n. . n.a. n.a. - 20 - 17 - 11 + 42 Rate of Profit/Loss (Z) n. n.. n.a. n.a. neg. neg. nem neg neg. - NeRligible n.a. - Not available Silurce: Ministry of Finance and Planning and Central Bank of Kenya. Table 30: GOVERNMENT BUDGET AND GENERAL GOVERNMENT AGENCIES,/1 1964/1965 - 1970/1971 (in E million) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 I. Budget Incomngs_: (a) Interest, Dividends and Profits 0.9 2.1 1.2 2.3 3.3 3.2 6.5 (of which Currency Board/Central Bank of Kenya Dividends) ( - ) (1.4) ( _ ) (1.1) (2.3). (2.4) (4.9) (b) Transfers from 1.0 0.8 0.4 0.4 - 0.2 - (c) Loan Repayments 0.4 0.6 0.6 0.9 0.6 0.4 2.4 TOTAL 2.3 3.5 2.2 3.6 3.9 3.8 8.9 II. Budget Outgoings: (a) Transfers to 2.8 1.1 2.4 1.7 1.9 2.6 4.8 (b) Loans 4.8 2.8 2.6 3.5 6.2 2.7 1.6 TOTAL 7.6 3.9 5.0 5.2 8.1 5.3 6.4 III. Balance (I - II) -5.3 -0.4 -2.8 -1.6 -4.2 -1.5 +2.5 /1 Excluding EAC and Local Governments. Source: Statistical Abstract, 1970 - 1972 Table 31: INCOME TAX RATES,-/ 1973/74 Tax Payable-/ by a Family with Average Income Level Four Children Tax Rate (Es per annum) (is) (%) 720 Nil. Nil 1,200 48 4.00 1,800 138 7.67 2,400 258 10.75 3,000 408 13.60 3,600 588 16.33 4,200 798 19.00 4,800 1,038 21.63 5,400 1,308 24.22 6,000 1,608 26.80 6,600 1,938 29.36 7,200 2,298 31.92 7,800 2,688 34.46 8,400 3,078 36.64 9,000 3,468 38.53 10,000 4,168 41.68 15,000 7,668 51.12 20,000 11,168 55.84 1/ These rates are only illustrative. The legal rate schedule is in terms of marginal tax rates and not average rates. 2/ Calculated by deducting the personal tax relief granted under the Act from the tax liability calculated from the rate schedule. Source: Budget, 1973/74 Table 32: BURDEN OF ROAD TAXATIONM 1964 - 1971 Taxes Cillected on Road Vehicles Average Tax Rates Petrol and 'Other' Import Duties Import Duty Diesel Oil Import Petrol Taxes per New Registered Passenger Car Year Licenses Taxes Duties Total per Vehicle i/ Road Vehicle 2' Imported 3 (in miLlion E s ) (in E s) 1964 0.7 4.7 1.6 7.0 50.3 134.3 154.2 1965 0.9 5.1 2.1 8.1 51.6 157.3 161.4 1966 1.2 5.9 2.7 9.8 56.4 186.5 181.9 1967 1.3 6.6 3.3 11.2 61.1 197.2 188.0 1968 1.4 7.2 3.3 11.9 63.5 219.4 217.0 1969 1.3 8.0 4.0 13.3 64.5 238.9 226.1 1970 1.4 8.9 4.8 15.1 65.1 235.4 235.4 1971 2.0 10.4 5.9 18.3 69.1 279.1 235.7 1/ This is the amount of petrol and diesel oil taxes collected divided by the total number of vehicles. 2/ This is the amount oI 'Other' import duties divided by the new registration of road vehicles. 3/ This is the import duty collected on passenger cars divided by the number of cars imported. Source: Statistical Abstract, 1972 Table 33: AVERAGE BURDEN OF IMPORT DUTY, SELECTED YEARS (by S.I.T.C.) 1964 _ _ 1970 1971 fity Net Average Diuty Net Average Duty Net Avera gt (.ate;ory _Cf.ollectedi hpmorts Rate Collected Imports Rate Collected imports Rade (in L '000s) (,) (in i '0OOs) (7) (in h '000s) M 1. Food and Live Animals 1,031 5,867 17.6 1,610 5,552 29.0 2,925 11,010 26.6 2. Beverages and Tobacco 1,415 867 163.2 1,469 900 163.2 1,706 1,512 112.8 3. Crude 'laterials' Inedible except Fuels 49 2,265 2.2 554 2,812 19.7 708 4,488 15.9 4. ' iaeral Fuels, Lubricants and Related Minerals 4,052 9,272 43.7 7,400 14,559 50.8 8,851 16,747 52.9 5. Animal and Vegetable Oils and Fats 6 903 0.7 169 1,956 8.6 35 3,557 1.0 6. Chemicals 442 6,779 6.5 771 14,816 5.2 1,051 18,415 5.7 7. Manufactured Goods, Classified Chiefly by Materials 4,349 19,359 22.5 7,138 36,737 19.4 8,668 45,176 19.2 8. 'iachinery and Transport Eqtipment 2,045 23,152 8.8 5,925 48,570 12.2 7,551 64,787 11.7 9. M4iscellaneous Manufactured Articles 1,401 5,524 25.4 2,725 11,328 24.1 4,260 17,114 24.9 10. Miscellaneous Transactions and Commodities, NES 183 3,609 5.1 823 4,796 17.2 - 526 1,299 - lotal 14,971 76,595 19.5 28,585 142,026 20.1 35,229 184,105 19.1 Sou rce: Stat i: .t i ci I Al,s t rac t, (1966 and 1972) Table 34: DISTRIBUTION OF LOCAL GOVERNMENT SERVICES, 1968 /1 Community Community Receipts/2 Expenditure and Social Population Total Total and Social per per Expenditure Category 1969 Receipts/2 Expendituredi tures itures _Head Head yer Head ('OOOs) -L 000- (h 000s) (L '000s) ) ( () (E) I. Municipal Councils 1. Nairobi 509.3 NA 8,850 4,585 NA 17.4 9.0 2. Monibasa 246.1 NA 2,728 1,987 NA 11.1 8.1 3. Nakuru 47.2 NA 853 338 NA 18.1 7.2 4. Kisumu 32.4 NA 605 295 NA 18.7 9.1 5. Thika 18.4 NA 236 99 NA 12.8 5.4 6. Eldorct 18.2 NA 318 141 NA 17.5 7.7 7. Kitale 11.6 NA 172 77 NA 14.9 6.7 TOTAL 883.2 11,826 13,672 7,522 13.3 15.6 8.6 II. County Councils 1. Nyanza Province (169) 2,090.0 NA 2,169 1,942 NA 1.0 0.9 2. Western Province (162) 1,310.0 NA 1,706 1,443 NA 1.3 1.1 3. Central Province (127) 1,658.0 NA 3,653 3,156 NA 2.2 1.9 4. Rift Valley Province ( 13) 2,163.0 NA 3,481 2,754 NA 1.6 1.3 5. Eastern Province ( 12) 1,895.0 NA 2,725 2,409 NA 1.4 1.3 6. Coast Province ( 11) 697.0 NA 851 668 NA 1.2 1.0 7. North Eastern Province ( 2) 246.0 NA 141 101 NA 0.6 0.4 TOTAL 10,059.0 11,751 14,628 12,471 1.2 1.5 1.2 III. ALL COUNTRY 10,943.0 23,577 28,390 19,993 2.2 2.6 1.8 /1 In 1968, local authority functions were not yet curtailed. Their expenditures were 22% of the total expenditures of central and local governments taken together. /2 Includes both recurrent and capital receipts. Source: Statistical Abstract, 1971 Table 35: DISTRIB11TION OF PUBLIC SERVICIES BY PROVINCE, AROUND 1970 Education Services Health Services Kcasi Roasd_ Percentage Number of people lealth Center Percentage Percentage of Primary School per per Health Centers Beds Dispensaries Percent of Share of of 'lotal SchDol Enrollment Enrolloent to Hospital Medical per Million per Million pet Million K.fl.C. Housing Secondary and Province Population Prima S A&e G 9ro- IL Bed Practitioner Population /2 Population /2 Fopulation /2 ixpemditurer Kincr Roads /3 1. Rift Valley iU.4 i4.7 i.1 h 62 i,755 29 1;2 58.u 2.8 2. Nyanza 19.4 16.1 13.1 27 1,269 2,219 9 76 30 1.2 8.9 3. Eastern 17.4 20.2 13.6 39 834 1,734 13 85 37 2.4 24.5 4. Central 15.3 24.9 22.9 47 766 1,287 20 141 39 15.1 11.3 5. Western 12.3 13.1 10.1 34 1,033 3,569 23 169 6 2.9 5.0 6. Coast 8.6 6.3 9.3 25 SL. 707 14 30 71 7.2 12.2 7. Nairobi 4,4 4.4 18.7 22 152 64 NA NA NA 65.2 NA 8. North gastern 2.2 0.3 U.2 4 1,308 1,230 12 49 49 0.0 10,2 Whole Country 100.0 100.0 100.0 36 715 871 17 106 38 100.0 100.0 11 Statistical Abstract, 1972 /2 These have been computed from the 1972 data provided by the Ministry of Health and the population data for 1969. /3 Ministry oL Works, Road Classification (July 1972) Source: ILO, Pt ent,Incomes d Equality: Strt6fr arrodctive ?plyent in Kenya, (1972), Chapter 18. Table 36: PRIMARY SCHOOL ENROLLMENT BY PROVINCES, 1968 - 1972 Share in Share in Total Total Primary School Enrollment Population Province 1969 1968 1969 1970 1971 1972 Central 15.3 24.5 24.3 24.5 24.4 24.3 Coast 8.6 5.9 6.0 5.9 5.7 5.7 Eastern 17.5 20.1 21.0 21.3 20.7 20.3 Nairobi 4.7 4.5 4.7 4.3 4.4 4.3 North Eastern 2.2 0.2 0.3 0.2 0.3 0.3 Nyanza 19.4 18.3 16.1 15.5 16.3 16.1 Rift Valley 20.2 14.4 14.3 14.2 15.0 15.0 Weatern 12.1 12.1 13.3 14.1 13.2 14.0 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 Source: Statistical Abstract, 1972, p. 170. Table 37: GOVERNMENT DEVELOPMENT EXPENDITIiRE ON AGRICULTURE AND SELECTED RURAL SERVICES, 1964/1965 - 1972/1973 (in b million) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 (Provisional) 1. Agriculture* 8.3 5.3 5.5 4.7 5.4 4.9 5.1 6.9 65.4 (of which Land Settlements) (6.6) (3.1) (2.5) (1.8) (2.4) (1.5) (1-8) (2.7) (1.3) 2. Rural Water Supply /1 0.1 - 0.1 0.2 0.4 0.4 0.5 0.8 1.0 /3 3. Rural Roads /2 0.1 0.2 0.7 1.3 1.5 1.8 4.9 3.8 5.0 /3 4. Total Capital Expenditure 10.5 12.1 16.6 21.8 26.8 31.0 44.4 48.3 64.9 5. Share of Agriculture in Capital Expenditure (x) 79.0 /4 43.8 33.1 21.6 20.1 15.8 11.5 14.3 9.9 6. Share of Rural Water Supply and Rural Roads in Capital Expenditure (%) 2.0 1.7 4.8 6.9 7.1 7.1 12.2 8.6 9.2 n.a. = Not available. * These figures exclude government expenditure on land adjudication. /1 This represents the development expenditure of Water Development Division on rural water supplies plus the water devel- opment expenditures of the Ministry of Health, Ministry of Land and Settlement and Ministry of Cooperatives and Social Services. Taken from Economic Survey (Annual). /2 This is the development expenditure of the government on settlement roads, feeder roads, tea roads, sugar roads and the like. Taken from Appropriation Accounts (Annual). /3 Projection of the trend. /4 As is obvious, a very large part of this reflects government expenditure on land purchases and resettlement. Source: Annual Statistical Abstracts Table 38: CENTRAL GOVFRNMENT FINANCES: KENYA IN COMPARISON WITH OTHER DEVELOPING COUNTRIES, AROUND 1970 (as percent of GDP or GNP) Individual Expenditures Administration Total (including Total Country Year Revenues Defense) Education Health Agriculture Expenditures 1. Burma 1970/71 15.1 8.1 2.8 1.1 1.1 23.9 2. Ethiopia 1969/70 9.7 5.6 2.1 1.0 0.4 12.4 3. Ghana 1968/69 14.9 4.7 3.7 1.2 0.7 12.7 4. Guatemala 1970 8.7 3.7 1.7 1.6 0.5 9.7 5. Honduras 1970 12.6 5.0 3.0 1.7 0.6 15.9 6. Ivory Coast 1970 20.7 4.0 3.3 1.6 0.8 24.8 7. Jamaica 1970/71 19.7 5.4 3.0 4.1 2.6 24.6 8. Kenya 1970/71 22.6 1.9 5.0 1.9 2.3 30.6 9. Korea 1970 16.5 6.2 3.1 0.2 1.9 19.6 10. Malawi 1969 13.8 4.7 3.8 1.3 3.6 25.2 11. Mali 1969 n.a. 4.4 3.5 1.9 1.0 15.4 12. Mexico 1969 7.8 4.8 2.9 1.1 2.1 24.0 13. Nigeria 1969/70 7.5 13.5 0.4 0.1 0.6 20.1 14. Panama 1970 15.3 4.3 4.0 2.2 0.7 23.8 15. Philippines 1970/71 10.5 2.5 2.8 0.6 0.9 10.4 16. Rwanda 1970 n.a. 4.1 2.5 0.8 0.5 9.5 17. Senegal 1968/69 19.2 8.5 3.8 1.8 1.9 21.0 18. Siera Leone 1968/69 14.5 3.2 2.6 1.0 0.5 13.5 19. Thailand 1971 15.0 6.3 3.4 0.6 2.0 19.6 20. Zaire 1969 n.a. 9.6 5.1 0.9 0.2 29.1 21. Zambia 1971 36.9 12.7 6.4 3.0 6.7 43.6 n.a. = Not available. Source: IBRD Economic Reports