How Kenya can restructure fiscal policy in the next 5 years

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This article first appeared in my weekly column with the Business Daily on August 27, 2017

Fiscal policy in Kenya over the past 5 years has been characterised by several features the first of which is aggressive growth in expenditure. Cytonn Investment makes the point that over the past 6 years, total expenditure in annual budgets have grown at an average of 14.7 percent yet revenue growth has only increased by 12.7 percent. This has led to more borrowing and expanding fiscal deficits with an increase in debt levels from 40.7 percent debt to GDP in 2011 to the current 54.4 percent. While some argue that Kenya’s debt is not at distress levels, if current patterns of spending continue the distress point will be quickly reached. Thus, it is important to ask how policy should be structured over the next 5 years to put the country on a more sustainable fiscal path.

At national level, fiscal focus should target cutting non-essential expenditure; government needs to be very firm on this and make the hard decisions required to prevent profligate spending, particularly in recurrent expenditure. Cytonn makes the point that recurrent expenditure accounts for 58.8 percent of the 2017/2018 budget. One way to address this issue is through robust support to the Salaries and Remuneration Commission (SRC) to cut salaries and better align compensation packages to reflect the economic reality of a developing African economy. The current association between public office and wealth accrual needs to be severed and stern fiscal policy backed by political commitment can make this happen. Further, a keener eye should be cast over the efficiency of government spending; procurement at national and county must focus on value generated for funds spent. Without doing so, Kenya will find itself on a path where careless and inefficient spending leads to debt accretion that doesn’t stimulate the economic growth required to meet debt obligations.

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Secondly, revenue generation needs to be ramped up; expenditure is growing at 14.7 percent and revenue collection by only 12.7 percent.  Revenue collection has to grow faster than expenditure if the country is to have greater funds available for public investment. One way to do this is by better supporting the KRA to prevent illicit financial flows from the country; a serious problem for African countries. The United Nations Economic Commission for Africa estimates that Africa loses more than USD 50 billion through illicit financial outflows per year. Devex points out that companies evade and avoid tax by shifting profits to low tax locations, claiming large allowable deductions, carrying losses forward indefinitely, and using transfer pricing. Government ought to undertake an audit of tax policy, restructure outdated tax laws and correct faulty tax arrangements with multinational companies; KRA needs to be supported to improve enforcement of these laws.

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At county level, fiscal policy needs to be characterised by, again, cutting down on unnecessary spending. County governments have to take the initiative on this and so far there have been encouraging signs of newly elected governors choosing to fully or partially redirect massive inauguration budgets to more productive areas; this should be encouraged. Further, county government budget processes ought to be more transparent; at the moment there are significant gaps in understanding how county budgets are formulated and implemented. More counties should follow in the footsteps of Elgeyo Marakwet county and develop a transparent, formula-based budget development process that prevents elite capture in budget formulation and deployment.

Anzetse Were is a development economist;


Mega infrastructure development not silver bullet for economy

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This article first appeared in my weekly column with the Business Daily on August 20, 2017

It is not a secret that the current and previous Kenyan governments (Kibaki and Kenyatta administrations) have prioritised investment in and the development of infrastructure. Kenya has prioritised infrastructure spending and development for the past 15 years. As the Brookings Institution points out, there is the view that investment in infrastructure- energy, transport, communication, irrigation, and water supply- propels economic output. The direct effect is raising the productivity of land, labour, and other physical capital. For example, steady supply of electricity reduces disruptions and time wasted at the work place. It complements the contributions of education, health, marketing, and finance. Infrastructure investment is seen as a foundation for and enabler of economic growth.

Government has allocated a significant percentage of annual budgets to infrastructure. Indeed, between FY 2016/17 to FY 2019/20, the government committed about 30 percent of total budget expenditure to infrastructure; compare this to 2.8 percent to agriculture. The concern is that despite this fiscal commitment, we have not seen the attendant economic growth; the economy has never even pretended to reach the 10 percent target of Vision 2030. So this begs the question as to what Kenya is getting wrong. Why isn’t infrastructure investment notably boosting economic growth? There are several reasons that provide insights to answer this conundrum.

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The first, harsh, reality is that the link between infrastructure and economic growth is more tenuous than previously assumed. The London School of Economics points out, the most recent studies on the magnitude of infrastructure’s contribution to growth tend to find smaller effects of infrastructure investment on growth than those reported in the earlier studies; this is linked to improvements in methodological approaches. Kenya shouldn’t assume that infrastructure investment and development will automatically lead to significant improvements in economic growth. Yes there is a link between the two, but less pronounced than was previously assumed.

The second reason that could explain the muted effect of infrastructure spend is that Kenya has such a massive infrastructure deficit that current investment has barely had any notable effect. According to the Capital Markets Authority, Kenya’s current estimated infrastructure funding gap is USD 2-3 billion per year over the next 10 years. However, the reality is that the infrastructure deficit in Kenya’s neighbours is likely more pronounced, yet the fact that countries such as Ethiopia have emphasised infrastructure investment and routinely hit double digit growth questions the plausibility of this argument.

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The final question to ask is: Is Kenya investing in the right infrastructure? The Brookings Institution makes the point that a push for more infrastructure only raises economic growth and people’s well-being if the focus is on quality and impact and not on the quantity and volume of investment. Has Kenya has fallen short here? Has the government conducted an audit of the impact of investment infrastructure investment and development thus far? Has there been an audit on the quality of the infrastructure developed thus far? Is Kenya investing in the right infrastructure? How efficient is our investment into infrastructure? Without an answer to these questions, the country will not learn from past mistakes and thus infrastructure development will not be recalibrated to be more effective.

It is therefore crucial that the government undertakes a thorough analysis on the nature, scale, efficiency and impact of infrastructure investment and developments made thus far so that the required improvements can be effected.

Anzetse Were is a development economist;

Economic Agenda for the Incoming Government

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This article first appeared in my weekly column with the Business Daily on August 13, 2017


With elections complete, it is time to focus on how the next five years can be fully leveraged towards making concrete socioeconomic gains in the three main sectors of Kenya’s economy.

The first economic setor is agriculture which constitutes 35 percent of the GDP and 61 percent of total employment. One problem with this sector is that on one hand the export-oriented segment of sector is very productive and profitable, yet domestic food security is still a major concern. Tea was the largest export earner for the country in 2016 alongside coffee and horticulture, yet domestic food consumption is constrained by subpar production exemplified by the maize crisis which was exacerbated by a severe drought. The next administration should focus on several issues: first is increasing allocations to the sector from the current 1.8 percent of the budget to, at a minimum, the African average of 4.5 percent. Secondly, effort must be made to address the challenges in sector coordination between national and county governments; clear roles and responsibilities must be delineated for each level of government. Finally, there ought to be a focus on active learning from productive agriculture sectors and lessons shared with less productive sectors with a focus on smallholder farmers.

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The second sector is manufacturing which is a mere 9.2 percent of GDP; the share of manufacturing in GDP has actually declined over the last five years and the sector formally employs only 300,000 people. Manufacturing can play a central role in driving economic transformation and job creation in Kenya as there is a window of opportunity for Kenya to capitalise on positive underlying factors in the global economy, including rising wages in Asia, the rebalancing underway in China, and expand Kenya’s capabilities and presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years. The incoming administration ought to make sure that the country’s manufacturing strategy as articulated in the Kenya Industrial Transformation Programme be prioritised in the implementation of the third Medium Term Plan of Vision 2030 due to start in 2018.

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The third sector is services which is currently driving Kenya’s economic growth, constituting about 55-60 percent of GDP. Leading sub-sectors include food and accommodation, ICT, real estate and, transport and storage. However, the key service sub-sectors that ought to be prioritised are education and healthcare. Interventions in health should focus on better fiscal support to the sector. In FY 2017/18 donor funding of development expenditure in healthcare is estimated to be up to 63 percent; such dependence is concerning. Secondly, there should be an emphasis on building the capacity of county governments, especially in terms of technical and administrative human resources, to better meet the health needs of their constituents. In education the focus should be on better aligning curricula and training to better meet labour market needs as well as reorient the country’s economic structure to one in which manufacturing plays a larger role. Finally, county governments ought to be supported in better equipping and expanding the reach of Technical and Vocational Educational Training Institutions (TVETs) and link students to practical apprenticeships at county level.

Anzetse Were is a development economist;

Use imports to develop domestic manufacturing

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This article first appeared in my weekly column with the Business Daily on August 6, 2017

Kenya is an import economy; we import just about everything from garlic and oranges to construction materials and heavy industrial machinery. The general view, which I largely accept, is that an import economy constrains economic growth and development due to several reasons. The first is that, an import economy dampens the ability of local manufacturing to meet the needs of the local market; instead foreign nations meet the country’s needs. As a result, imports lock out local manufacturers from benefitting from domestic demand. Secondly an import economy essentially creates a situation where domestic demand generates jobs and income for foreign countries. As a result, local job creation is muted because the market has been captured by foreign entities.

That said, since Kenya is an import economy it is important to find means through which the situation can be leveraged for economic growth as there are some benefits to the status quo. The first is that an import economy creates market capture that can be exploited by domestic industry. In being an import economy, it is clear which products Kenyans buy and the related market size for each product type can be easily estimated. This provides a basis on which government can launch effective import-substitution strategies as there is a sure bet market to which local industry can sell if their goods are of similar use, quality and value.

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Secondly, innovation is garnered through imports. As an import economy, the country gets a clear sense of the new ideas as well as the standards and features that sell in domestic, regional and international markets. When a Kenyan buys a snack made in Italy, it provides local snack manufacturers an opportunity to see the quality of snacks that garner an international market. Thus imports provide a source of innovation and standards that can be emulated by local manufacturers.

Thirdly, because an import economy is flooded with products from around the world, it provides an opportunity to create export-oriented manufacturing where local manufacturers learn about what products sell regionally or internationally. Thus imports provide the foundation for creating a manufacturing sector that is export-oriented. Through learning about standards and innovation in the point elucidated above, local manufactures have a clear idea of what sells on the international market. Thus, through the analysis of imports, government can determine priority industries in the country and track imports in those industries to get a clear idea of what type and quality of product can be the foundation for the  country’s on own export push for manufactured products.

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Thus imports can be leveraged for both import-substitution AND export- orientation strategies; the two are not mutually exclusive. However, the negative effect of imports can only be mitigated if there is deliberate effort both from government and manufacturers to exploit the gains that imports provide. In doing so, Kenya can transition from being a country reliant on imports to one where local manufacturers regain domestic market share and also build export capacity and sales.

Anzetse Were is a development economist;

Massive potential for the Sports Economy in Kenya

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This article first appeared in my weekly column with the Business Daily on July 30, 2017

A few weeks ago, over 50,000 Kenyans attended the IAAF under 18 World Championship, the largest crowd in the event’s history. Kenyans were there to not only cheer on Kenyan athletes but also attend an international sports event in the spirit of global athletics. What the event made clear is that if a sports event is well organised, well publicised and in the right facility, Kenyans will cram themselves in to get a piece of the action.

The championship has raised broader questions on the Sports Economy in Kenya. Why isn’t sports a bigger revenue generator for the country and why aren’t local events as well attended as the Championship was in Kasarani?


The Sports Economy can be defined as all economic activities which require sport as an input, i.e. all goods and services which are related to a sport activity. These include sport clubs, public sport venues, sport event organisers, sports equipment sales etc. However, the multiplier effects of the sports economy are significant, positively informing activity in the sports education and training sector, media coverage and even the hospitality industry.

Data from other countries indicates how large this sector the economy can be; a 2012 report by the EU found that as of 2005, value added by the sports-related sector was up to 173.86 billion Euros and the direct effects of sport, combined with its multiplier effects, added up to 294.36bn Euros in the EU. In the UK, in 2010 the sports sector generated GBP 20.3 for the economy. In the USA as of 2013 the sports industry as a whole is said to generate about USD 14.3 billion in earnings a year.

Given that Kenya is a sports powerhouse, excelling in athletics and even rugby, why isn’t the sports sector a more important player in the country? There are several reasons behind this. As the Sports and Development Organisation (SDO) points out, research shows that investment into sport in developing countries is much less than in developed countries as sport development is usually not a top priority in the national budget or in the education system of most developing countries. As a result a vicious cycle emerges where underdevelopment of and under-investment in sport decreases the potential for athletes to build their talent and the ability of the sector to grow. SDO also highlights the ‘muscle drain’ issue where athletes from developing countries supply industrialised countries’ markets with talent.

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To be fair, in Kenya there have been effort to develop the sports sector through local marathons and the emergence of international training facilities for long distance runners. However, this is not enough, more effort needs to be made to not only monetise the sector but also generate a figure of the amount needed as investment into the sector to make it a more effective economic player. More efforts also needs to be done to study the sports economy ecosystem: What events are popular with Kenyans? How much are Kenyans willing to pay for a sports event? What sorts of facilities are required to attract Kenyans to sports events? In beginning to unpack these issues, Kenya stands to develop an entire segment of the economy that has thus far languished in neglect.

Anzetse Were is a development economist;

Industrialisation in Kenya: What do political party manifestos say?

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This article first appeared in The East African on July 24, 2017


Further development of manufacturing can play a central role in driving economic transformation and job creation in Kenya. There is now a window of opportunity for Kenya (and other East African countries) to capitalise on positive underlying factors in the global economy – including rising wages in Asia, the rebalancing underway in China, and strong regional growth in Africa – and significantly expand its capabilities and global presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years.

But the recent performance of the Kenyan manufacturing sector has been weak. The share of manufacturing in Kenya’s gross domestic product (GDP) was only 9.2 percent in 2016 (well below average for a country with Kenya’s level of income) and this share has been declining in recent years. Several decades ago, Kenya had a relatively complex and substantial industrial sector by regional standards, but its East African neighbours have been catching up in recent years.

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Decisive and comprehensive action is required in order to reverse the decline, double manufacturing production and employment, and increase the share of manufacturing to 15 percent of GDP within the next five years. With this in mind, the Overseas Development Institute (ODI) and Kenya Association of Manufacturers (KAM) developed a 10-point policy plan to transform Kenyan manufacturing and create jobs. These 10 points, based on close co-operation amongst a range of stakeholders, aim to inform pre-election debates and can also be used by the new government to implement a more focused and effective industrialisation strategy.

There has been an analysis of the manifestos of the three main political parties to determine the extent to which they support manufacturing in Kenya and the region. The manifestos of Jubilee, the National Super Alliance (NASA) and the Third Way Alliance were launched at the end of June 2017. All three parties emphasise the industrial agenda as central to Kenya’s economic transformation in general terms, which is encouraging, with NASA emphasising innovative initiatives and especially the small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance being more specific in their recommendations.

There are a range of notable similarities with the 10 policy priorities in the KAM-ODI booklet. Firstly, all three parties prioritise addressing either general or specific aspects of the enabling environment. The Third Way Alliance commits to addressing counterfeit goods, one of the KAM-ODI action points. Secondly, all three parties want to enforce a fiscal regime that is predictable and fair, a key action point among the ten policy priorities, and emphasise fair taxation in particular. Jubilee further discusses the action point on devolution. The Jubilee manifesto discusses the KAM-ODI action point on land banks and NASA and the Third Way Alliance discuss industrial parks, which need land. The Third Way Alliance pledges to work with county governments to set aside land for industrial parks, offering a practical way to implement the KAM-ODI action point on securing land for SEZs and industrial parks.

The feasibility of the creation land banks and setting aside land for industry will be linked to issues of acrimony over land title and cost of relocating populations on said pieces of land. For example, an SEZ was due to be set up in the Western part of the country but had to be scrapped as an agreement could not be reached on what land could be used due to claims of title on the piece of land. Thus all parties will have to undergo a thorough land audit in the areas the government intends to develop industrial parks and SEZs and begin with areas where there is clear land title that is not contested.

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In terms of energy, NASA discusses the need for an energy policy. Jubilee highlights the need for lower electricity tariffs for industrial usage and the Third Way Alliance calls for liberalisation of the energy sector and revisions to electricity billing and pricing to reduce the cost of electricity for key manufacturing sectors. Both NASA and Jubilee highlight the need for investment in electricity infrastructure. Jubilee also emphasises green energy and, in a similar vein, NASA and the Third Way Alliance focus on ramping up clean and renewable power generation.

What most of the manifestos are not clear on is how they will reduce the cost of energy in the country. For example, Kenya needs a reduction of five cents per kilowatt hour would bring the cost down to that in Tanzania. It is only the Third Way Alliance manifesto that states they will tackle the cost of energy issues by liberalising the energy sector and revising electricity billing and pricing. However, an additional problem with energy in Kenya is power outages; Kenya has more power outages than Uganda, Rwanda and Ethiopia. None of the manifestos are not clear on how this will be addressed. All three manifestos are vague on the type of reforms and investments needed to address inefficiencies and incentivise investment in power transmission and distribution.

All three parties suggest the establishment of industrial funds or development banks specific for industrialisation, such as an export-import bank (Jubilee and the Third Way Alliance) or a co-operative fund for agro-processing (NASA). But none of the parties place strong emphasis on suggestions for financial sector development. Similarly, the three parties’ manifestos do not give attention to foreign direct investment (FDI) to promote industrialisation. While these plans sound feasible, the implementation of these financing schemes will determine uptake by private sector. Ideally, the funds should offer financing perhaps at concessionary rates. The most important factor however is that the funds need to be patient such that private sector has time to use the capital effectively and generate returns over a realistic period of time. Yet the manifestos are not very clear on how financing to the sector will be structured. The Jubilee manifesto comes closest to specifics, stating that they seek to provide long-term credit funded by long-term bonds; one wonders why this strategy has not already been deployed. Further, none of the parties place strong emphasis on suggestions for financial sector development or how to promote FDI to support industrialisation.

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In terms of skills, NASA and the Third Way Alliance highlight the importance of general education, whilst Jubilee prioritises the need to nurture a globally competitive work force to power industrialisation. NASA and Jubilee stress the importance of linkages between universities and the rest of society, although Jubilee seems clearest on this and explicitly mentions the need to develop formal linkages between the private sector, academia and government. At the moment, there is a sizeable gap between what is taught to students and what the job market requires. Therefore, if curricula are not significantly revised and linked to a push to encourage students to take up of science, technology, engineering and maths (STEM) subjects, any partnerships with academia may not be fruitful in terms of creating a labour force with skills required for industrialisation. Jubilee manifesto’s pledge to promote the study of science, technology, engineering and maths but again, one wonders this has not already been done. Both the NASA and Third Way Alliance manifestos do not contain specific details on which subject areas to target for educational improvements.

NASA and Jubilee highlight the role of a fit for purpose civil service to support industrialisation. NASA stresses the need to reduce contractors’ cost of doing business with government, streamline procurement, process payments promptly and inculcate a zero tolerance approach to corruption. Jubilee wants a truly fit for purpose public service, and mentions the importance of reducing waste, dealing with procurement and rationalising the public sector wage bill. The Third Way Alliance has a narrower focus on measures to combat corruption. This element will likely prove to be the most difficult to implement as Kenya has notoriously been unable to hold those implicated in corruption scandals to account. Thus, it is dubious as to whether any of the parties have the political will required to implement this element of the manifestos.

The Third Way Alliance manifesto places strong emphasis on developing value chains in priority manufacturing sectors, including agro-processing, textiles and leather; but some of the Alliance’s proposals to support value chain development are quite protectionist in nature. The NASA and Jubilee manifestos also mention value chains, with the NASA manifesto emphasising synergies and linkages amongst enterprises. The issue of value chains is closely linked to agriculture and what has become clear over the first iteration of devolution is that agriculture seems to be neglected by both county and national governments in terms of budget allocations. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are clearly sub-par. Thus for the value chain manifesto declarations to work, there is need to more robust allocations to agriculture at national and county level and better coordination between the two levels of government; none of the manifestos articulate how they would make this happen.

In the context of the EAC, the push for exports in the KAM-ODI booklet is important. Both NASA and Jubilee press for better market access, NASA for SMEs in particular. Improving and/or maintaining market access in the EAC is an important element of the NASA and Jubilee manifestos, aligning well with the KAM-SET call for an export push. The Jubilee manifesto focuses on expanding Kenya’s access to the US in textiles, whereas NASA emphasises market access for MSEs. In contrast, improving access to markets for Kenyan exports is not prioritised in the Third Way Alliance manifesto.

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To be clear, access to EAC for manufactured goods is riddled with problems. Total exports from Kenya the EAC registered a 4 percent decline in 2016 to KES 121.7 billion, with exports to Uganda and Rwanda falling by 9.3 percent and 2.5 percent respectively. Further, opportunities offered by the EAC’s integrated market has institutional and regulatory barriers to trade such as such as customs clearance, standards and certification, rules of origin, licences and permits, truck inspections and language barriers.  None of the manifestos address these issues. Further, the entry of China and India into the regional market has eroded Kenya’s EAC market share from 9 percent in 2009 to just 7 percent by 2013.  The World Bank claims that Kenya’s trade performance is declining quickly due to an influx of goods from China into Uganda and Tanzania, which are major export destinations for Kenya.  In the manifestos it is not clear how EAC market access issues will be addressed. The Jubilee and NASA manifestos make general statements about Kenya’s role within the EAC, but there is little detail in either manifesto in terms of specific measures or priorities to support access for Kenyan goods in the EAC market. The Third Way Alliance’s manifesto does not make any reference to Kenya’s role in a regional context.

Anzetse Were is a development economist;

Revenue generation targets unrealistic

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This article first appeared in my column with the Business Daily on July 23, 2017

I am of the view that revenue generation targets are unrealistic, informed mainly by finding ways to cater to the government’s ballooning expenditure rather than any realistic economic dynamics. Over the past few years, revenue collection has fallen short of the targets, but it should be noted that the Kenya Revenue Authority (KRA) almost reached targets despite the constraints they face. For example, in the year just completed (FY 2016/17) total revenue collection stood at KES 1.365 trillion representing a performance rate of 95.4 percent. However, the shortfall in shillings was KES 66.64 billion- a significant number.

Although the inclination is to blame the KRA for under-performing, I am of the view that KRA is given unrealistic targets each FY. These targets seem more informed by aggressive increases in government expenditure and seem oblivious of the serious constraints that mute tax collection.

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The first issue is that revenue generation targets tend to be revised upwards over the course of the year. KRA’s original revenue target for the financial year 2016/17 was KES 1.415 trillion which was revised to KES 1.431 trillion, an increase of KES 16.24 billion. This is a concern because motivations behind increases in targets are not clear. Is the increase due a realisation in Treasury that it cannot raise as much as anticipated in borrowing and thus they place pressure on KRA in the form of increasing revenue generation targets?

The second constraint is that the macroeconomic environment informs the extent to which targets deviate from forecasts. For example, it is estimated that a 1 percent point reduction in GDP growth reduces revenue by KES 13.4 billion. In terms of inflation, a 1 percent point increase in inflation requires that revenue targets be raised by KES 13.0 billion to cater for the value of money lost due to inflation. Thus macroeconomic dynamics inform the extent to which KRA can hit targets.

Thirdly, government policy decisions particularly those related to tax policy affect the ability to generate revenue. The non- implementation of tax policy in terms of the adjustment of specific excise rates in FY 2016/27 did not occur negatively impacting revenue generation by KES. 4.911 billion. Additionally, the duty free importation of essential foods (maize, milk, sugar) led to a revenue loss of KES 4.363 billion in the 4th quarter of 2016/17. Indeed, it is estimated that government policy decisions cost KES 13.006 billion in revenue generation in FY 2016/17.

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Fourthly, government itself is to blame; delays in remitting income tax from public institutions costs KES 823 million.

Finally, sectoral issues inform the ability of KRA to collect tax. For example, declining profitability among large firms where 16 NSE listed firms issued profit warnings in 2016, had an adverse impact on corporation tax. Additionally, the downsizing and shutting down of firms which resulted in over 7,000 staff lay-offs in various institutions, mainly banks, adversely affected PAYE performance.

It is time that revenue generation targets were informed by the dynamics elucidated above. If this does not happen, government will continue to be seen to be trying to buffer itself from its aggressive expenditure through creating unrealistic targets rather than submitting austerity budgets that limit unnecessary spending.

Anzetse Were is a development economist;